The Fed’s Hidden Driver of Inflation
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“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
John Maynard Keynes – The Economic Consequences of Peace, 1920
“And when we see that we've reached that level we'll begin to gradually reduce our asset purchases to the level of the underlying trend growth of demand for our liabilities.” Jerome Powell, January 29, 2020
With that one seemingly innocuous statement, Fed Chairman Powell revealed an alarming admission about the supply of money and your wealth. The state of monetary policy explains why so many people are falling behind and why wealth inequality is at levels last seen almost 100 years ago.
“Real” is a very important concept in the field of economics. It generally refers to an amount of something adjusted for the effects of inflation. This allows economists to separate true organic growth or decline from the effects of inflation.
Real is equally important for the rest of us. The size of our paycheck or bank account balance is meaningless without an understanding of what money can buy. For instance, an annual income of $25,000 in 1920 was about eight times the national average. Today, that puts a family of four below the federal poverty guideline. As your grandfather used to say, a dollar doesn’t go as far as it used to.
Real wealth and real wage growth are important for assessing your economic standing and that of the nation.
Here are two facts:
- Wealth is largely a function of the wages we earn.
- The wages we earn are predominately a function of the growth rate of the economy.
Those facts establish that the prosperity and wealth of all citizens in aggregate is meaningfully tied to economic growth or the output of a nation.
Now, let us consider inflation and the role it plays in determining our real wages and real wealth.
If the rate of inflation is less than the rate of wage growth over time, then our real wages are rising and our wealth is increasing. Conversely, if inflation rises at a pace faster than wages, wealth declines despite a larger paycheck and more money in the bank.
With that understanding of “real,” let’s discuss inflation.