Rodney Johnson | Thursday, January 31, 2013 >>
I try to stay away from teen-speak. But with three teenagers, I’m constantly hit with terms I didn’t learn in school. I hear things like “bromance” in conversation or read “ROFLMAO” in a text message… I even see the latest in hand signals like the thumb and forefinger in the shape of an “L” on the forehead.
I now know the meaning of each of the examples above, but keeping up with all of it is tiring. Plus my kids laugh at me when I try to use such things in conversation.
Still, it’s proved useful outside of the teen world…
As it turns out, the Fed has been flashing the typical American the “loser” sign for some time now. And while I don’t feel I’m missing much by not keeping up with teen-speak, I’m definitely missing a lot, including money from my wallet, thanks to the Fed.
For the last five years the Fed has used unconventional tactics to attack what it sees as “major issues” in the U.S. financial system. From bailouts to loans to straight up money printing, the Fed has been moving mountains (of cash) to get things done.
In short, it’s trying to turn the tide of deflation that comes from debt reduction by cranking up the printing presses to full speed. This action is supposed to create inflation, and it does to a degree…
The Fed wants inflation and wants it badly.
The Fed wants stuff to cost more.
It needs prices to move higher so people will be compelled to buy stuff before it gets out of their reach. From cars, to homes, to gadgets, the Fed is desperate to make sure we face the prospect of having to pay more so we make the decisions to rather pay sooner!
This is supposed to boost demand, which will, in theory, boost production… thereby leading to increased employment and voila! The economy is “fixed!”
There’s just one problem. It doesn’t really work that way.
The Fed has definitely made prices go higher in some areas. Look at healthcare, or education, or food, or energy.
The Fed’s efforts have even mitigated some of the fall in the housing market, although the bubble that burst was so big that prices still fell 30% to 40% (and probably have more to go).
What the Fed has NOT done, and could not do, is somehow make incomes go up. Or, for that matter, make it so that consumers don’t have to save for their retirement so they can rather spend their money now on things like their children’s education.
This means the average American has flat income but rising costs (as prices go up around him). The net result: a falling standard of living.
That’s right. A big “L” for loser.
So, who are the “winners?”
That would be large banks, who not only got bailed out, but now benefit from the very real idea that if any trouble comes their way they’ll simply get bailed out again. The banks also get to make loans at 4% to 5% while paying depositors between nothing and 0.5%.
What a gift!
Equity traders and investment banks are loving this new normal, where funds and bank trading operations reach out on the risk scale to buy more and more, driving markets and prices higher.
Along the way there are a few scraps that fall from the table…
If we have retirement accounts with some equity exposure, chances are we have seen some growth. Of course, this has been more than offset by the loss of income on conservative fixed income, but let’s not quibble.
All of this highlights the ugly truth about inflation: it is not equal… it is not fair.
Inflation spreads through an economy unevenly, bringing unearned benefits to some and undeserved pain to others. Government officials get to run deficits with exceptionally low interest rates, bad-faith bankers get to keep their jobs and earn millions in profits, while consumers are put on the hook for higher public debt while their incomes fall further behind the cost of living.
This is what happens with monetary (money printing) inflation… and it must be so. If all things remained equal, if there was no shift in wealth, no change in value that took place, then why would any central bank ever print money!?
There must be an effect they are looking for. And I’m here to tell you that there is… and it has been accomplished.
What is being taken from us is being given to others.
All the while Ben Bernanke is shaking the hand of Jamie Dimon, then looking at us while he makes the shape of an “L” on his forehead.
Ahead of the Curve with Adam O’Dell
Rodney covered the “L is for Losers” side of the Fed-manipulation game. So I’ll take a look at the big winner.