Then I will draw near to you for judgment. I will be a swift witness against the sorcerers, against the adulterers, against those who swear falsely, against those who oppress the hired worker in his wages, the widow and the fatherless, against those who thrust aside the sojourner, and do not fear me, says the Lord of hosts. – Malachi 3:5
A Brief Recap of Fiat Currencies and Monetary Policy …
We’ve written on multiple occasions that the fiat monetary system and the shenanigans at the Federal Reserve are the mechanism by which the wealthy and powerful transfer money from the poor and middle class to themselves.
To the common man, money represents a medium of exchange and a store of value – and it must serve both functions to be money. We exchange our production with one another using money as an intermediary, lest we be reduced to barter – a much less efficient method of exchange. The money in our pockets represents the exchanged value of our productive lives. It is what we have gained in exchange for our ability and our quite-limited supply of time. It is what we have produced but not yet consumed. (Thus, when our “neighbors” tax us and take our paychecks for their own consumption, we take it personally – it is the democratic form of slavery.)
When the Federal Reserve prints money out of thin air (or banks lend it into existence out of thin air) they have generated something that competes directly with the exchange of our production, our lives, and our time. They have generated, with nothing more than the wave of a hand, the ability to bid in exchange for other goods and services. Thus, those with “first access” to the newly printed money – the government, the crony capitalists, the banks, and the already wealthy – gain something at the expense of the rest of us (it is zero sum … until it’s worse than zero sum). It is very much an “oppression of the hired worker in his wages” – to use Malachi 3:5 parlance.
They Keynesian justification for the fiat money system is just a facade. The elites need a reason to print; it’s now they stay elite.
At present, the justification for money printing (or, more correctly stated – “interest rate repression”) is the Fed’s dual mandate of stable prices and full employment. For whatever reason, “stable prices” has been defined as “2% inflation” and “full employment” has been defined as “around 5% unemployment”.
The Dual Mandate and the Obamacare Effect …
The Fed is now running into a problem with definitions. If you ever write down a set of conditions for the governance of monetary policy, people will take note if the conditions are met and yet you keep the printing presses going.
In the past these issues have been dealt with by changing the definitions (e.g., the removal of food and gas from “core” CPI), or by adding mandates (adding “full employment” to “stable prices”). More recently these issues have been addressed by calling into question the Fed’s own statistics (e.g., when the unemployment rate falls solely because the participation rate plummets). We discussed this last one further in “Bernanke Prints On“. (Remember, they always want to print – it’s how the elites stay elite. They only stop when the system threatens to blow up Wiemar style; a loss of confidence in the Fed is a game-ender.)
Of late the Fed has found an interesting foe in its printing policy: Obamacare. Through economically unproductive means, Obamacare appears to have brought about meaningful “improvement” in the Fed’s preferred statistics. (We use the scare quotes to note that “improvement” isn’t always a good thing – particularly when we’re talking about the goal of rising prices.)
For years now we have known that Obamacare reduces unemployment without improving the employment situation. First, Obamacare defines “full time” employment as 30 hours per week. Second, it makes stricter requirements for employers with 50 or more full time employees. Thus, small and medium sized businesses have an incentive to reduce hours below 30 per week and hire more people to fill the gap. No increase in production, but a decrease in unemployment – more hired workers.
Now Obamacare seems to be hitting the second part of the dual mandate as well. The latest CPI figures (released Friday) show a 0.2% decrease in aggregate prices, but a 1.8% increase in prices when ignoring food and energy. (Food and energy prices have been trending lower of late.) Why the massive increase in “core” CPI? Healthcare costs are spiking … thanks to Obamacare.
We’ve often harped on the fact that Obama follows the “favor-the-wealthy” policies of previous administrations. But here we have his signature legislation taking the legs out from under the Fed’s dual mandate for printing money and stuffing it in the pockets of the powerful. Do we dare give him the benefit of the doubt? Is it possible he’s been playing the long game this whole time?
I doubt it, but I do find these developments interesting to say the least. So, will the Fed finally raise short term interest rates from zero (or near zero) now that their favored measures (unemployment and core CPI) are very near the goal?
I obviously have doubts, but sooner or later they have to either raise rates or admit that fiat money has run its course and cannot be propped up any longer. If they do raise rates, I think a bit of the “forcing of the hand” will have to be attributed to Obamacare.