Like a Thief in the Night: Part I

Like a Thief in the Night: Part I Image

“If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.” – Thomas Jefferson

Those words were written over 200 years ago, but do they ring any bells in your head today?  What if I mention the Federal Reserve?  If not you are not alone, but you better open your eyes quickly.  The Federal Reserve is stealing money from your pocket and you do not even know it is happening.

Before I go any further, here brief review of the Federal Reserve from a past article:

The Federal Reserve, our nation’s central bank, operates in a shroud of secrecy and with absolutely no oversight controls by Congress.  Since its founding in 1913, the Fed has been the target of fiscal conservatives and libertarians alike…

Many Americans have little understanding about what the Fed is or what it does.  At best, they may just assume it’s a government entity that has always been around… the Fed is the single most influential entity in both the U.S. and the world economy.  The Fed directly and indirectly affects every single American though its decisions and fiscal policies.  That is a lot of power!

Entire books and documentaries have been published on the Fed, so unfortunately I would do great injustice trying to tackle it all in 1000 words.  A brief summary of the Fed and its history can be found on Wikipedia, but if you have more time I recommend reading the New York Times bestseller End the Fed by Ron Paul (Small disclaimer: I certainly do not endorse all of Ron Paul’s policies, when it comes to fiscal matters, the fed, and government irresponsibility, he usually nails it!).  Another great NYT bestseller is Meltdown by Thomas Woods, which takes a more general look into the causes behind our economic woes.  And then if you are a complete economics nerd, the Ludwig von Mises Institute has a documentary on YouTube, along with countless free e-books, documentaries, and other resources on their website.

In the current economic flux we are in the Federal Reserve has been tasked to do whatever it can to create stability and growth.  That of course is its chief purpose.  Chairmen Ben Bernanke has not been shy about keeping interest rates low by quietly pumping cash into the economy, a measure known as quantitative easing.   The Fed and the government keeps quantitative easing low key for a reason.  They prefer you to stay ignorant of the costly effects such a policy has on your pocketbook.

Quantitative easing is essentially printing money to inject in to the financial system in order to ease credit markets by inflating the money supply.  Since money can be created out of thin air electronically, no actual printing of paper is necessary.   There are two key problems with quantitative easing that you should be aware of because they can severely affect your life.

First, the very action of printing money causes inflation.  That is the Fed’s objective, but it is not necessary good.  Common sense tells you that the more you have of something the less each item is worth.  Therefore, by inflating the money supply every dollar in America becomes worth less.  Specifically, every dollar in your wallet and bank account is worth less.  For example, the T206 Hogas Wagner baseball card is the rarest, most valuable baseball card in the world.  By 1911 no more than 200 of them were distributed to the public.  However, if 5000 of them were originally printed then Wayne Gretzke would not have received a $500,000 reward when he sold one of the few remaining copies.

The second problem with quantitative easing is really an extension of the first problem.  Inflation is the result of printing more money, but what happens when too much money is printed?  The answer is hyperinflation!  Hyperinflation is the result of out of control inflation causing prices to increase rapidly.  We have experienced hyperinflation before during the Revolutionary War due to the excessive printing of continental currency, but the best example of hyperinflation is the Weimar Republic (post WWI Germany).  Hyperinflation was so severe in the Weimar Republic that employees were paid as much as three times per day so they can run out and purchase food and supplies before their money became worthless.  At one point it cost $3 billion Marks (German currency) for one pound of bread!

America’s economy and money supply may not be near the conditions of the Weimar Republic, but we are by no means immune to the same disastrous result if we pursue the same inflationary policies.  The Fed may be using quantitative easing in a smarter (I use that term very loosely here) way, but at the cost of your hard earned dollars!  In part 2 I will go into specifics about the Fed’s quantitative easing actions and what we can likely expect from it in the near future.

Read Part II