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The Fed’s Big Decision: Destroy the Middle Class or Destroy the Middle Class
The Federal Reserve and Central Banks globally face a hard decision. Will they destroy the middle class with a recession or with inflation?
Fiat Money: A Financial System Based on Theft
Since the creation of the Federal Reserve in 1913, we have existed within a system based on "moderate inflation." The idea, which we covered extensively in "A "Mostly Peaceful" Heist" series, is that central banks, governments, and those who serve them have convinced the masses that prices increase over time naturally. We have been led to believe that a "moderate" amount of inflation was an indicator of a healthy economy.
Through the central bank's Keynesian propaganda, the state has been able to extract wealth from its constituents through this hidden tax, inflation.
Inflation is simply the expansion of the money supply, and since 1913, the monopoly on money issuance has allowed the state to consistently debase the currency to enrich themselves. For several decades this happened without much question since the rate of inflation was "moderate" enough. The masses thought that prices went up and were comfortable accepting a small amount of inflation each year if it meant the economy was "healthy."
Since the dollar and other fiat currencies are not backed by any commodity, such as gold, there is no constraint on the creation of money. Well, actually, there is one constraint, the public's trust in the currency.
The heist of savings has been subtle enough over decades that the masses gave it little thought; however, in other countries, when inflation became too high and became debilitating, faith was lost, and currencies collapsed. The US Dollar has managed to avoid that fate, as the US has chosen to debase the currency over a longer time scale. The heist has been a marathon, not a sprint.
The "mostly peaceful" heist, colloquially called "moderate inflation," stole wealth from savers and increased the cost of living for all constituents.
The Middle Class: The Main Victims of the Heist
The working and middle classes, however, were the most disproportionately impacted by the fiat thieves. As their cost of living continued to increase, their wages stagnated, which resulted in a deteriorating quality of life. Time theft has been most pronounced for those who have seen everything become more expensive around them without enough increase in income to keep up.
Skilled laborers and those in white-collar fields such as finance, medicine, law, and technology were fortunate enough to grow their earnings at a faster rate than the working class and middle class. Depending on one's profession, it is possible their wages increased faster than the inflation rate, affording them a better quality of life over time. However, this is not the case for most people who have witnessed a worsening life due to money printing.
Those who earned enough money to put the excess into financial assets, which tend to be the same white-collar folks, were able to preserve their purchasing power against inflation. There is nothing wrong with owning assets. It has become a necessity to build any sort of wealth in the fiat era. But those who lived paycheck to paycheck or had minimal savings in a bank account were not as fortunate and saw their savings melt away like an ice cube.
This is the nature of the fiat financial system. A system based on inflation, which requires people to not only earn an income but to have to earn enough to begin investing to be able to stay afloat. This is incongruent with the nature of money. Our ancestors sought the hardest money, which could not be diluted, to store their hard-earned savings. Gold was the premier store of value for thousands of years. People were able to earn their money and save it.
The fiat system has regressed us as humans. The working and middle classes have suffered in this fake money era. Those who have been closest to the creation of new money have benefited greatly from the expansion of the money supply.
Not only did the expansion of the money supply erode the quality of life of the working and middle class over several decades, but the manipulation of interest rates and unconventional monetary policy, such as Quantitative Easing, also continued to transfer wealth from the middle class to asset-owners.
Again, nothing wrong with owning assets, but those who control the money, tend to own the most assets. They disproportionately benefit from these policies that increase asset values far beyond economic growth.
Federal Reserve Chairman: The Wizard of Oz
In the fake money fiat world, it's been widely accepted that the Federal Reserve, primarily made up of 12 unelected officials, must manage economic cycles through its control of interest rates. These exact manipulations of interest arguably create the "boom-bust" economic cycles due to credit expansion/contraction, but I digress. The agreed-upon process for managing interest rates in the fiat system is that central banks lower the benchmark rate during recessions to spur economic growth, meaning more borrowing, investments, and consumption. They raise the rates when the economy begins to overheat, which could be signaled by rising inflation. Higher rates are meant to slow down economic activity and can even lead to a recession.
A prime example of this is the Great Financial Crisis. In response to the housing market crash (by the way the Fed created the housing bubble) and the ensuing recession, the Federal Reserve cut interest rates from 4.75% to 0%. Alas, this was not enough to stimulate growth. After lowering rates to zero, the Fed implemented a new type of monetary policy called Quantitative Easing. A fancy phrase for money printing. The Fed created money from nothing and began to purchase US Treasuries and Mortgage-Backed Securities. The artificially low rates and QE stayed in place for far longer than most expected well after the crisis. These accommodative monetary policies created asset bubbles across the board in real estate, equities, bonds, crypto, etc., which are now in the midst of popping.
However, the entire post-2008 period, between the bailouts of Wall Street by the taxpayer and the monetary policy that followed the crisis, served to grow the wealth gap, transferring money from the middle class to the financial and political elite. While economic growth was relatively muted from 2008-2020, financial assets had an incredible decade plus due to the financial engineering that took place.
“Post Covid Era:” Wealth Destruction
It was already clear that the financial system favored those who controlled it, but that became abundantly clear in the "Post Covid Era." As the virus took the world by storm, financial markets panicked, pricing in the worst-case scenario. There was a massive sell-off, even in US Treasuries, as all types of investors were scrambling to hold dollars rather than assets. Central banks and governments globally embarked on the most aggressive monetary and fiscal policy ever seen. Here's more detailed information on the response if you are curious.
The short version is that interest rates were once again lowered to 0% around the world and even negative in some countries. Additionally, there was an unfathomable amount of money printing. In the United States alone, there was a $6.4 trillion increase in the money supply, which amounted to a 42% increase. Alongside the tsunami of money printing were the draconian lockdowns from governments around the world. The combination of the money printing and the government response created a "K shape recovery." Another blow to the working and middle classes. While Main Street America and the global middle class had their livelihoods destroyed by forced business closures and inflation, the Ruling Class benefited massively from the favoritism toward large businesses and the trillions of dollars that entered the economy.
Despite the 42% increase in the US money supply, savers received 0% on their deposits. An outright robbery of purchasing power along with, in many cases, a collapse in income due to business closures. Sure, the governments may have sent a few thousand dollars to people to stay home, which led to record savings for a quarter, but now those people are much worse off as their businesses have shut doors permanently or have gone back to work with the same wage despite everything being much more expensive.
Just like any crisis in the past, Covid was an opportunity to transfer wealth from the masses to the elites. According to Forbes, "The number of billionaires on Forbes' 35th annual list of the world's wealthiest exploded to an unprecedented 2,755—660 more than a year ago. Altogether they are worth $13.1 trillion, up from $8 trillion on the 2020 list."
An aggregate increase of $5 trillion to the billionaires' net worth, what a coincidence that there was over $6.4 trillion added to the US money supply.
We are nearly three years into this "Post Covid Era," and the majority of people are worse off than they were before the world went crazy. Again, the labor market is tight, but most people did not receive a 42%+ raise, at least not anyone I know. So now, people face worse living conditions and much higher prices, especially for food and energy.
But as anything, the media, the propaganda arm of the state, has created confusion around the higher prices and worse quality of life most people face. As we wrote in "The Fiat Cave: An Allegory of Monetary Deception (Part 2)," the Fiat Jailers keep us, prisoners of the monetary system, through the expansion of the money supply and then point at the shadows on the walls, the donkey and elephant. The media tells us that we should hate the prisoner next to us for our struggles.
In reality, regardless of who is in power, the financial system is constructed to siphon the wealth of the masses for the benefit of the ruling class. Most of us do not realize this. We are victims of the Fiat Cave, confused and distracted. While media mouthpieces and bureaucrats tell us the high prices we face are due to Putin, Oil & Gas companies, or the Biden Admin, rest assured that it's the fault of the Fiat Jailers as a whole, who control the money.
Now, as we face the highest inflation in 40 years measured by the Consumer Price Index (CPI), an entirely bogus metric, the prisoners of the Fiat Cave are struggling to survive. They have been crushed by the money printing and will be crushed yet again soon enough.
In an attempt to reduce the high prices that are due to money printing, the Federal Reserve is leading the charge on interest rate hikes. CPI was most recently reported at 7.1%, much above the 2% target, and everyone knows inflation is much higher than that. So let's be extra clear, the Fed created this problem of high prices while telling you it was "transitory" and has since admitted they were wrong and started hiking rates at the most aggressive clip in history.
The tightening of financial conditions in 2022 has destroyed wealth at the fastest rate ever, and now a recession looms on the horizon.
The Fed and central banks globally face a decision, will they crush the middle class through a recession or inflation? We will explore that in Part 2.
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