The View From 1776

The Fed Aims To Continue Stealing Your Money

2% annual inflation, the Federal Reserve’s current policy target, will produce cumulative inflation of 144% over a normal 45-year working span.  At retirement almost $2.50 will be required to purchase what $1.00 buys today.

Posted by .(JavaScript must be enabled to view this email address) on 05/07 at 04:48 PM
  1. In addition to those in the market who benefit from the current monetary system are the millions of Americans with home mortgages. Over the years, they will pay off the mortgage with somewhat inflated dollars, thus reducing the impact of the debt. The value of the asset remains generally intact because with reasonable maintenance, most houses will last indefinitely.
    Posted by .(JavaScript must be enabled to view this email address)  on  05/07  at  07:19 PM
  2. This, am I to assume, makes mortgage lenders readier to make mortgage loans that will be repaid in depreciated dollars?
    Posted by .(JavaScript must be enabled to view this email address)  on  05/07  at  09:03 PM
  3. Interesting article--and I agree that the government debt, continually escalated by the Fed printing money, will hurt citizens for generations to come. But I don't quite see the logic of valuing corporate stock in terms of how much gold they are worth. Indeed, I see little value in gold except for jewelry for the ladies!

    I have never owned gold and see it merely as a speculation or an adornment. It goes up and down in price and provides no income.

    I also don't understand why the harm done by inflation is always reported based on the assumption that a person holds all his assets in a cash account, which is, since the FRB was founded by Wilson, a fools game. M. Jay hinted at the solution above--In my youth it seemed to make sense to acquire real estate and common stocks and finance them as much as possible with cheap debt. House lots in suburban Boston have gone up in price about 100 times in the last 55 years. If they were bought with a fixed rate mortgage, that leverage could more than double that actual multiple return on your investment. (Roger Babson also told us in the 50's to "buy land, especially waterfront!")

    Nevertheless, the crime against Americans is that most wage earners never save or invest so they get further behind over time and their after tax consumable income buys less and less. And the public schools do not teach them how to cope with the government/bankers thievery.

    What it comes to is that to survive the depradations of Obama and Goldman Sachs, one must understand finance, inflation, appreciation rates, leverage, the real estate market, and tax minimzation. Fortunately, when I was applying for three job openings at HBS, I was rejected by two, and accepted for the accounting, finance, and tax position! The rest was history.
    Posted by bill greene  on  05/08  at  09:43 AM
  4. Thomas,

    You are correct that Mortgage lenders understand perfectly well that their loans will be repaid in depreciated dollars. They structure their loans to take this into account, or they will soon be out of business!
    Posted by .(JavaScript must be enabled to view this email address)  on  05/08  at  10:35 AM
  5. J. Jay,

    Your last comment is not quite accurate. They don't structure their loans to take this into account because, individually, they (lenders) no longer have either control or responsibility for that structure. Once the Fed assumed that responsibility, lenders became mere agents of the Fed, and the Fed is a quasi-appendage of the Federal government. So, if anyone now has responsibility for this dilemma and sets it terms it is the FRB and Federal government. For their part, lenders have very little wiggle room.

    They (lenders) all know a reckoning is coming, but they are also gambling that reckoning won't happen soon enough to matter to them personally; and history has thus far proved them right. Why doesn't the Fed call a halt knowing it is crash prone? They don't because that would result in an immediate crash and the board members don't want to be the guys who caused the worst crash in financial history. So, they patch it up the best they can and keep things bouncing along.

    At some point, however, the sheets will have to be balanced; else we will have to burn down the whole wobbly system and start over. When that happens, whoever is left holding the debt will be screwed. For that matter, so will the rest of us since we will be forced for some time to resort to barter when our paper and plastic money are worthless. Property and gold values will collapse too, so I don't see much real advantage there except that something is still better than nothing (assuming you can hold onto it). It has happened before, just not on this scale; so we do know it will happen, just not when.

    It seems to me it will happen when enough confidence is lost in the system we have that people stop investing in it and lending sources dry up. We are seeing signs of that happening already. Of course, confidence ebbs and flows, so it is still anyone's guess which cycle will be the proverbial 'straw that breaks our camel'. Lending has always been a risky affair, so it is just a matter of how risk intolerant our system has become.
    Posted by .(JavaScript must be enabled to view this email address)  on  05/18  at  06:29 AM
  6. There was a time when local banks gave out mortgages to their customers who they knew personally--and most importantly, those banks then held and serviced the mortgages until they were paid off. This worked well because both the lender and borrower were and remained individually responsible for their actions. And if a banker made a bum loan they took the consequences.

    As Bob S points out, the government agencies, and legislature, and executive fiat, has replaced that system with a complex system where no one is responsible for their actions. Most of the profit is reaped at the time of mortgage placement, and the resulting paper is peddalled off to others, who then securitize it and peddle it off to others. Like musical chairs, the last one left standing gets the shaft--but, even then, the government may bail them out.

    Almost everything in political "science" and economics comes down to personal responsibility. Without that self-controlling factor, nothing functions properly. Regulatory activity should only be designed to provide an open, level playing field, with fair and just consequences for wrongdoing. As Adams is quoted in this site's masthead, no organization can . . "contend with human passions, unbridled by morality and true religion.

    Posted by BIULL GREENE  on  05/18  at  07:21 AM
  7. To bring the discussion back to reality, banks are perfectly aware that over the life of any mortgage loan some inflation will occur (and they are aware that if no inflation occurred the country would be in a heap of trouble called "deflation.) So, 2% per year inflation is a perfectly workable level of inflation that - history shows us - has not caused the sky to fall over the last century.

    Those who fear it are free to buy up gold and stick it under their mattresses if that makes them feel more secure.
    Posted by .(JavaScript must be enabled to view this email address)  on  05/19  at  09:32 PM
  8. The real reality, Nr. Jay, is that banks, and there are many different types of them, will do what they can to make a profit. Like all of us they have to learn how to cope with government edicts. In the past the classic scenario was to charge 6% on loans, pay 2-3% to depositors, and hope that the spread would exceed their costs and inflation.

    Recently the government has rigged low interest rates, so depositors earn less than 1% on their deposits, borrowers pay 3-4%, and the spread won't cover the bank's cost of operations let alone offset inflation. That may explain why mortgage banking has been a disaster for the last decade or more, and why the big banks have gone into complex speculative practices that has bankrupted many, or forced taxpayers to bail them out. The irony is that those big banks are still reaping billions in profit from these speculative practices, while the mortgage sector suffers.

    Clearly, the true reality is that the government has disrupted almost every facet of the financial industry while depriving savers of a decent return on their thrift and rewarding the bad behavior of well connected financial titans.

    As this 1776 post asserts, inflation is a major and dangerous force to be reckoned with. As I asserted in #3 above, the unfortunate reality is that citizens, as well as banks, to survive the depradations of Obama and Goldman Sachs, must understand how to beat the system--including inflation and regulatory hurdles.

    My college classmate, Wayne Rogers, wrote a book on this subject: "Make Your Own Rules; A Renegade's Guide to Unconventional Success." As the title clearly indicates, you cannot succeed in America anymore by simple work and thrift. Rogers points out how you have to constantly find ways to circumvent the many obstacles placed in your way by a meddling government bureaucracy. And he illustrates how to even take advantage of those hurdles and regs to make a buck!

    This diversion of a people's efforts into non-productive schemes and devices results in a less effective economy--the expected and historically proven end result of all socialist programs.
    Posted by BILL GREENE  on  05/20  at  06:18 AM
  9. Mr. Jay, you write , “To bring the discussion back to reality, banks are perfectly aware that over the life of any mortgage loan some inflation will occur (and they are aware that if no inflation occurred the country would be in a heap of trouble called "deflation.).”

    I don’t believe you can document a single case in which deflation caused an economic problem. Deflation is, so far as I know, always a result of an economic recession, not a cause. If you know of specific instances, I will welcome the information. Japan, about which we have had some discussion, went into deflation after massive over-expansion of bank credit and loans to too many bad credits, which snuffed out creditworthy lending expansion for more than a decade.

    More broadly, there is no single “price” to be measured as inflation or deflation. As has been windily noted, high-tech prices have rapidly and steadily decreased year-by-year, while many commodity prices have risen, because of the rising costs of production. Meanwhile the Fed has decreased the value of the dollar, especially since 1971, when Nixon took us off the last vestiges of a gold standard.

    The only real danger is from central banks run by hubristic people who think they know how to manage vast, extraordinarily complex economies, the same people (Bernanke, e.g.) who were telling Congress that everything was in great shape just months before the financial system imploded in 2007-2008. Mr. Bernanke’s assessment was that the only problem was too much saving in the worlds’ economies, at a time when businesses and individuals were drowning in debt beyond their capacities to service.
    Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  09:52 AM
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