Your ever shrinking …
… has now dropped in value to ¥78 and €0.69, though the Bank of Japan and the European Central Bank have done their darndest to devalue their own currencies as well (good for exporters, bad for the middle class). But in this race to the bottom, no one can beat the Fed. Well, OK, some could, for example Argentina, Zimbabwe, and my good ol’ Weimar Republic.
It’ll bounce back a bit, but the long-term trend is solid. To illustrate: Back in the day when I came to the US, the dollar was worth 4 Deutsche Marks (DM). In 2001, the DM converted to the Euro at a rate of DM 2 for €1. Hence, had the dollar remained stable vis-à-vis the DM/Euro, it would be worth €2 today. But it’s worth €0.69—a 65% drop over the decades I’ve been here. So, that house of yours that tripled in value during that time in dollar terms, well, actually, it declined in real terms by 7%, and your gain was an illusory amalgam of inflation and devaluation. Thanks to the Fed, whose stated and published goal is exactly that—to make you feel rich, so you spend more and hand your money over to its cronies. They call it “wealth effect.” But in reality, you gradually get bled dry. And that’s what ails the middle class today.
“But there’s nothing we can do,” you say.
Not true. There’s a solution: Vote for people who promise to abolish the Fed and fold its regulatory functions into the FDIC, SEC, and other agencies.
If that actually happened, interest rates would be set by the credit markets. Quantitative easing (printing money) and secret bailouts would be replaced by the consequences of a truly free market and our legal system, which is able to deal with even large bankruptcies and restructurings. And no one could borrow below the rate of inflation, not even overnight. That won’t solve all our problems, but it would solve some of our most fundamental ones. And yes, lots of companies, even “good” ones, would go bankrupt—ownership would transfer from stockholders to creditors, but “good” companies would survive bankruptcy, as Delta and numerous others have done, and customers would never know the difference. It’s part of the cleansing process a free market needs periodically, one that we should have gone through during the last crisis, but that the Fed prevented with the trillions of dollars it printed and handed to its cronies so that they wouldn’t have to take the big losses that were coming their way.
And you and me, we’re paying the price for it on a daily basis.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.