A series of financial panics in the late 1800s and early 1900s were responsible for delivering upon us the scourge of the most self-important, pompous and clueless of creatures…the central banker.
Enough was enough.
Not one’s to waste a good panic, the politicians and bankers decided the US monetary system could no longer be left to the vagaries of market forces.
The solution to the ‘problem’ caused by these unruly market forces? Central control.
The US Federal Reserve Bank came into being on 23 December 1913.
The Federal Reserve Act
The Federal Reserve Act established three objectives: maximising employment, stabilising prices and moderating long-term interest rates.
Stabilising prices? Hmmm.
Prior to the introduction of ‘central control’, the market was doing a pretty good job of stabilising prices all by itself.
Source: Business Insider
According to Business Insider (emphasis is mine):
‘In 1913 prices were only about 20 per cent higher than in 1775 and around 40 per cent lower than in 1813, during the War of 1812.
‘One hundred years after its creation, consumer prices are about 30 times higher than what they were in 1913. This pattern, in varying orders of magnitudes, repeats itself across nearly all countries.’
In 1913, prices were 40% lower than they were in 1813.
To me, it looks like market forces did a pretty good job of keeping prices in check.
What’s not to like about paying less?
Since central control was legislated into existence, prices have been blown out of the water…rising 30-fold.
If stabilising prices was a KPI (key performance indicator), the Fed would have been sacked long ago.
The following chart shows in the Pre-Fed era, market forces corrected the imbalances between inflation (blue) and deflation (red).
At times, the corrections resulted in a roller coaster effect — with deflation of minus 20% followed by inflation of 20%.
Markets can be brutal…but effective in resolving excesses (in both directions).
Source: Advisor Perspectives
These large swings in economic activity were the Trojan horse used by the bankers and US Congress to convince (hoodwink) the masses of the need for central control.
The public — as usual — was duped into believing the powerbrokers only had society’s best interest at heart.
The reality has been altogether different.
The creation of central banks (and later, the abolition of the gold standard) handed control of the monetary system to wasteful politicians, egotistical central bankers and greedy financiers.
Reason Why Inflation is Good
The real reason inflation is good (for them), is because — over time — it diminishes the value of debt.
Enabling spendthrift politicians to finance extravagant promises and for the banking sector to profit (handsomely) from unbridled loan growth.
The entitlement and debt legacies we have today together with banks that have grown ‘too big to fail’ are a result of handing control of the monetary system to politicians and bankers.
The inflation chart shows that after 1940, the central banker commitment to produce inflation — as evidenced by the dominance of blue in the chart — made a mockery of the price stability objective. Year after year prices increased.
Price instability became so bad in the 1970s that President Gerald Ford infamously introduced the ill-fated WIN (Whip Inflation Now) campaign.
President Ford even had these badges mass produced…no kidding.
For the record, his master plan failed miserably.
As the chart shows, inflation has been our constant companion for more than 80 years.
We’ve only ever known inflation. The central bankers have indoctrinated us into believing ‘rising prices are good for us’.
And while our incomes and assets rose faster than inflation, we never questioned the doctrine. We literally bought (and borrowed) into the ‘inflation is good’ creed.
Speaking of rising incomes, the term ‘bracket creep’ never existed 100 years ago.
Rising income levels push wage and salary earners into higher tax brackets delivering more tax dollars to the spendthrift political class.
Politicians want inflation, not because it’s good for us, but it’s good for them and their ‘barrels of pork’.
Central bankers are well aware of who butters their bread and they’re determined to give us inflation…whether we like it or not.
In November 2002, Ben Bernanke (before he became Fed Chair) delivered a speech at the National Economists Club in Washington, DC.
The title of the speech: ‘Deflation: Making Sure “It” Doesn’t Happen Here’.
Bernanke boldly stated:
‘We conclude that, under a paper- money system, a determined government can always generate higher spending and hence positive inflation.’
The central controllers know only too well, the debt-funded economic growth model (the model politicians and bankers so desire) is totally and utterly dependent upon inflation.
Without inflation, savings trump debt. Consumers refrain from spending today in the hope prices are lower tomorrow. Tax revenues stagnate or fall. Debt levels reduce rather than increase.
This is the real reason for the absolute determination to maintain this economic fraud.
And that’s why they’re ‘making sure it doesn’t happen here’.
Yet, the central banker inflation doctrine fails the most basic of pub tests.
Let’s imagine that we (you and me) had the opportunity to interview the Treasurer on this topic.
Us: Thank you Treasurer for agreeing to chat with us today. According to the RBA website: ‘The [RBA] Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time.’
Given that you are party to this agreement, obviously you consider this is a worthy objective?
Treasurer: Allow me to quote from the RBA site, ‘This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community.’
Us: OK. If that’s the case, which costs should go up sufficiently low enough to achieve this target? Electricity, childcare, petrol, food, rents, insurances or perhaps, all of the above?
Treasurer: Well…ah, ah…it’s not that simple.
Us: Really? I thought CPI is measured on the weighted price movement of a basket of goodies?
Treasurer: That’s correct.
Us: Aren’t these goodies in that basket?
Treasurer: Yes. But…
Us: But what?
Treasurer: Sorry I don’t have time for a detailed explanation now. Suffice to say, we are committed to the RBA inflation target AND determined to reduce cost of living pressures.
Us: How do you do that?
Treasurer: Meet the twin objectives?
Us: No. Speak out both sides of your mouth AND keep a straight face?
Treasurer: Lots of practice.
This past decade has shown us that generating positive inflation with newly minted dollars is not as easy as Bernanke, Yellen, Powell and co thought it would be.
Which is why we can expect central bankers and the political class to do whatever it takes to stoke the inflationary fire.
Whether they can succeed where Japan has failed is a hotly debated topic.
The sheer volume of debt in the system — a shameful legacy of central bank policy — acts like lead in the economy’s saddlebags.
The more they try for growth, the more weight the economy must carry. Which in turn, slows down the pace of growth. A real catch-22 situation.
For now, inflationary pressures are contained. But I suspect when the next unexpected rout on Wall Street saps consumer confidence, we’ll see stimulus efforts go into overdrive.
Then who knows what we’ll have…deflation, inflation or stagflation?
After more than a century, it’s obvious central banks have done more harm than good.
In the midst of rising share and property markets, most people might disagree with that assessment.
However, in the space of 25 years we’ve witnessed the Fed blow three asset bubbles. Two have burst spectacularly. When the current one meets its pin, it’ll be a disaster on an epic scale.
When it happens, we’ll see who is left to sing the praises of central bankers.
This would be my song to central bankers (apologies to Cher):
‘If I could turn back time
‘If I could find a way
‘I’d take back those powers that’ve hurt us and you’d never see the light of day.’
Editor, The Rum Rebellion
Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.