Is The Federal Reserve Destroying Us Or Saving Us?

Most Americans have only a very limited understanding of how the Federal Reserve affects every aspect of our lives.  Neither the Chairman of the Federal Reserve nor the twelve members of the Board of Governors are elected by the American public.  The Federal Reserve operates independently in secret and has the power to make financial decisions that impact the financial well being of every American citizen.

During the financial crisis of 2007-2008, Congress was shocked when they were asked to approve $700 billion in TARP funding to rescue the banking system.  Little did Congress or the taxpayer know at the time, but $700 billion was actually small change compared to the $7.7 trillion that the Federal Reserve secretly committed itself to lend to the financial industry.  The Fed only revealed the details of its massive secret loans when forced to by a Bloomberg freedom of information request.

Many economists believe that the actions taken by the Federal Reserve saved the United States from crashing into another Great Depression.

$7.77 trillion — The amount the Fed pledged to rescue the financial industry, according to Bloomberg research that examined announced, implied or actual upper limits on lending and guarantees. This number, which represents potential commitments, not money out the door, was first published in March 2009, when it peaked.

“One of the keys to understanding why we’ve avoided another Great Depression, so far, is to see how bold the Fed was in 2008 and 2009,” said Niall Ferguson, a Harvard University history professor. “That boldness consisted of a range of contingency commitments that backstopped the banking system. Just because they weren’t used doesn’t mean they weren’t important.”

Economic historians will be debating whether or not the Fed saved the American economy from a depression for decades, but now that the Fed has taken an active role in attempting to stimulate the economy and create jobs through quantitative easing (money printing), many analysts are starting to question whether the Fed will wind up destroying us while attempting to “save” us.

In an essay written by Dylan Grice of Societe Generale, serious questions are raised about the potentially adverse impact on America’s financial future due to the massive amount of currency debasement being caused by the Fed’s rampant money printing. The full article can be viewed at John Mauldin’s Outside the Box, a must read site.

At its most fundamental level, economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. I fear a Great Disorder.

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for…). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations.

“Next to language, money is the most important medium through which modern societies communicate” writes Bernd Widdig in his masterful analysis of Germany’s inflation crisis “Culture and Inflation in Weimar Germany.” His may be an abstract observation, but it has the commendable merit of being true … all economic activity requires the cooperation of strangers and therefore, a degree of trust between cooperating strangers. Since money is the agent of such mutual trust, debasing money implies debasing the trust upon which social cohesion rests.

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer? Inflation of the CPI might be a consequence both seen and measurable. A broad inflation of asset prices might be a consequence seen, though not measurable. But what about the consequences that are unseen but unmeasurable – and are all the more destructive for it? I feel queasy about the enthusiasm with which our wise economists play games with something about which we have such a poor understanding.

If the authorities raise taxes explicitly and openly, voters know exactly why they have less spending power. They also know how much less spending power they have. But if the authorities instead raise money by simply printing it, they raise the revenue by stealth. No one knows upon whom the burden falls. People notice only that they can’t afford the things they used to be able to afford, or they can’t afford the things which everyone else can afford. They know that something is wrong, but they just don’t know what, why, or who is to blame. So inevitably they look for someone to blame.

So it is with monetary debasement, as Keynes understood deeply (so deeply, in fact, that it’s ironic so many of today’s crude Keynesians support QE so enthusiastically). In 1921 he said:

“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some …. Those to whom the system brings windfalls …. become “profiteers” who are the object of the hatred … the process of wealth-getting degenerates into a gamble and a lottery .. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

History is replete with Great Disorders in which currency debasement has coincided with social infighting and scapegoating.

Which brings us to today. Despite the CPI inflation of the 1970s receding, our central banks have continued to play games with money. We’ve since lived through what might be the largest credit inflation in financial history, a credit hyperinflation. Where has it left us? Median US household incomes have been stagnant for the best part of twenty years (chart below)

Yet inequality has surged. While a record number of Americans are on food stamps, the top 1% of income earners are taking a larger share of total income than since the peak of the 1920s credit inflation. Moreover, the growth in that share has coincided almost exactly with the more recent credit inflation.

These phenomena are inflation’s hallmarks. In the Keynes quote above, he alludes to the “artificial and iniquitous redistribution of wealth” inflation imposes on society without being specific. What actually happens is that artificially created money redistributes wealth towards those closest to it, to the detriment of those furthest away.

The Fed may have saved us from a depression only to wind up putting the vast majority of Americans into poverty worse than what a depression would have caused.


  1. Dear Author,

    I think you owe us some more background on Quantitative Easing and fact-checking of Mr. Mauldin’s “Outside the Box”. Consider that the Fed’s policy involves absolutely no cash printing; QE is a play on the balance sheets of the Fed and the reserves held by various banks. The Fed has no authority over money printing (, and QE does not pass money into the hands of the US government (seigniorage is not a possible outcome). The Fed pursued QE as our best shot of influencing the willingness of banks to lend money such that the US economy has the smallest chance of experiencing adverse inflation. Please also remember that we now have a targeted inflation rate of 2%, and nothing in the consumer price index indicates otherwise.

    QE aside, I think it was a great idea to lend $7.7T to our nation’s banks. The Obama administration prevented a black hole in our financial system, and the administration is now pursuing legal repercussions for their misdeeds!


  2. Kevin, It makes absolutely no difference whether the fiat money (legal forfeiting) ) is printed or not. I achieves physical existence by being entered on to the balance sheets of banks by simple virtue of the Fed saying it exists The government accept the notes the Fed has printed as payment for assets it transfers to the Fed. If it did the same for all notes printed by the citizens of America there would be no unemployment. Banks are willing to mend money. The problem is no pone wants to borrow it because there is no longer economic use for it, as a result of the Fed monetary policy.economic use for it. If you do not accept that inflation is much higher than reported compare gold of 1957 at $34 with current gold at $1,700 In 1500 you could buy a high quality suit in a haberdashery in London for an ounce of gold and today at Barney’s in New York you can still buy it for the same once of gold. 2% of annual inflation since 1957 if it was only that, has reduced the purchasing power of the dollar today to a 5 cents
    For the past fifty years, all the published charts illustrating the decline of the dollar from such-and-such a date to the “present” show the following type of curve. Confiscates 64% every generation (20 years) confiscates 90% during working years(45years) , total confiscation during 70 years.

    These, of course, are averages. A few people in the middle class of the bureaucracy will have managed to place some of their dollars into tangible assets or income-producing securities—what few remain—where they are somewhat protected from the effects of inflation. For the vast majority, however, inflation hedges constitute but a tiny fraction of all they have earned over a lifetime.

    And so we find that, in The New World Order, inflation has been institutionalized at a “modest” level of five per cent. Once in every five or six generations—as prices climb higher and higher—a new monetary unit can be issued to replace the old in order to eliminate some of the zeros. But no one will live long enough to experience more than one devaluation. Each generation is unconcerned about the loss of the previous one. Young people come into the process without realizing it is circular instead of linear. They cannot comprehend the total because they were not alive at the beginning and will not be alive at the end. In fact, there need not even be an end. The process can be continued forever.
    By this mechanism—and with the output of work battalions— government can operate entirely without taxes. The lifetime output of every human being is at its disposal. Workers are allowed a color TV, state-subsidized alcohol and recreational drugs, and violent sports to amuse them, but they have no other options. They cannot escape their class. Society is divided into the rulers and the ruled, with an administrative bureaucracy in between. Privilege is now largely a right of birth. The worker class and even most of the administrators serve masters whom they do not know by name. But serve they do. Their new lords are the monetary and political scientists who created and who now control The New World Order. All of mankind is in a condition of high-tech feudalism.

    You will never catch the perpetrators using them as the police. The first three collapses of the U.S. Central bank has perpetrators still waiting in the hereafter to be punished.

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