Why (and How) the Fed Could Incinerate Your Savings in One Month
By Ron Paul, for Birch Gold Group
As you might imagine, the last time I talked to the team at Birch Gold Group, the topic of inflation came up. I think this is a crucial matter for every American to understand.
Let me start with a fact about how money used to work. According to Michael D. Bordo, professor of economics at Rutgers University:
Whatever other problems there were with the gold standard, persistent inflation was not one of them. Between 1880 and 1914, the period when the United States was on the “classical gold standard,” inflation averaged only 0.1 percent per year.
In other words, if governments really cared about price stability, they’d adopt a gold standard!
Now, here’s why they won’t…
The cost of maintaining economic stability
The Federal Reserve was founded in 1913 to do one thing: maintain economic stability.
Now, economic stability is a good thing! That’s what enables families and corporations to plan for the future. Lack of stability creates uncertainty, reduces confidence in the economy and encourages short-term thinking at the expense of long-term planning.
I’m a big fan of a generally stable, prosperous economy.
These days, the Federal Reserve’s economic goals are:
- maximum employment
- stable prices (targeting a 2% annual inflation rate)
- “moderate” long-term interest rates
Here’s the problem: the Fed’s definition of “stable prices” results in a guaranteed loss of 2% of your purchasing power every year.
Why? Well, because they say so:
The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.
Notice, also, that “over the longer run” part of the statement above. That’s part of Federal Reserve Chairman Jerome Powell’s current list of excuses for today’s 8.6% inflation (over four times their goal!)
Now, let me ask you, which of these is better for price stability? Annual price increases of:
For me personally, I’m a big fan of knowing today’s money will still be worth about the same in the future! So let’s do a little math. Let’s put $1,000 under the mattress for ten years. After a decade, that $1,000 would be worth:
I simply cannot stress this enough:
The Federal Reserve’s goal is to destroy your purchasing power at “only” 2% per year.
Even at a “moderate” 2% rate, it’s taking a toll on your savings.
The 2% number seems arbitrary, even capricious, to me. Here’s the Federal Reserve’s explanation of why 2% wealth destruction per year is a good thing:
…inflation that is too low can weaken the economy. When inflation runs well below its desired level, households and businesses will come to expect this over time, pushing expectations for inflation in the future below the Federal Reserve’s longer-run inflation goal. This can pull actual inflation even lower, resulting in a cycle of ever-lower inflation and inflation expectations. If inflation expectations fall, interest rates would decline too. In turn, there would be less room to cut interest rates to boost employment during an economic downturn.
In other words, the Fed has to have some inflation, so they can intervene to “fix” the market during an economic downturn. (And, as we know to our despair, sometimes the Fed gets it very wrong.)
Could the Fed fix this ongoing wealth destruction, this invisible tax, just by changing their 2% target to 0.1%?
Theoretically, yes. In the real world, absolutely not. Here’s why.
It’s not about money, it’s about control
I’m going to quote a passage from my book, The Case for Gold:
Because gold is honest money, it is disliked by dishonest men. Politicians, prevented from buying votes with their own money, have learned how to buy votes with the people’s money. They promise to vote for all sorts of programs, if elected, and they expect to pay for those programs through deficits and through the creation of money out of thin air, not higher taxes. Under a gold standard, such irresponsibility would immediately result in high interest rates (as the government borrowed money) and subsequent unemployment. But through the magic of the Federal Reserve, these effects can be postponed for a while, allowing the politicians sufficient time to blame everyone else for the economic problems they have caused.
Because the Federal Reserve has another power: they can create “money.” They don’t actually print it (that’s the Treasury Department’s job). Instead, they simply “buy” U.S. debt on the open market, and credit commercial banks’ reserve accounts with however many dollars they “spent.”
This is how money is created.
In other words, the Federal Reserve operates as a constant source of funds to finance Congressional deficit spending.
Ever wonder why nobody in Congress talks about “balancing the budget”? Because they think they don’t have to! They believe the next Senator or the next administration will somehow figure it out for them.
If Congress was an individual who constantly spent beyond his means, eventually, he’d find no one willing to take his IOUs. Congress doesn’t have to worry about that, though, because they have the Federal Reserve who has an unlimited budget for turning government debt into dollars.
The real problem with the gold standard was that it prohibited this sort of financial hocus-pocus. The amount of circulating money was limited to the quantity of gold the nation held – period!
And, ultimately, that’s why the U.S. won’t go back to a gold standard anytime soon. It would force our government to make fiscally-responsible decisions, and figure out a way to pay for the $30.5 trillion (and counting!) they’ve already spent.
It would force our government to make hard decisions – like you and I do every day.
Until Washington, D.C. can bring themselves to behave responsibly, we’re stuck with a monetary system that arbitrarily destroys your wealth on purpose, for the “greater good.”
Here’s one final thought, another quote from The Case for Gold:
The Coinage Act of 1792 recognized the importance of not debasing the currency and prescribed the death penalty for anyone who would steal by debasing the metal coins.
We’ve come a long way from the principles our Founding Fathers set forth for the nation, some of them good, some of them bad. I firmly believe the Federal Reserve is one of the most economically destructive agencies in American history.
Ron Paul is a medical doctor, a retired Captain of the U.S. Air Force, an author who’s published 21 books and former twelve-term U.S. Congressman representing the state of Texas. He’s emerged as one of the leading voices challenging government’s addiction to deficit spending and the Federal Reserve’s wealth-destructive monetary policies. He works with Birch Gold Group to educate Americans about the threats to their financial futures, and how to protect themselves and their families.2022, Featured, federal reserve, inflation, ron paul