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Inflation Or Deflation? It Is The Fourth Branch Of Government (The Federal Reserve) That Will Make That Decision For Us

Today there is a great debate in the economic community about whether we are going to have crippling deflation or unprecedented inflation in the years ahead.  For decades, a never ending spiral of debt has fueled the almost unbelievable prosperity that Americans have enjoyed.  We have lived way beyond our means, and in the process we have piled up the biggest mountain of debt in the history of the world.  Now, the fourth branch of the U.S. government (the Federal Reserve) has a  decision to make.  Will the Federal Reserve allow the U.S. economy to deleverage, thus setting off a deflationary nightmare worse than the Great Depression, or will the Federal Reserve attempt to crank up the debt spiral one more time by flooding the U.S. economy with another giant wave of paper money?

Of course when I say that the Federal Reserve is the fourth branch of the U.S. government I am being facetious.  The Federal Reserve is about as “federal” as Federal Express is.  It is a privately-owned central bank that has been very open about the fact that it is “not an agency” of the U.S. government.  But the truth is that it has become just as powerful (if not more powerful) as some of the actual branches of the U.S. government. 

For example, U.S. Representative Ron Paul recently told MSNBC that he believes that the U.S. Federal Reserve is now more powerful than the U.S. Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

Most Americans do not even understand that the U.S. government does not issue U.S. dollars and that it does not run the U.S. economy.  It is actually the unelected Federal Reserve that performs those functions.

Why do the American people permit a group of unelected elite bankers to have complete control over our money suppy and to have the ability to tell us what our interest rates are going to be?

It doesn’t make sense.

The American people need to get educated about what the Federal Reserve system is and what it is doing to our economy.

The Federal Reserve system guarantees that the United States government is forever trapped in an endlessly expanding spiral of debt.  Any time the U.S. government wants to issue more money, they have to go into debt to get it.  But the Federal Reserve does not create the money to pay the interest on that debt at the same time.  Eventually the U.S. government has to go into even more debt to keep the game going.

About the same time the Federal Reserve was created, the federal income tax was created as well.  The idea behind this was that slowly but surely, wealth would be transferred from the hands of the American people to the U.S. government and ultimately to the owners of U.S. government debt. 

But why does the U.S. government have to go into debt to anyone in order to get more dollars?

The U.S. government is supposed to be a sovereign nation under the U.S. Constitution.

Why can’t the U.S. government just decide that it is going to print whatever U.S. dollars that it wishes to?

It has been done in the past.

But that is not how things work under the Federal Reserve system.  Under the Federal Reserve system, we have experienced a mind blowing spiral of debt and inflation that is now reaching a terminal phase. 

Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.  The chart below will give you some idea of the chaos that inflation has inflicted upon our economy….

Notice that inflation was nearly non-existent before the Federal Reserve was created.  In fact, inflation really started skyrocketing after Nixon took us off the gold standard in the 1970s.

So what happens now?

Well, right now the U.S. economy is in a complete and total mess.  If you add up all of the consumer debt, business debt and government debt in the United States, it is around 360 percent of GDP.  That is far worse than it ever has been before.

So will the Federal Reserve allow our economy to deleverage? 

That sounds like a good idea to many, but the truth is that allowing the debt bubble to pop would have horrific consequences. 

Right now, our entire economy is based on debt.  Our entire standard of living is based on debt.  Allowing the economy to deleverage could potentially set off a deflationary maelstrom that would be unlike anything we have ever seen before.

So that means that we should crank the debt spiral back up and keep the game going, right?

Well, that is not a good alternative either.

Cranking up the debt spiral again would keep the economy stable for a while longer, but ultimately it would make our long-term problems even worse.

In fact, if we keep flooding the economy with endless waves of paper money and debt we are eventually going to see the same kind of hyperinflation that other nations have experienced in the past.

The truth is that there is no good solution to our financial problems.

One way or another, this thing is going to crash.

We are either going to have inflation or deflation and it is the Federal Reserve that is going to make that choice for us.

For now, the Federal Reserve is trying to have its cake and eat it too. 

Just the other day, Federal Reserve Chairman Ben Bernanke delivered a speech in which he urged the U.S. government to get debt under control….

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, “If something cannot go on forever, it will stop.”  One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

At the same time, there are a growing number of indications that the Federal Reserve is getting ready to unleash another round of quantitative easing.

Basically, what quantitative easing means is that the Federal Reserve makes a bunch of money up out of thin air and uses it to buy up stuff like U.S. Treasuries and mortgage-backed securities.

The Federal Reserve hinted very strongly during their last policy meeting that this was about to happen, and in recent days both the president of the Federal Reserve bank of New York and the president of the Federal Reserve bank of Chicago have both come out with public statements indicating that they would be very much in favor of a new round of quantitative easing.

In the end, it seems likely that the Federal Reserve will come down on the side of more debt, more paper money and more inflation in a desperate attempt to stimulate the economy.

This will especially be true if the U.S. economy starts seriously faltering again.

But what the American people need to understand is that all of this is essentially out of their hands.

The Federal Reserve is going to continue to make decisions of the utmost importance to our nation without being accountable to any of us.

Isn’t our system great?

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comments

  • mondobeyondo

    Does it even matter? The end result will be the same.
    Read “Fire and Ice” by Robert Frost.

  • Not so Mad Max

    “The American people need to get educated about what the Federal Reserve system is and what it is doing to our economy.”

    The above is a laudable goal but how about we work on getting people to vote in all elections, or at least learning who their congress people are. Then maybe we can shoot for how the Fed Works.

  • Ben Franklin Jr.

    Why not both? If you step away from the dollar as the yard stick, you will see that it is possible to have both Hyperinflation and deflation at the same time. What has the price of oil done in terms of the cost of gold or silver? Tuesday the price of silver (in $) saw a 4% increase. Was this due to a scarcity of the metal or because of the POMO action the same day? I submit that silver isn’t really scarce but the dumping of newly printed dollars into the financial markets is the reason for this action.

  • Zack

    We need deflation – which is the liquidation of the malivenstment in unproductive parts of the economy. Unfortunately, the Fed seems more interested in creating an inflationary holocaust.

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