The Federal Reserve’s White Squall

by TopherMorrison on March 18, 2012 in Economy, Featured, Most Read

Before President Obama’s State of the Union address in January Peter Schiff spoke with David Frum, former speechwriter for President George W. Bush.  While obviously very articulate and generally well informed Schiff trounced Frum’s subtly rosy outlook on the economy, the idea that gold is more manipulated than treasuries and his wild assertion Federal Reserve activity had thus far not lead to inflation.

At one point in the interview and in a distinctly condescending tone Frum interrupted Schiff to make a point: “As you know, as you know… the theory…and especially the kind of theory that you would hold is: if central banks are buying debt that that should lead very rapidly to an inflation which should cause a rise in interest rates and a collapse in the value of the bonds, but that is not was has happened” Frum insisted, “its invisible!”

Frum’s fallacious argument that central banks’ actions lead “very rapidly” to inflation is an exaggerated position to which few economists and advocates of honest money subscribe.  Rather, central banks like the Federal Reserve over time eliminate competition by design (the reason why no new banks were created in 2011), create bubbles of high activity through easy money, thereby devalue our currency which results in inflation and then subsequently through their enforcer member banks rob real wealth incrementally. This is “how the Fed steals for the 1%.”

While not burning Frum’s straw man to the ground Schiff quickly poured cold water on the idea inflation was “invisible” pointing out that the Consumer Price Index (CPI) rose 3% in 2011, a number which Frum evidently was unaware of and once confronted with immediately and emphatically declared was “not right.”  Much to his chagrin, the CPI is actually 3.1% and real inflation is much worse.

At the beginning of March according to the American Institute for Economic Research (AIER) seeking to “develop an index of inflation that tracks the price changes ordinary people see in their everyday lives” proffered their Everyday Price Index (EPI), which attempts to address what the CPI does not.  AEIR found inflation soaring at 8%.  It’s obvious by their findings that the elites in the political-media complex, Wall Street, and the Federal Reserve aren’t feeling the pinch or don’t care to admit the average person is.

What is the reason for the disconnect?  Well, as Ronald Reagan famously declared inflation is a tax and that is what we are seeing today, the Federal Reserve is taxing the living daylights out of us.  As we all know, taxes are generally borne well by the elite and wealthy and even if we measured inflation as we did in 1980 and acknowledged our currently real inflation rate of 10% based upon that abandoned measurement it still doesn’t significantly effect the lifestyles of those in Washington D.C. or Wall Street like it does middle America or those living on fixed income and minimum wage.

No doubt the economy will be a deciding factor this election season, but 77% of Americans say gas will be the most important factor and the Federal Reserve’s actions over the last few years play a big part in the price.  Because oil is denominated in dollars inflation is easiest to see in gas prices.  Late last month Floridians were paying $5.89 for a gallon of regular gas in Lake Buena Vista and almost $6 for premium.  If you think things can’t rapidly deteriorate, think again – gas jumped 10 cents during an ABC ‘World News’ broadcast!

While the Middle East isn’t a stranger to tumult nobody could have predicted how the Federal Reserve’s actions could have led to the Arab Spring uprising.  Our advantage here in the United States is we benefit from being able to print the world’s reserve currency, but for how long?  China, Russia and even India are looking to trade with alternatives other than a dollar seen as increasingly volatile.

With all of the quantitative easing and more on the way, next to zero interest loans and the secret liquidity lifelines including guarantees of almost $16 trillion to Wall Street and foreign banks the cataclysm seems unavoidable.  While Ben Bernanke and David Frum might agree inflation is “subdued” history has shown us that sudden crisis can come without a moments notice, very similar to a white squall.  Monetary policy as sailing, by Bloomberg’s Amity Shales:

“The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.”

In the Federal Reserve’s first years on the job the CPI-U (urban CPI) went from 1 percent for 1915 to 7 percent in 1916 to 17 percent in 1917, obviously the calculations were different, but these are similar numbers to what we have now.  We saw similar inflationary events happen during World War II and in the 1970s’ economic malaise when Nixon scapegoated gold as a result.  Historical skeptics might write this all off as mere war spending alone during the first World War, WWII and Vietnam, but considering all the aforementioned financial gimmickry we buried beneath more than a $1.2 trillion National Security budget (FY 2012).

Today it’s coming from everywhere!  Whether it’s the threat of ObamaCare taking over one sixth of the economy, our growing entitlement liabilities under Medicare, Medicaid and Social Security, or the Federal Reserve trying to pay for it all while bailing out its member banks and socialist failures in Europe the impending squall is building energy just off our bow.  More from Amity Shales:

“The phrase ‘perception is reality’ is overused generally. But perception can be reality in monetary policy. The bond market doesn’t act merely on what it sees. It acts on what it expects of the Fed or the government. And our own Fed has let us know it’s capable of just about everything, which includes inflationary monetary policy. Disillusionment can come as fast as a gust, but building faith that the government won’t inflate again is like building a new sailboat, a project of years.”

Do we want to be spending years rebuilding the American sailboat?  No.  More importantly if Americans today had to rebuild it would they understand the blueprint, the U.S. Constitution?  If not where does that leave us, where does it leave the world we invented?

You can answer that one.

The Federal Reserve's White Squall, 5.0 out of 5 based on 1 rating

Tags: Arab Spring, ben bernanke, David Frum, deflation, Dow Jones, economic collapse, economy, End The Fed, federal reserve, inflation, monetary policy, OWS, Peter Schiff, s&p Print article