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All 12 members of the Fed’s Open Market Committee voted for the increase. One of them was Esther George, president of the Federal Reserve Bank of Kansas City. George then did something unusual in an interview with National Public Radio: she told the truth about what the Fed does.
“We see today that there is still some reserve of savings for households, which can allow them to continue spending in a way that keeps demand strong,” she said. “That suggests we may have to keep going for a while.”
In other words, the problem today as the Fed sees it is that ordinary americans have too much money. And the Fed will continue to bludgeon the economy until that is no longer the case.
This is essentially what Paul Volcker said in 1979, shortly after taking office as Fed Chairman: “The standard of living for the average American must go down.”
To normal people’s ears, statements like those of George and Volcker sound appalling and outrageous. And maybe they are. But George is not a monster; she also expressed concern that the Fed might go too far, saying, “I’ve been in the stabler and slower camp [rate increases], to begin to see how these effects of a lag will play out. You could honestly say she should be celebrated rather than blamed for her words: she was honest about the Fed’s mission and how it works.
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In 1977, Congress formally instructed the Fed that its mission was to “effectively promote the goals of maximum employment [and] stable prices. but what does that mean? And what happens when these two goals collide?
In theory, unemployment could get so low that regular workers could raise their wages so quickly that inflation would skyrocket. In practice, we know that unemployment can be so high that workers can not get higher wages, and as the economy grows, all earnings flow upwards.
The Fed stands directly on the fault line generated by the oldest and most fundamental conflict in history: that between wealthy creditors and working class debtors.
In any society with huge wealth disparities like the United States, creditors are always terrified of debtors taking over the monetary system, printing tons of money, and destroying the value of creditors’ financial assets. .
Currently, US households have about $16 trillion in debt, including $11.4 trillion in mortgages. Another $1.59 trillion is student debt. But thanks to cumulative inflation of 14% over the past two years, that $16 trillion is only worth today what $14 trillion was worth this time around in 2020. say that $2 trillion was actually transferred from creditors to debtors.
This is by no means a simple transfer of $2 trillion from the rich to the poor. It is complicated. Lots of rich people have big mortgages, for example. But on the net, it is indeed a big loss of wealth for the wealthy, and a gain for people further down the income scale.
The job of the Fed is to mediate between these two directly opposing interests. Creditors generally want lower inflation and higher unemployment; debtors will generally benefit from the opposite. The Fed’s preferred approach is to pretend that these interests are not opposed. But George just told the truth: they are.
After a huge increase in recent years, the poorest Americans now enjoy higher net worth than ever in US history. It gives them an unusual little leverage, some leeway, the ability to quit their job for a better one, even though, as George puts it, they “can continue to spend in a way that keeps demand strong.”
It’s a nightmare for rich creditors. They want this leverage of the working class eliminated as soon as possible and inflation crushed.
The Federal Reserve reacts eagerly to pressure from wealthy creditors, in part because wealthy creditors are mostly the only ones who understand the Fed and yell at it. So the Fed is now deliberately trying to slow the economy down until people’s savings are depleted and they can’t afford to keep buying things.
This truth about how the world works is ugly. Journalist William Greider explained in his book “Secrets of the Temple: How the Federal Reserve Runs the Country”:
Economic liquidation, in fact, resembled the form, but not the content, of a primitive religious practice—the pagan ritual of human sacrifice. Certain individuals were chosen to serve as victims for the good of all of society…in moral terms the process was sadistic, an example of what Thorstein Veblen called the enduring barbarism of modern society.
The economic victims were chosen at random, but mainly from the weakest groups in society. The methodology employed by the Federal Reserve to induce contraction…ensured that the strongest individuals and companies would be able to escape selection. There was this hierarchy within democracy – a hierarchy of vulnerability.
There are almost certainly better and fairer ways to deal with inflation than human sacrifice. For example, the central tension between debtors and creditors at the heart of the Fed’s mission would be greatly reduced if we were a more egalitarian country. But we can never understand this unless we are willing to look directly at reality.
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