The Fed, inflation and currency wars

By From page A1 | November 30, 2012


JAMES RICKARDS is the author of the book, Currency Wars. Courtesy photo

This year, the Mountain Democrat has covered the subject of the economy in a series of articles.

From stories describing how local people have lost their homes and jobs, to battles over higher taxes and fees, the thread running through all these articles is how people are affected by monetary policies.

Helping to make sense out of what is happening locally, nationally, and internationally, two individuals knowledgeable about the monetary system were interviewed on what is happening and how it affects us both economically and politically in this first of three articles.

One of those interviewed was G. Edward Griffin, who is an American film producer, certified financial planner, and author of several books, including one about the Federal Reserve called The Creature from Jekyll Island. He has a degree from the University of Michigan in speech and communications.

The second is James Rickards, author of the book Currency Wars: The Making of the Next Global Crisis. Rickards is a partner in JAC Capital Advisors, a hedge fund based in New York. Rickards has held senior positions at Citibank, Long-Term Capital Management and Caxton Associates and has appeared on CNBC, Bloomberg, Fox, CNN, BBC and NPR and is an Op-Ed contributor to the Financial Times, New York Times and Washington Post.

Rickards is also a visiting lecturer at Northwestern and the School of Advanced International Studies (SAIS), has delivered papers on risk at Singularity University, the Applied Physics Laboratory and the Los Alamos National Laboratory. He is an advisor on capital markets to the Director of National Intelligence and the Office of the Secretary of Defense. He holds a Master of Laws in Taxation from the NYU School of Law; a Juris Doctor from the University of Pennsylvania Law School; a Master of Arts in Economics from SAIS and a BA from Johns Hopkins.

The magic money machine at the Fed

Both Griffin and Rickards say much of America’s economic woes can be blamed on the Federal Reserve or the Fed. Since its founding in 1913, Rickards says it has destroyed 95 percent of the value of the dollar; Griffin says it’s more like 97 percent.

According to Griffin and others who have research the subject, the Fed is not an agency of the government and it has no reserves. Instead it is a cartel of private banks that has gained the most important monopoly of all — control of the country’s money supply.

Griffin said whenever the government needs money, the Fed simply creates it out of thin air and gives it to the government. That money then goes to government employees, contractors, foreign governments, and others. However, no one knows exactly who the Fed gives it to because it refuses a complete audit in order to protect its “independence.’

Eventually the money is deposited into commercial banks and using what’s called fractional reserve banking, the commercial banks are able to multiply the value of that money nine times in the form of loans at interest. In other words, for every $1,000 deposited with the bank, they can loan out $9,000. This so-called “high-powered money” is also created out of thin air.

The interest charged by the Fed on the use of their imaginary money goes first towards their expenses — which Griffin says are considerable — and then the remainder goes to the Treasury Department. Currently the interest due on this money is so large it will never be paid back. This raises the specter that the Fed, which recently announced it will buy $40 billion a month in mortgage-backed securities, may eventually take possession of a good portion of America’s assets in payment of the interest on the imaginary money they loaned us.

The Fed, the government and inflation

While Congress has the power to issue money interest free, it has chosen to support the Fed because of how the government benefits. According to Griffin, the government is always spending more money than it takes in in taxes. And if they had to cover all their expenditures with tax revenue, they’d be voted out of office or there would be a revolution.

So needing a large source of revenue other than taxation, they went into partnership with the Fed and gave them the authority to create money out of nothing. “That’s not all of it,” said Griffin, “but that’s the reason the government went along with this. They saw it as a means to get revenue without having to tax people and that’s the cause of inflation.”

However, inflation turns out to be the biggest tax of all although it’s a hidden one. On the surface, the price of everything appears to be going up when what’s happening is that the value of the dollar is declining because of money printing tied to government spending.

For example, back in 1955, a McDonald’s hamburger was 15 cents, a milk shake was 20 cents and fries were 10 cents. Today, it’s $1 for a basic hamburger, $1.20 for a milk shake, and 90 cents for fries.

Rickards notes that defenders of the Fed say the expanded money supply has improved the standard of living and maintain there’s no cause for complaint.
Income inequality
“But when you debase the money you create winners and losers,” he said. “The winners are banks, speculators, hedge funds, smart investors … there are a whole set of winners … The losers are everyday Americans. People who save. People who rely on insurance policies, retirement income, annuities, any kind of fixed income where it’s not going to go up….they are the losers. When the Fed pursues these policies, it transfers wealth from savers to speculators and banks and that increases income inequality.”

Rickards said that income inequality is actually worse in the United States than in places like Mexico. He said when he was growing up, “we always saw Mexico as the classic top-down oligarchical unequal income distribution society and yet America is even worse. The rich are getting richer and the poor are getting poorer.”

Rickards believes recent actions by the Fed to dramatically increase the money supply are deliberate efforts to create inflation in order to reduce what the U.S. owes to other countries. And though he doesn’t think these actions are intended to destroy the dollar, the debasement may have that effect anyway.

Devaluing debt to China

At present Americans benefit from the fact that the dollar acts as the world’s reserve currency. It has had that role since 1945 when the dollar was set as the peg against which other countries valued their currencies. It is that status which has allowed for the growth of America’s welfare-warfare state.

“But when things get bad enough we may find there’s another global reserve currency at the end of the day,” he said.”(The) short-term agenda is to get inflation into the economy because the U.S. cannot pay off its debts … 4 percent inflation for 17 years cuts the value of the dollar in half. So we can’t pay off our debts, but if we cut the value of the dollar in half, we can. So we’re sort of saying to the Chinese, hey, we owe you $3 trillion dollars, but we’re just going to print more money so here’s your $3 trillion dollars, but good luck buying a loaf of bread.”

Right now the U.S. is exporting its inflation because of the dollar’s status as the world’s reserve currency. According to Rickards, “For the time being, inflation is going abroad and is contributing to inflation in other countries because they are trying to peg their currency to the dollar and the way it works, we print more dollars and they find their way abroad in the form of purchasing their exports or direct foreign investments or hot money capital flows.

“If you’re China or another country and we’re trying to maintain your peg to the dollar, you have to print more of your own currency to soak up the dollars. The faster we print money, the faster other countries have to print to soak up dollars if they want to maintain the peg to the dollar. The result is inflation shows up overseas. (But it) will come home eventually.”

Contact Dawn Hodson at 530-344-5071 or [email protected] Follow @DHodsonMtDemo on Twitter.

Dawn Hodson

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