From the front page of the April 10 edition of The Wall Street Journal: “Fed officials expressed concern about the persistence of low inflation at a policy meeting last month, according to meeting minutes.” I know the Fed has been hoping, wishing, and working for higher inflation for a long time now, but I just can’t get used to the idea of the central bank desiring inflation. I guess it’s because I’ve always thought that the purpose of a central bank is to defend the soundness of its country’s currencies, not to depreciate it. How quaint and naive of me.
The Fed tries to defend its pro-inflation stance by asserting that more inflation will boost economic growth—as if real growth is achieved by creating more monetary units. If only wealth production could be increased so easily. I don’t know whether we should laugh or cry that the central bank’s leaders espouse such a facile theory.
Let’s look at what the actual consequences will be if the Fed achieves its stated target of two percent inflation per year. Perhaps this dates me, but I can remember when an inflation rate of two percent was cause for concern. (Note: I am using “inflation” in the same sense the Fed now uses it—as a measure of increased prices, also expressed as its converse, a measure of the loss of a currency’s purchasing power—not in the technical economic sense of a rate of increase of the money supply.)
If the Federal Reserve Note (the dollar substitute that serves [poorly] as our currency today) depreciates at a two percent rate, it will lose one-third of its purchasing power in only 20 years. You would think that if President Obama really cared about the middle class as much as he claims to, he would protest the Fed’s erosion of the buck’s purchasing power. For the despised rich to lose one-third the purchasing power of their millions would be a nuisance, but for the middle class (not to mention the poor) such an erosion of purchasing power could be a disaster for their standard of living. Of course, some middle class persons will be able to increase their productivity and pay faster than the rate of inflation, and may even receive a financial windfall by investing in assets that do well during periods of currency depreciation, but that raises issues of unfairness, since some in the middle class will benefit while others get hurt.
For the Fed to strive for a two percent inflation rate while holding interest rates at historic lows, with short-term rates falling well below two percent is to punish saving, thereby disincentivizing the capital formation that enhances workers’ productivity. Combining Fed-engineered inflation with the Fed’s ZIRP (zero interest rate policy) will create Bizarro bonds, advertised in the fictitious Bizarro world as “Guaranteed to lose money for you”—one of the goals of that topsy-turvy world of inverted values.
Who benefits when the Fed depreciates our currency? Debtors, of course, since they will be able to repay their loans in currency units of depreciated purchasing power. And who is the largest debtor, therefore, the greatest beneficiary? That would be the federal government–the largest debtor in history. If the Fed succeeds in meeting its target (a big “if,” because markets could overwhelm the Fed with deflationary forces or the Fed could miscalculate and trigger a faster inflationary depreciation than their target rate) then purchasing power equal to one-third of Uncle Sam’s nearly $18 trillion of debt will not be returned to the Treasury’s creditors. In short, the Fed will have defrauded lenders to the tune of $6 trillion.
Currency depreciation is one of government’s oldest tricks. John Maynard Keynes cynically advocated currency depreciation as a way to erode the purchasing power of labor’s wages as a politically acceptable way to deceive workers. Indeed, the spirit of Keynes is alive and well at the Federal Reserve today. The scary part is that most people regard what the Fed is doing as helpful, even normal. Welcome to the Bizarro world.
