INTRO: Since the pandemic started, the money supply
within the US has risen by $6.3 trillion.
This is equivalent to a monthly increase of $233 billion, a daily increase of $7.7 billion,
and an hourly increase of $324 million.
Clearly, the money printing and quantitative easing has gotten way out of hand over the
past two years, and now, we’re facing the disastrous consequences of these economic
policies.
Last month, we say an inflation reading of 8.6% which is the highest reading in 40 years.
Meanwhile, average gas prices across the US have rocketed to $4.50, and I don’t think
we even need to discuss housing.
To make things worse, it seems like its going to take several months if not a few years
for inflation to cool down.
But, even if inflation where to go to zero tomorrow, all of the price hikes that we’ve
already seen are here the stay.
For prices to actually go down, we would need deflation or some radical change within supply
and demand.
So, chances are, prices will likely just continue to go up.
But, why did the fed even allow for this?
Many just assume that the fed is filled with a bunch of idiots who don’t what they’re
doing, but I don’t think this is completely true.
The fed has the best economists in the world on their side, so it’s very likely that
the fed did consider this outcome.
They simply decided that the potential consequences were worth the risk.
But, why do we even have the fed in the first place, and why do they print money.
It seems like things were way better before the fed was even a thing.
In fact, between 1776 and 1902, there was literally no inflation.
But, eversince the fed was created in 1913, the US dollar has only gone down in value.
In fact, the US dollar has lost 98% of its purchasing power since the fed was created,
and that was as of 2010.
The number is probably over 99% today.
Clearly, this is no coincidence, so why don’t we just close down the fed and stop printing
money?
NATIONAL BANKS: Well, to really understand why the fed is
even a thing, we have to take a look back at history and see how things were before
the fed.
The fed is actually not the first time that the US has experimented with the idea of a
national bank.
In fact, the US has played with national banking since the late 1700s.
At the time, the national government was extremely weak politically and economically.
The vast majority of power was given to state governments so that they could better tend
to local needs.
While this might sound great at first glance, this made the national government useless.
They weren’t able to achieve national goals such as paying off war debt, stabilizing the
currency, and rebooting the economy.
So, the founding fathers eventually decided to replace the Articles of Confederation,
which was the original document that governed the US, with the new and improved US constitution.
This gave the national government substantially more power, and treasury secretary Alexander
Hamilton wanted to leverage this power to establish a national bank.
He felt that a national bank would help establish economic stability within the US, and while
he did face some opposition, he would eventually get his wish in February of 1791 when President
Washington signed the bill into law.
Several months later in December of 1791, the first Bank of the US would open for business.
At first, the bank primarily dealt with national matters.
For example, they collected tax revenue, distributed funds across the US, and paid for various
programs and loans.
Something that was off limits, however, was buying US government bonds.
The founding fathers feared that this was not only an inflation risk but that this would
cause the public to lose trust in the national bank.
This also meant that the national bank did not set monetary policy and they did not act
as a bail out service for dying institutions.
They were just a regular old bank that happened to be used by the national government as well
as the public.
Despite this, the existence of a national bank was still a hot matter for the two decades.
Most of the people who initially opposed the bank still opposed it in 1811 when the bank
was up for recharter.
And given that the federalist party had lost the white house, the bank would eventually
be shut down in 1811.
Just one year after this, however, the war of 1812 would begin which once again introduced
economic instability.
This gave supporters of the bank the perfect opportunity to win over public support and
establish yet another national bank called the second national bank of the US.
Over the next decade, this bank would play a monumental role in the United States’
westward expansion as they issued loans to farmers and businesses that were looking to
settle the west.
Despite this major role in westward expansion, they were still not allowed to set monetary
policy or bail out institutions directly.
However, it didn’t take long for the bank to start playing with lending policies to
influence national interest rates and the money supply.
This freedom didn’t last long though as Andrew Jackson would soon come to power.
THE ERA WITHOUT A FED: Andrew Jackson was a major opponent to banks
in general because he simply didn’t trust them.
About 20 years before becoming president, he sold some land and the buyers would pay
him using paper notes from a bank.
But, before he could trade in the paper notes, the issuers would go bankrupt which meant
that his paper notes were worthless.
In other words, he had essentially given away the land for free.
For obvious reasons, Jackson was not a big fan of banks following this experience, and
he believed that only silver and gold should be used for transactions.
But, this wasn’t the only reason that Jackson was opposed to a national bank.
He felt that a national bank gave too much power to too few people.
He also felt that a national bank gave the federal government too much power over state
governments.
And on top of this, he felt that the national bank didn’t have enough regulatory oversight.
So, from his perspective, the solution was clear, the national bank had to go.
And when he won the 1832 election, he felt that he had affirmation from the public that
that’s what they wanted as well.
Jackson would veto the recharting of the national bank, and though congress tried to override
his veto, they would not succeed.
Jackson would pay off the entire national debt by selling federally owned land and cutting
spending substantially.
He would divide the remaining reserves amongst the state banks, and with that, the US would
enter a period with no national bank.
This actually worked out great for quite some time, and it seemed that there no need for
a national bank.
But, eventually, the civil war would role around which not only devastated the economy
but resulted in loads of debt.
And this time, there was no national bank to maintain stability and keep debt under
control which led to banking panics becoming rampant.
If you’re not familiar with what a banking panic is, it’s basically when a bunch of
people become fearful that their bank is not liquid enough.
So, they go to withdraw all of their money while the still can.
And when a bunch of people do this, it results in the bank actually becoming illiquid.
The US saw such panics almost every decade.
There was one in 1873, one in 1893, and one in 1907.
There was also two close calls in 1884 and 1890.
During this time period, people lived in constant fear that their bank could collapse at any
time.
And it was more popular than ever to just store gold under your mattress.
The US put up with this uncertainty for several decades, but the 1907 banking panic would
end up being the last straw.
The public was sick of living in constant fear of a financial collapse, and the government
was sick of constantly dealing with econoimc instability.
So, the government got together and hashed out the details of a new national bank.
And eventually, in 1913, they would pass the Federal Reserve Act which established the
fed that we all love and hate today.
WHY PRINTING MONEY?: As we can see from history, there needs to
be some sort of central financial body to ensure national financial stability.
This isn’t to say that a decentralized system is impossible, but thus far, a centralized
stystem has simply been far easier to establish and maintain.
So alright, the existence of the fed makes sense, but why are they so reckless with inflation?
I mean, this is literally the third time that we’re seeing high inflation within the past
100 years.
Well, the thing to keep in mind is that the fed is not trying to eliminate inflation by
any means.
In fact, they want inflation.
Not 8 or 10% inflation, but 2 or 3% inflation.
So whenever we’re under that target rate, like we were during the covid recession, the
fed will lower rates and print money.
And whenever we’re above that target rate like we are right now, the fed will increase
rates and engage in monetary tightening.
But, why even play this difficult balancing act and artificially create inflation.
Well, there’s a few reasons for this starting with encouraging spending and investing.
Every year that you simply hold cash in a savings account, you’re basically penalized
2 to 3%.
This discourages people from hoarding cash in a bank account.
Instead, they end up either spending the money or investing the money.
The government doesn't really care which one you do because both of them help the economy
and gdp.
There’s actually a full on economic theory surrounding this phenomenon called the paradox
of thrift.
The theory states that rising personal savings is detrimental to economic growth.
Here’s the thing, companies and industries become more efficient and productive with
time.
This means that the cost of goods are naturally deflationary over the long term.
I mean, just think about how much TV and computer prices have come down over the past 30 years.
I bet most of us wouldn’t buy an 8k TV right now because we know that they’ll be way
cheaper in 5 or 10 years, and that’s with inflation.
If there was no inflation, it would just be even more beneficial to wait it out.
And as more people put of such purchases, their savings will go up which according to
the paradox of thrift is detrimental to economic growth.
So, one of the key reasons the Fed supports inflation is to maximize GDP.
Another key reason is to decrease the debt load.
It’s no secret that the federal government has a boat load of debt, and inflation significantly
helps with handling this debt.
Here’s the thing, over time, debt payments remain constant.
However, with inflation, it becomes easier and easier to earn money which in turn means
that it becomes easier and easier to make your monthly payment.
Now of course, the government is still taking on way too much debt, but that’s a whole
different story.
By maintaining low but persistent inflation, they’re able to ease the burden of debt
payments not just for themselves but for everyone in the US who’s in debt.
If you’re not willing to play the game how they want it though by investing and taking
on good debt, inflation is just constantly screwing you over.
THE FED EXPLAINED: At the end of the day, money printing and
inflation are not that great for the average person.
It makes it way harder to carry on daily life and nearly impossible to achieve things like
home ownership.
But, despite this, the fed wont stop printing money anytime soon.
Sure, they might pull back for a little until inflation cools down, but sooner or later,
they’ll be printing money once again because it protects national interests.
It boosts GDP, makes the debt burden easier to handle, and it allows the government to
make up for their massive deficit.
As an everyday person, we can complain about this all we want, or we can play the game
how they want it.
We can invest in stocks, real estate, leverage low interest rates, and protect ourselves
as much as possible from inflation.
Or we can do nothing and remain a part of the middle class that’s constantly getting
poorer and poorer.
To me, the choice is clear, but that’s just what I think.
Would you guys prefer 0 inflation?
Comment that down below.
Also, drop a like if you hope that inflation cools down sooner rather than later.
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