Deadly Assumption #3: The Federal Reserve System Will Not Inflate
One of the most useful tools on the Web is the Inflation Calculator. It's on the Website of the Bureau of Labor Statistics. It's part of the Department of Labor.
Why not give it a try? Go to this Web address:
The first list of options on the left-hand side of the screen is this: Inflation & Consumer Spending. The second link is Inflation Calculator. Click it.
Up pops a box. At the top of the box is blank box. It's for money. I like to use 1000. Underneath is a year. They use 1980 as the base year. That's good for a test. Type in 1000. Then click "Calculate." You will see what you must earn ,after taxes, to buy today what $1,000 bought in 1980. Go ahead. Try it.
This assumes that the Consumer Price Index has not been manipulated by government statisticians to make the rate of depreciation (inflation) seem lower than it is.
Now have a little fun. Use the program to find out what it takes today to buy what $1,000 bought in 1964. That was the first year of Lyndon Johnson's Great Society spending programs. I'm not going to tell you the number. See for yourself. Enter 1000. Use the down triangle to activate the pull-down list of years. Use the scroll bar to get to 1964. Click the highlighted link: 1964. Then click "Calculate."
Grim, isn't it?
This calculator allows us to go back to 1913, the year that the Federal Reserve Act was signed into law. Put 1000 in the box. Then click "Calculate."
Oh, my.
Let's return to Assumption #3: "The Federal Reserve System Will Not Inflate the Dollar." Why would anyone believe this? What evidence is there which would support such an assumption?
On this site, I include a link to a page that has links to several important Federal Reserve charts. This link is on the right-hand side of the site's home page. I include these links because I want my readers to monitor FED policy on a regular basis.
There may be a few weeks or even a few months when FED monetary policy is flat or even deflationary: reduced money supply. But these periods do not last long. Within weeks, the Fed will go back to expansion.
If the FED were to stabilize money, there would be a recession, followed by a depression. Why? Because, ever since the administration of Franklin Roosevelt, beginning in 1933, the FED has inflated the money supply, and prices have risen. Everyone today has made contracts based on the assumption that prices will rise. Debtors expect to have help from the FED in paying off their loans. They expect to be able to repay in depreciated money.
If the FED were to reverse its policies since 1933, every debtor would find that his debts are going to become more burdensome than he imagined. Businessmen would start firing workers and cancelling new projects. Interest rates would rise. Money would get scarce. We call this tight money.
The invariable result is a recession. Recessions are always fought by the FED by expanding the money supply. This is the FED's only counter-cyclical (they call it cyclical) policy: create new money in order to force down short-term interest rates and "get the economy rolling again."
In the recession of 2001, the FED pumped in money. The Federal Funds rate was driven down from 6% to 1% in less than one year. This is the overnight rate at which banks lend to reach other -- the shortest of short-term rates. You can see this in this FED chart:
The decline is visible in all four mini-charts, but the FedFunds rate, at the bottom of the page, is startling. This is the most dramatic fall in interest rates in our era, both in terms of speed of decline and percentage of decline.
The economic recovery has not been much of a recovery. It has been marked by increases in housing prices, because buyers have taken advantage of the fall in interest rates. They have re-financed their homes. They have bought larger homes with larger mortgages.
Why should we expect deflation? Why should we expect even stable prices?
The FED in 2005 began to stabilize the money supply. Short- term interest rates have more than doubled, although they are still far below normal. Depending on what price indicator we choose, prices are rising to match the increase in the Federal Funds rate.
After taxes and after rising prices, real wages were falling in the first half of 2005. On average, the American worker was getting poorer. Nevertheless, he still refused to save. He was borrowing even more money to buy consumer goods.
The typical American has learned that inflation will eat up his savings. He sacrifices now, only to see his bank account fall in value. He has learned a lesson: "Eat, drink, and be merry, for tomorrow things will cost even more." And they will.
There are ways to beat inflation. That's what my Website is all about. But how many Americans are aware of these strategies? Hardly any. So they spend. They eat their seed corn and borrow money from Asians to buy more.
This is not good news for the American economy. But it's good news for people who are members of my site, and who take steps to beat the system.
These departments are relevant to preparing for a recession and profiting from it: Federal Reserve Policy, Business Start-Up, Your Career, Real Estate, and Budgeting.
Meanwhile, don't forget to subscribe to my free Tip of the Week report, which is sent every Saturday morning. The sign-up box is on the Home page.