Everybody’s Problem

Atlanta, GA

April 4, 2022

A couple months ago, we noted the tendency of insufferable do-gooders and self-righteous busybodies to get everything wrong, magnify or invent problems, and then do everything in their power to make them worse. 

By doing so, they increase their sense of self-worth…and can inflate their dollars of financial worth…by diverting attention from the serious shenanigans happening off-stage. Today we retract the curtain, and shine a light on the primary protagonist of our most potent public pathologies.

CS Lewis considered Pride the worst of the deadly sins, because it was the source and stimulus of all the others. Among government agencies and Deep State institutions, the same can be said of the Federal Reserve.

We know the Fed isn’t technically a government agency. Officially, it’s a State-sanctioned “private” cartel whose governors happen to be appointed by the President, approved by Congress, and serve at the behest of big banks.

“The Creature from Jekyll Island” was constructed a century ago at a clandestine conclave off the coast of Georgia, to which top-tier Senators, Wall Street barons, and captains of industry traveled under assumed names. 

By the time they‘d settled into their dining cars for the return trip north, the foundational concrete had been poured. The meeting was secret, but the fat cats left enough paw prints in the cement to let us know who was there, and what they did.

Using the Panic of 1907 as a handy excuse to erect an edifice they’d long wanted to build, these luminaries gathered to ensure that “the system” would never again be compromised by the irresponsible acts of a few bad banks. 

Instead, from then on, all of them would be in on the scam! And a “lender of last resort” would serve as a controlled croupier, dealing financial favors from the bottom of the deck.

No longer would a few rogue banks over-extend themselves atop the inverted pyramid of diminishing reserves. Now, every bank would do so. And the process would be carefully coordinated by a new captain, steering a hull that hauls its own icebergs.

The government, as comedian Dave Smith put it, is the mafia masquerading as a human rights organization. The IRS is its street-corner muscle, the brass knuckles that instills fear to empty pockets. 

The Fed is a more sophisticated consigliere. It operates behind the scenes, surreptitiously fleecing the flock to fund the racket. 

Whereas the IRS storms the cellar and steals the wine, the Fed slowly dilutes it. But only after pouring the Château Margaux into the glittering goblets of its connected cronies. The general public gets the left-over liquid. While the Big Shots catch a buzz, the hoi polloi suffer the hangover. 

It is this counterfeit cocktail that numbs average Americans, and rips them off. By taking our money to keep our booze, the central bank bartender siphons funds from the outsiders to the insiders, Main Street to the Deep State, the makers to the takers. This home-made hooch “pays for” the wars, bail-outs, stimulus checks, pay-offs, annual bonuses, and big boats that keep the grift afloat. 

By counterfeiting currency to buy “assets“ and monkey with rates, the Fed distorts the structure of production, jams price signals, precipitates cyclical booms, and necessitate painful busts. The Great Depression, the stagflation of the 1970s, the dot-com bust, the 2008 meltdown, and the “everything bubble” that’s now starting to leak were all consequences of monetary malfeasance.

But funny money also enables colossal crises that otherwise couldn’t occur. The First World War…and the incessant conflicts and carnage it bequeathed the subsequent century…would have been impossible, or severely constrained, without a steady infusion of counterfeit cash. 

Like transparent marbles across a ballroom floor, each injection of phony money becomes a hidden catalyst for a new calamity. It isn’t only the dogs of war that it loosed from their leash. Fake money freed a litter of ravenous hounds, that have grown into embedded institutions that get hungrier as they eat.

As with any counterfeiting racket, the beneficiaries of the fraud are those who first receive the funds. With their conjured cash, they compete with unsuspecting suckers for an unchanged quantity of desirable goods. 

Without creating real resources, the initial recipients use this new “money” to pilfer old wealth. By the time the sham cash reaches later recipients, its intrinsic value has become apparent. Prices have risen, goods are gone, and the masses are left holding the bag.

But where did its contents go? After World War II, and particularly since the 1960s, government money fertilized a thicket of connected industries that grew like weeds. 

Their growth was initially inhibited by the herbicide of gold. But since that constraint was removed in 1971, these crony rackets have covered the country like kudzu over Georgia. They spread in every direction, but the trunk of the vine is the financial services sector.

Loans are the coin of the realm in a debt-based system. Using monetarist pixie dust, the central bank conjures cash from thin air to buy government debt. When the Fed lowers rates or reduces reserves, it entices banks to create money by extending loans. 

This river of money soon flows to and from its fertile banks. It overflows them as liquidity rises, to nourish the industries, boondoggles, bamboozles, and scams that crave the wave. For half a century prices have risen on an ocean of debt. Among those washed while we get cleaned are the Educational, Pharmaceutical, Military, and Medical complexes that soak us today.

The catalogue of carnage governments committed couldn’t have been published without clipped coins, debased money, or counterfeit currency. The War Between the States, both World Wars, and every martial misadventures since would not have been possible without a Niagara of ink from the Federal Reserve.

Whenever there’s a question, the answer is always more “money”. A respiratory virus? Fire up the presses. “Supply chain” disruptions? Need more “liquidity”. Rambunctious Russkies? Create more coin. Much as our wise central bankers should remove the punch bowl and let someone else drive, some wiseacre always orders another round and puts a new song on the jukebox. No matter what happens, the Fed is at the wheel…pressing pedal to the medal, and careening toward a cliff.

And its fated to fall from a deepening hole. On the last day of February, US government debt crested $30,000B. 

That’s billion, with a “T”.

At the turn of this century, the tab was “only” $5.6T. Ten years later, after launching two idiotic wars and bailing out its wealthiest benefactors, the feds owed $14T. 

They had so much fun doubling the debt in a decade that they decided to do it again. When 2020 ended, they were $28T in hock. Barely a year later, they’re at thirty. Total worldwide debt exceeds $300 Trillion, more than three times global GDP.

But that was six weeks ago. Who knows what heights they’ve ascended since. As noses bleed and heads spin, creditors wait anxiously at the base camp. 

They have to know that if their money comes down, it’ll be a skeletal remnant of the flesh that went up. It’s wandering aimlessly in the thin air of uncharted territory. The scouts and sherpas to whom it’s entrusted are unreliable guides. How were the able to climb so high?

Official inflation approached 8% in January, the highest in forty years. Were rising prices measured as they were four decades ago, the rate of increase is twice as bad as we’re told it is. The Fed’s “target rate” of 2%…which would consume half existing wealth in only one generation…is well in the rear-view.

But “rate of inflation” is misleading. For one, it is an aggregate number, which hides more than it reveals. Prices of different items rise at varying rates, so the stealth tax shifts wealth in numerous ways. Using a single number to capture innumerable effects is misleading at best, particularly when that number is itself fraudulent.

In a healthy, sound money economy, the natural tendency is for prices to fall, as they did through the prosperous decades of the Belle Époque, under the classical gold standard. 

That being the case, the official “inflation rate” should be compared not to a baseline of zero, but to price decreases that would otherwise have pertained. By using an artificially high benchmark, the inflation rate understates actual monetary dilution…leaving aside government efforts to mute inflation with statistical shenanigans like “hedonic adjustments” and elimination of essential “non-core” expenditures such as food and energy.

To “fight inflation”, the Fed last month raised its real funds rate from about minus 7.75% to about minus 7.5%. They’ve got to be kidding. But they’re also in a bind.

Given the actual rate of inflation, nominal rates of interest likely need to exceed 10%, and probably more. Forty years ago, when true inflation was less than it is now, Paul Volcker took the Fed funds rate to twenty percent. Only another 1,950 basis points to go!

No way they can get there. At least not intentionally. If they do, they may save the dollar, but only as a marsh-mellow over the smoking embers of the financial markets.

Treasury Secretary John Connolly once told other countries that the US dollar is “our currency, but it’s your problem.” The same, by extension, could be said of the Fed.

But now, it’s everybody’s problem.

JD