Wednesday, July 29, 2009

The Fed Steals Your Money

More rain in Cincinnati and my sunflowers continue to grow.

The main topic today is monetary policy, or the way monetary policy is run in the United States. Monetary policy is run by the Federal Reserve Bank (1913) our central bank that was created by Congress. It is my opinion, that the Fed has gotten involved in things that should be handled by the Congress, but since so few people have any idea what monetary policy is, or does, no one, and, especially the talking heads on TV, say anything about this.

Yesterday I read a short article in TIME magazine about the minimum wage. Can people live on a minimum wage is a real good question. But a better question is: why does the minimum wage need to be raised every few years? Inflation? Yes, inflation makes it necessary for the Federal Government to raise the minimum wage every few years. But, did you know that on an adjusted for inflation basis, the minimum wage was the highest in 1968? Back then, you could buy 5 gallons of gas where today you buy less.

This morning while watching Morning Joe on MSNBC, one of the talking heads said that not everyone is going to be able to own a home. That there will be some people who, because they earn a minimum wage will have to rent their whole lives. That means that if you rent your whole life, you can not lock in your rent the way a person who buys a home and locks in their mortgage payment for 30 years. (I know in some parts of the USA there is rent control, but for my purposes, let us leave this out.)

Monetary policy is run for the benefit of those that can borrow. If you can not borrow money, you are left on the sidelines. Borrowing money to buy a home gives you a certain measure of stability. And, if you buy a building with several apartments, or a 2-family (duplex), the rents help you pay the mortgage. In periods of inflation, rents go up and more money comes in, while at the same time, the mortgage payment is locked in for 30 years. Owning is better than renting under the way monetary policy is run in the USA. The idea that everyone who can afford to own a home should try to buy a home is still a good idea. The trouble came when it became perverted and people that had no business taking on such a huge mortgage tried to buy a home on a liar's loan.

So, where am I going with all this? Right back to the issue of consumer protection for home buyers and SEC protections for investors. If, we establish that monetary policy is going to be run for the benefit of those that can borrow, see why credit ratings are so important to both individuals and corporations, then inflation will follow, and as inflation follows, it becomes necessary for a whole group of institutions to invest funds for the future. If people and institutions must invest to maintain purchasing power because monetary policy is going to be run in such a way as it creates inflation, then does not it fall on Congress to at the very least protect both individual and institutional investors against unsavory practices by Wall Street?

The old saying, "the rich get richer and the poor get poorer" is not too far from the mark. When Congress lets Wall Street make "marks" of us all, the whole country pays. Look around, the mortgage-bond market meltdown, the financial crisis and the economic crisis that followed are directly related to the lack of creditable regulation, auditing, oversight, transparency and enforcement of the Securities Laws (1930s) and the Investment Acts (1940s) that were already on the books.

People will have to wake up to the man made financial and economic disaster that just occurred before change can take place. It is your hard earned money they are stealing, and only you can stop it.

Stay tuned.

P.S. You need to write your Senators and your Representative about your concerns for a more level playing field for investors both large and small. Wall Street has highly paid lobbyists to make their case, you need to counter too. We have the vote, now we need to use it. The revolution is just beginning!!!


LceeL said...

So the real question, in my mind, is what would a non-inflationary economy look and feel like?

moneythoughts said...

It is almost like saying what would a gasoline powered engine look like without any exhaust into the atmosphere. At this point, I think that is impossible; however, Butch is the gearhead to answer that.

I think you are making my point. Inflation is a by product of an economy that uses credit. But, not just simple credit. You have to go back to understanding how commercial banks make loans, create demand deposits, and can make other loans from the original demand deposit and continue this process until they have used up the reserves they must hold back against each loan they create. That is why the ability to borrow money is also referred to as leverage. If you walked into a bank in downtown Chicago and borrowed $10 million by just signing your name to a note, think of the leverage that would give you.

I know zero inflation can not exist in our style of economy. Thus, investing, whether a large state pension fund, insurance company fund, foundation, endowment or a 401-k for an individual is by circumstance a necessity. How else can we hope to maintain the purchasing power of our dollars without investing? So, we are a little bit over a barrel. We have a choice: save at the interest rate and pray that inflation doesn't destroy the future purchasing power of our savings, or, invest in the capital markets and take our chances. With all the peoples that have money invested in state employee pension funds, state teacher, public school employees, police & fire and highway patrol pension funds, you would think that our U.S, Senators and Representatives would be more vigilant looking out for our money. They are so concerned about our health care, you would think they could shift a little of that concern towards our retirement.

winslow said...

In every endeavor the question is "who fumbles the least".

It appears at this point in time, China is making better decisions.

Within 15 yrs, China will the economic power in the world. All of our discussions about U.S. economic and fiscal policy may be moot.

moneythoughts said...

I disagree. The United States will still be a place people will want to come even if China is the largest economy in the world. They have the largest population already.

The USA might become a niche player in your opinion, but the growth of ideas and the opportunity to see those ideas go from paper drawings to a physical reality will be something giving us a distinct edge. That is if we don't destroy ourselves and our freedoms. Our democracy, like other democracies, is dependent upon a loyal opposition. That loyal opposition, in my opinion, is disappearing, or morphing into a virus that may destroy us all.

Butch said...

Ahhh, but winslow might be right. China has started to morph as you put it. We are too morphing with the help of our greedy corporations that take our jobs off shore and the government that allows it and calls it "free trade".

And like you said, until we protect ourselves by letting our congressional buttheads know how we feel, China yes but maybe even Mexico may claim the industrial crown. China has, whether they want to admit it or not, into a more capitalistic state over the past few years. The taste of money and wealth will change a lot of things.

True free interprise will bring true freedom in the long run. People do come to the US for our democracy, China is changing and changing fast.

Robert said...

Over the past couple of decades, inflation has been rampant in house values (in many parts of the country) and health care costs. In some other areas, like electronics, prices have been even coming down. Technology and other factors have driven these price drops.

Education costs and a few other things have been inflating also, but many sectors of the economy seem to remain stable or even experience price drops.

It's kind of like we have diverging economies in terms of inflation.

No wonder a lot of people can't afford to buy a house these days and many have borrowed for a house that was out of their means. They were able to borrow only because a bank didn't check to see if their income was enough to qualify for the loan.

That has put us where we are at now. The foreclosure crisis.