The Fed Is NOT Your Friend

“I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson

“The bold effort the present (central) bank had made to control the government . . . are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it…. Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” – Andrew Jackson

The Federal Reserve continuously employs policies which exacerbate wealth inequality in America, favor the rich over the poor, the asset owner over those living paycheck to paycheck, the homeowner over the renter, obliges its favorite sectors (particularly the banks) and broadly exists to uphold the current system of power and wealth in America. For the vast majority of Americans, the Fed is not your friend.

The Fed’s primary policy objective of assuring smooth US Treasury market functioning has enabled our leaders in Washington D.C. to oversee a completely dysfunctional government which is generating perpetually massive budget deficits for as far as the eye can see. There is now no political will for either spending cuts or tax increases, no legislative momentum to address the growing deficits in any way, constant divisiveness up and down the aisle and overall, a broadly broken government that is only working really for the 1%. America just continues to borrow from future generations at an accelerating rate with no hopes of ever paying the money back while expecting that the rest of the world will just continue to stand by idle, supporting us with continued UST purchases like they have been doing for 50+ years.

Unlike what occurs in other emerging, banana republics when government dysfunction and rampant deficits exist, the United States, as the world’s reserve currency issuer with the UST as the global neutral reserve asset, has been able to stave off attacks from James Carville’s noted “bond market vigilantes”. Carville said:

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a . 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Because of the Fed’s activities, whenever the UST bond market vigilantes try to show up to exert some market based interest rate punishment on D.C., they are demonstrably neutered before ever being able to help force real change. The Fed continually acts to save the UST market from dysfunction (5 times in the last 5 years and dozens more since post 1971) with a variety of special facilities, rule changes, money printing and whatever the heck else it wants to make sure that the US Treasury market continues to function properly. But this is the problem. By always stepping in, the Fed really is acting as the “Chief Enabler” giving the Congress and Administration carte blanche to just grow deficits forever, never instilling any discipline on a government that is clearly in need of some.

This enabling has created an environment where the constant bailing out of the UST market has taken the US down a path of US$ debasement and above trend inflation to “payback” our massively growing debts rather than forcing any real change in tax and spend policy. The problem with this path is that this inflationary outcome threatens to disrupt the fabric of society. Inflation erodes the wealth of those who can least afford it in a slow, cruel way and while the government hopes the public never notices the “inflation tax.”

Inflation is the main policy objective of the Fed and government as the only way to pay back our debts. However, the policy of giving the public “bread and circuses” can only exist for so long, as the ancient Roman empire eventually found it. And it seems like we are finally getting closer to an end game as the tectonic plates of geopolitics are starting to shift.

This behavior in D.C. from both our elected legislative leaders and the Fed is now accelerating the path towards the creation of alternative, multipolar world where the US$ is no longer at the center and the UST no longer exists as the world’s neutral reserve asset. Foreign governments are tired of the US$ money printing, the lack of any plan to lower the deficits or debts, as well as the potential expropriation of their excess reserves if they become an “enemy” after how the US treated Russian reserves post their invasion of Ukraine. Led by China and Russia and increasingly supported by OPEC members recently added to the BRICS contingent, the East is slowly reintroducing Gold back into the monetary system where it had been for thousands of years, typically being reinserted after the hegemony abuses its exorbitant privilege for far too long.

The world is going back to settling excess trade balances in Gold again. Regular individuals are increasingly saving their excess wealth in Gold and Bitcoin, where supply cannot be doctored easily and trust is assured. We are moving rapidly to this reality. The Fed has allowed this to happen.

While the pathway to a new multilateral currency world will eventually lead to a more balanced global society, the inflation likely to come in the US against hard assets before we get there is going to be massive.

While we need the US$ weakness to help rebuild American manufacturing, infrastructure and military capabilities, this transition will be massively inflationary first. Americans need to start preparing for this in advance. While I hope the transition to this multilateral, mercantilist world can be orderly, I fear that it won’t be. Just like Thomas Jefferson did 250 years ago. History rhymes.

Fix the money fix the world.