But the Fed didn’t do that. Instead, it made its money available to financial institutions and indirectly to the government. The financial institutions devised numerous imaginative ways to make money on the new money, but very little of it got into the hands of middle class consumers, the people who can most directly drive up consumer prices. Reported inflation has actually fallen, to a low 1% in the US, and only .8% in Europe.
Are these inflation figures reliable? Inflation certainly does not feel this low to most people. And, in all probability, it isn’t.
Shortly after Social Security and other government payments were linked to inflation, government statisticians began changing the way inflation is calculated. You won’t be too surprised to learn that much of the re-engineering, which reduced reported inflation, was done by the always clever Clinton administration.
Business economist John Williams (shadowstats.com) estimates that if we calculated inflation the same way we did in 1980, it would be running at around 9% today.
Based on this, are we on the verge of even more inflation? Is that where all the Fed’s new money creation will lead us? Perhaps, but not necessarily.
When the Fed creates masses of new money, one result can be runaway inflation. But there are other possibilities. All the new money can instead lead to recession, unemployment, and even depression.
How is it that the new money can produce such different outcomes? Keep in mind that the new money created by the Fed is not just given away. It is made available to banks to lend, and thus enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much can strangle it.
As consumers, businesses, and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income instead are siphoned off to pay for past mistakes. We end up with a zombie economy, still breathing, but just barely.
Historically we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.
Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending. It also holds interest rates very low, which for now keeps the debt house of cards from tumbling down.
Will the Fed’s feckless money creation end in inflation or depression? It could go either way. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness, and depression.
It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970’s. If we measured inflation as we did in the 1970’s, it would be apparent that we already have it today.
The new Fed chairman Janet Yellen says that 2014 will finally bring us back to blue skies, with economic growth picking up. She also believes, relying on government figures, that unemployment is currently 6.8% and falling.
What this overlooks is that reported unemployment is falling because more and more people are giving up and dropping out of the labor force. As John Williams points out, the unemployment number, calculated as it once was, would be rising, not falling, and over 20%, similar to what we had in the Great Depression.
This article was published by permission of Against Crony Capitalism.org