COVID-19 and the Fed

FORGET NONE OF HIS BENEFITS
volume 19, number 19, April 30, 2020

“Differing weights and differing measures, both of them are abominable to the Lord.” -Proverbs 20:10[1] 

When you go to the meat section of your Super Market and you wish to buy a pound of ground beef for the soup you are preparing for that night, and the package says the weight is one pound and the price is $3.50 per pound, then the price you are to pay for one pound of ground beef is $3.50. But what if the butcher has a false scale which reads one pound but the scale is off by one tenth of one pound? You would still pay $3.50 but you have been cheated because you are unknowingly receiving less than you paid for. Clearly God hates this sort of thing and calls it an abomination. To put this into perspective, He also calls homosexuality an abomination (Lev.18:22). 

Congress recently approved, and President Trump signed, the $2.2 trillion CARES ACT[2] stimulus package to keep our economy going in the midst of the COVID-19 pandemic. Here’s an important question to ponder—how did we pay for it? Did the U.S. Treasury have an extra $2.2 trillion stashed away in a bank? The answer is “No.” Well, where did the money come from? The Treasury just printed it. Actually, to be more specific, they really did not print $2.2 trillion. They simply digitalized it. Voila! They declared (the Latin word is fiat and economists call this fiat money), made up out of thin air, $2.2 trillion so that the Federal Reserve Bank (the Fed) could purchase $2.2 trillion in U.S. backed securities, mainly Treasury notes. This injected $2.2 trillion into the money supply.[3] Actually, as of April 16, the Fed is now on the hook for a record $6.42 trillion, one third the size of our economy.[4]

Okay, so what’s wrong with this? Well think of it like this. Let’s say that my town of Irondale is a city state, completely independent from the city of Birmingham, Jefferson County, the state of Alabama, and the United States. Let’s also assume that Irondale has declared that our fair city state will only use gold to back promissory notes (dollar bills) and furthermore, Irondale has a supply of 50,000 ounces of gold, no more, no less. Today gold is selling for nearly $1700 per ounce so this means my fair city state has a real money supply of $85 million. If I go down the street to Golden Rule Barbecue and buy a barbecue plate for $11, then I could conceivably use a gold coin or paper currency to pay for the meal or I could charge it on my credit card and pay the bill later with a check, cash, or online debit from my checking account. It does not matter how I pay because gold is backing the purchase.

But let’s say the city state of Irondale incurs a $20 million debt in building a new Shades Valley High School and the property tax revenue is well short of covering that debt. What are the city state fathers of Irondale to do? They decide to allow their Central Bank to buy $10 million worth of bonds at five percent interest from the Treasury Department. But wait, where does the Central Bank get the money for the purchase of these bonds? They print it or digitalize it. It’s like my granddaughters playing hotel at our house and writing checks on my old bank in West Hartford. I have seen them write checks to me for $100,000! Pretty cool but we know this is only fiction. There is no money to back their checks. This is not so for the city state fathers of Irondale. They inject $10 million of additional “money” into the money supply which had been fixed, tied to gold at $1700 per ounce. Now there are more “dollars” in the money supply while the gold reserve of 50,000 ounces remains the same. So the owner of Golden Rule Barbecue is paying more for the pork he buys to make his delicious barbecue plates. So, in order to make sure he keeps his profit margin, he has no choice but to raise his prices. 

This, my friends, is the major cause of inflation in the fictitious city state of Irondale, and this is the cause of inflation in our United States. You may object and say, “Well so what? We all generally get an annual cost of living increase in our salaries so we can weather any storm.” Tell that to a Senior citizen living on a fixed income. His monthly Social Security check of $1000 today will have the spending power of around $800 or less in ten years or so.[5] And, as always happens in the world of economics, the poor are hit the hardest. They tend to have very little margin for error and their spending power is already severely limited. As just one practical example, the income of the poor rarely keeps up with the annual rate of inflation. So over a couple of years their dollars buy fewer and fewer groceries.

Therefore they have no choice but to buy cheaper, less healthy food. I doubt that many poor people shop at Whole Foods. We already know that many of those dying from COVID-19 are older minorities, some of whom live below the poverty line, who also tend to be in poorer health with comorbidities. Some of them are suffering from Type 2 diabetes, heart disease, or hyper-tension which are often caused by obesity which can result, from among other things, eating unhealthy food.

How did this happen? The Federal Reserve Act of 1913 declared that our nation would have a central bank, the Federal Reserve System, and since that time the U.S. dollar has lost 95% of its value.[6] When our national government expenditures (the warfare and the welfare state) exceed tax revenue then the Fed buys U.S. securities and basically writes a check for the amount of the deficit. The Fed, unlike you or me, however, does not need any money in its account to back the check. The Treasury note it is purchasing is what backs the check. Do you remember in Dumb and Dumber how Lloyd and Harry, like drunken sailors, were spending the money which they found? However they dutifully put IOU’s in the suitcase, saying, “We are good for it,” promising to pay it back, though of course they did not have the money to do so. We laughed at the absurdity of their actions but that is what the Fed does everyday.

What is the remedy for our present distress? I answer this in two ways—ideally and practically. Ideally, in my humble opinion, we should go back to having our money tied to the gold standard. I say ideally because we are so far down the road that many economists, who are even sympathetic to this idea, say that it cannot happen in today’s world, that it would bring the utter collapse of our economy. However, hyper-inflation is inevitable. No family, business, or nation can live for very long beyond their means. Some economists have warned us since the 2008 housing bubble debacle that bailing out banks which were deemed “too big to fail” would produce hyper-inflation. It has not happened yet. Why? Businesses and nations are still placing their confidence in the American dollar, though, of course, there is nothing backing it but a nice warm feeling. But one of these days hyper-inflation will come and our economy will come crashing down. It may be that the only remedy then is to devalue our currency by a certain percentage across the board and start over.

And practically, as believers in our Lord Jesus Christ, be honest in your dealings with all people. Never be guilty of “differing weights and differing measures.” Live within your means. One of the great tragedies of our present economic insanity is the lack of incentive to save. The Fed artificially manipulates the interest rate, usually keeping it very low. So, why invest $10,000 in a CD when you receive only 1 percent return? If you are able, why not go ahead now and pay your children’s Christian school tuition for the next five years instead of leaving it in a low interest bearing account? You know your dollars will be worth far less in five years. Your money today has more spending power than it will in five years. This drives people to spend money instead of investing or saving it, and sooner or later many spend more than they make, just like our government. Soon they find themselves behind the economic eight ball. 

Finally, the future could be very bleak for many all over the world. Already I am hearing reports of coming famines of Biblical proportions in many African countries due to the economic impact of the pandemic. Therefore this is a very good time to remember that our citizenship is in heaven (Philippians 3:20,21). We are waiting for the day when the Lord Jesus will transform the body of our humble estate into conformity with the body of His glory by the exertion of the power that He has to put all things in subjection to Himself. We will live with Him forever in complete perfection. We have a gracious, sovereign, and merciful God who promises always to meet our needs, who promises never to leave us nor forsake us, who promises that when we go through the deep rivers of hardship and sorrow, He walks through with us, and the waters will never overflow us or destroy us. 
_______________________

1   The Bible is replete with admonitions to not cheat people out of their money by using dishonest weights and measures—Lev.19:35,36, Deut.25:13-16, Ezek.45:9,10, Amos 8:4-6, Hosea 12:7,8, Micah 6:10-14, Prov.20:10, 11:1, 16:11, 20:23, 22:28.
2  CARES ACT stands for “Coronavirus Aid, Relief, and Economic Security Act.”
3  “How the Government Pulls Coronavirus Relief Money Out of Thin Air,” The New York Times, April 15, 2020
4  “Fed Balance Sheet Increases to Record $6.42 Trillion,” <reuters.com> April 16, 2020.
5  The Fed’s target rate of inflation in two percent per year, though the actual rate of inflation is usually higher. At any rate, the $1000 now will be worth $800 or less in ten years. 6  “How the Federal Reserve Causes Inflation,” <silvermonthly.com

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