Death By a Thousand Treasury Purchases

Inflation is one of the most misunderstood economic concepts. This ignorance is intentional. If everyday citizens truly realized the causes and effects of inflation, it would become supremely unpopular and eventually cease to exist. Inflationary policy is not a new concept and has coincided with the creation of debt-based and fiat monetary systems. There are of course benefits to inflation as it drives the growth of economies and particular asset classes. However, the negative effects of inflation are seen everyday as goods and services are priced higher and higher. We must inquire and understand the following: What is inflation and how does it affect the average individual? How is it created and who is responsible? How do we combat inflation if it becomes out of control? If we remain oblivious and refuse to understand these concepts, inflation will persist unabated. Without any recourse, the value of our currency will continually depreciate until we are all compelled into endless poverty.

First things first. What is this phenomenon they call inflation? Simply defined, inflation is an increase in the supply of money. The more money that is introduced in the economy the less valuable each unit of money becomes. This causes assets, commodities, and everything else with a scarce supply to inflate in price. Thus, inflation is a surplus of currency chasing the same amount of goods. If the money supply was fixed at certain amount, the creation of goods would outpace the money causing everything to decrease in price. This is deflation or an increase in the value of money.

Consider a game of Monopoly. Each player begins with around $1000 which they can use to purchase properties and trade with other players. The moment the game starts everyone understands the value of each individual property considering its proportion to the money provided. If everyone started with say $5000, the value of money has now significantly decreased, and the properties now appear much cheaper. This makes the game less enjoyable because everyone is “rich” in comparison to the cost of each property. The only way to bring the value of properties back to equilibrium would be to increase the price of each property at the same rate the money supply increased. Now every asset and penalty is 5 times the original amount.  In summary, the value of the properties never changed, just the price. The price of any good is determined by amount of money people are willing to pay for the value of said good. The more money in the game, the higher the prices. This is how markets work.

Now consider if this happened in real life. Let’s say the supply of United States Dollars increased 5-fold. Assuming the amount of all the products, real estate and services stayed the same we now have a surplus of money. Naturally the value of each dollar is now 1/5th of it’s prior value and the cost of everything will eventually catch up to the money supply. Now an economy comprised of 350 million people and trillions of dollars in assets is far more complicated than a game of Monopoly. There are various income levels, socioeconomic classes, and lifestyles. So, people value things differently. The value of a dollar to one individual could be completely different from another. However, the prices of goods will eventually have to match the average esteemed value. Luxury products will probably not dramatically increase in price, but the bare essentials will. Items with a higher demand are the first to change and typically do so in dramatic fashions. Things like food, housing, and energy will skyrocket in price because the supply of these goods has not changed but the money supply has. Therefore, inflation can be dangerous for people who don’t have the means to afford these higher prices. Big surprise, the poor are damaged the most.

Unfortunately for the entirety of human society, this hypothetical is no theory at all. In the last two years, 80% of all US dollars in existence were created out of thin air, a 5-fold increase in the money supply. Now you are probably thinking right now “my wealth didn’t increase 5 times over, where did all the money go”? Most of it was spent by governments for COVID related expenses. You know masks and stuff. The rest was given directly to individuals via welfare, unemployment benefits, and PPP small business grants. It may not seem like it, but the average American received more money during the pandemic than they did before. People who engaged in markets like real estate, stocks and crypto saw exponential rises in wealth. The rich saw their wealth explode and businesses received heaps of government assistance whether it was needed or not. All in all, there’s a lot more money circulating through the economy without an increase in goods, services, and assets. In some cases, goods decreased causing an even deeper discrepancy with the money supply. Similar to our hypothetical, high demand commodities like oil, lumber, copper and wheat have all quadrupled in price in the last year. Some assets will eventually catch up to these resources and some will remain. It’s all dependent on demand for said goods. There is obviously a lagging effect, but eventually we will reach equilibrium as prices become equal to the value of goods as a condition of a decreased value of dollars. We can reasonably assume that inflation will get worse before it gets better.

We know understand what inflation is and how it effects the economy around us. We have recently experienced an incredible surplus in the money supply and now must live with the consequences. At this point you are probably furious that life has now become excessively more difficult due to higher cost of living, stagnant wages, and the faltering value of money in your bank account. Now you want to know who to blame. It’s probably the president, right? Or the prior president? Congress maybe? No, it’s those pesky Russians! Or the Chinese? It’s got to be the uber rich and the greedy corporations? These are all great guesses but not the truth. The propaganda ministry will give you all sorts of scapegoats and individuals to blame but the true culprit will never see the light, as is intended.

So who is to blame, who created all this inflation and why did they do this to us. There is only one entity that can create new US dollars and it’s the Federal Reserve Bank. Created in 1913, “the Fed” is not the only central bank nor is it the first, but it is the first of its kind. Central banks are situated all over the world and they all do similar things. We will keep our scope on the US Fed but understand that central banks around the world have been engaging in the same malicious practices. The textbooks will tell you that central banks are designed to appease the effects of market cycles through the use of monetary policy. The best way to describe a central bank is simply a bank for governments and other banks. They are tasked with open market operations (manipulating the money supply), determining reserve requirements (manipulating credit creation), and determining interest rates (manipulating lending practices).  The Fed ironically has nothing to do with the federal government and has limited if any oversight from our elected officials. I like to refer to the Fed as the government’s daddy. If a president or congress wants to spend money that they don’t already have through taxation; they will simply borrow it from the Fed. The Federal Reserve lends them this money by purchasing Treasury securities. This acts like a bond or debt agreement where the government promises to pay back the Fed plus interest. The fun part is that the Fed doesn’t actually derive its funds from any revenue but simply prints the money out of thin air and still has the audacity to charge interest.

“But wait there’s more!” There is nothing stopping the Federal reserve from acquiring other assets and paying for it with money that they create. The Fed can purchase open market assets like stocks and corporate bonds; they can buy physical assets like gold silver and real estate; they can even buy debt units like mortgage-backed-securities. Wait… hold up. The Fed can issue debt to our government through treasuries while also purchasing outstanding consumer debt using money that they do not actually possess. This makes the Fed the official buyer and lender of last resort, meaning they control every aspect of our economy. As central banks increase their balance sheet, more money is created and spent, driving inflation higher and higher. Every government on Earth is beholden to these central banks, they do not pay taxes, their leaders are not elected, and there’s not a single entity that oversees or polices them. All the powerful and important people of world will never call out the central banks because they know that inflationary policies are beneficial to the value of their assets and will only make them richer.

The money is broken. The world reserve currency, the US dollar, is backed by nothing so if the rest of the world ties their currencies to USD, their money is worthless too. Technically USD is backed by oil via the petrodollar system, but that is a discussion for another day. The money is inherently worthless by itself. Prior to 1971, dollars were backed by gold, but this did not stop governments from deficit spending which leads to an imbalance in the ratio of dollars to gold, which then leads to insolvency and inflation. This occurred during WW1, the Great Depression, WW2 and throughout the 1960s. These inflationary practices have destroyed the value of our currency and is a direct cause of the widening gap between the rich and poor. This horrendous cycle has occurred repeatedly throughout human history even going back to the fall of the Roman Empire. There is only one way this can end.

 How do we combat this godforsaken system? Sometimes the remedy is worse than the illness. Currently, the world economy is addicted to central bank manipulation. The easy money policies have no doubt built up the modern world. Although, this was at the expense of the world’s more impoverished societies. Let’s say today all the central banks exploded and governments were forced to spend only what they receive in taxes, what would happen? Markets would collapse, the value of homes would be diminished, every penny you ever saved would be worthless. It would be complete anarchy. We would have to start over. Some say it’s the price to pay for freedom. Others say the current system is the price to pay for security. Pick your poison friends because no one is coming to save us.

I wish I could give you a happy ending, but I really can’t come up with an escape without considerable pain. Our ignorance has allowed this to go on for far too long. If we can’t learn from our past mistakes, we are doomed to repeat them over and over until the world wakes the hell up. I hope some day in the future people will look back at this cycle of greed and suffering with pure animosity. They will use a gold-backed decentralized crypto currency with a deflationary fixed supply and they will laugh at our financial illiteracy. They will look at debt-based fiat monetary systems the same way we look at slavery today. Because honestly… what’s the difference?