The immorality of central bank fiat monetary systems

I have posited for years that our modern day monetary system is insane. Aside from the obvious problems with moral hazards, the inflation tax and oh so many bubbles, lately events have conspired to illuminate a glaring example of the immorality of the system.

First, let's consider the devastating effects of inflation on the less than top 25% (percentile of wealth). Following the fiscal and monetary policy responses to the Covid 19 pandemic, we are currently experiencing a period of high global inflation. Central banks around the world have been reversing course from expanding balance sheets (QE) and Zero Interest Rate Policies (ZIRP) and are now contracting balance sheets (QT) and raising interest rates in efforts to fight inflation rates that have at times hit double digits all over the globe.

There is always a lag between monetary policy actions and effects in the market. While it's largely understood that inflation hurts folks on fixed incomes and at the (lower) margins, the consequences of persistent inflation are now highlighting just how destructive it is for everyone not in the top quartile of wealth:

...
A record-breaking share of auto loan applicants say they’ve been rejected for loans this year, according to the Federal Reserve Bank of New York.

Based on surveys collected in February, June and October, an average of 11% of automobile-loan applicants said they had been rejected, the highest yearly car-loan rejection rate since the New York Fed began tracking the figure in 2013.

That speeds past the previous record on car-loan rejections, which was set in 2020, when 7.9% of applicants said they were turned away from a car loan.

The potential potholes awaiting car shoppers were just one part of the New York Fed’s quarterly survey on consumer access to credit. Overall, consumer credit is tightening, the report found. Fewer people are applying to see what terms and rates they could get on cars, credit cards, mortgages and mortgage refinances.

Across the board, reported rejection rates for loans climbed while application rates dropped year to date. The report showed hints of households facing financial pressure.
...

https://www.msn.com/en-us/money/per...is-year-new-york-fed-survey-finds/ar-AA1kfuKH

November 20, 2023 – According to the latest data from Fidelity Investments®’ Q3 2023 retirement analysis, account balances have decreased slightly since last quarter, while withdrawals and loans are inching up, showing the impact economic events such as inflation and market volatility can have on Americans‘ wallets—and ultimately their retirement savings. ...
...
Hardship withdrawals: In Q3, 2.3% of workers took hardship withdrawal, up from 1.8% in Q3 2022. The top two reasons behind this uptick were avoiding foreclosure/eviction and medical expenses.

401(k) Loans: Inflation and cost of living pressures have resulted in increased loan activity over the last 18 months. In Q3, 2.8% of participants took a loan from their 401(k), which is flat from Q2 and up from 2.4% in Q3 2022. The percentage of workers with a loan outstanding has increased slightly to 17.6%, up from 17.2% last quarter and 16.8% in Q3 2022.
...

Fidelity® Q3 2023 Retirement Analysis: Workers Commit to the Long-Term While Navigating Uncertain Markets and Short-Term Challenges

BOSTON, November 20, 2023 – According to the latest data from Fidelity Investments®’ Q3 2023 retirement analysis, account balances have decreased slightly since last quarter, while withdrawals...

newsroom.fidelity.com

...
Americans outside the wealthiest quintile have run out of extra savings generated early in the pandemic and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.
...

Americans Are Pulling Cash From Their Retirement Savings to Pay Bills

www.bloomberg.com

Americans now owe $1.08 trillion on their credit cards, according to a new report on household debt from the Federal Reserve Bank of New York.

Credit card balances spiked by $154 billion year over year, notching the largest increase since 1999, the New York Fed found.
...
Credit card delinquency rates also rose across the board, according to the New York Fed, but especially among millennials, or borrowers between the ages of 30 and 39, who are burdened by high levels of student loan debt.

With most people feeling strained by higher prices — particularly for food, gas and housing — more cardholders are carrying debt from month to month or falling behind on payments, and a greater percentage of balances are going more than 180 days delinquent, according to a separate report from the Consumer Financial Protection Bureau.

Nearly one-tenth of credit card users find themselves in "persistent debt" where they are charged more in interest and fees each year than they pay toward the principal — a pattern that is increasingly difficult to break, the consumer watchdog said.
...

https://www.cnbc.com/2023/11/07/credit-card-balances-jump-to-1point08-trillion-record-how-we-got-here.html

Against that backdrop of the middle and lower classes getting squeezed hard, the Bank for International Settlements (BIS) just released a 117 page report which posits that central banks are incentivised to pick winners and losers to goose GDP even if it causes inflation for the have nots:

... Monetary policy design has traditionally taken aggregate productivity as given. In the workhorse model of monetary policy – the New Keynesian model – the central bank faces a trade-off between stabilising inflation and reducing the short-term deviations of output from its potential level. If monetary policy can affect misallocation and TFP, the central bank should also ponder how its decisions will impact the supply side of the economy in the medium term. Such considerations may be of relevance in phases of very active monetary policy, such as in the current inflationary environment.

This paper seeks to shed light on the interaction between monetary policy and capital misallocation and its implications for optimal monetary policy. ...

Our model predicts that an expansionary monetary policy shock improves capital allocation and thus raises TFP. We call this effect "the capital misallocation channel of monetary policy". We present empirical evidence supporting this prediction: expansionary policy induces high-productivity firms to increase their investment more than it does for low-productivity firms. The central bank has an incentive to exploit the capital misallocation channel, by engineering a temporary economic expansion to increase TFP at the cost of some inflation. ...

Firm heterogeneity, capital misallocation and optimal monetary policy

This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus...

www.bis.org

Picking winners and losers is the (immoral) violence inherent in the system. Sound money and/or a bi- or multi-lateral system of competing currencies including a sound money component like GAULT would constrain monetary policy malfeasance by offering folks at the lower bound a fully realized alternative to protect themselves (financially).

"Don't concern yourself - these are just side effects"

 

[Casey Jones]

There is no question that our current debt-based system, with currency continuously eroding, is insane.

First, the corrosive nature of slowly-debased fiat...which is something we're told is a GOOD thing (the FRB's Targeted Inflation Rate)...this DISCOURAGES savings. CBDCs will completely end that barbaric tradition, as, almost-certainly, there will be time limits on allocated "money" (digital scrip). Use it or lose it.

Your discretionary purchases come from debt, not from savings.

Well, anyone over the age of twelve can see the problem with that. What about old-age? How, instead of cutting the cost for big-ticket purchases, does PAYING MORE in DEBT, LATER, help?

Part of this is self-explanatory. You will own nothing and you will love it. We're gonna ban cars and private homes, ban land ownership.

So, how are people going to prepare for secure old age? RELY ON THE GOVERNMENT SCRIP TO KEEP COMING? When Davos Man has already castigated retirees as Useless Eaters?

Basically, this puts us...puts Man...back before economic history. As he was developing the concept of money and its use.

First, barter. Works good but there's problems.

Then, chits. Something that denotes obligations or credits. "Stored work units." Seashells were tried, as were bushels of grain. Obviously those had problems - anyone who's tried to lug grain baskets around, knows that. Anyone who's tried to save grain for any period, sees the problem.

That was where PRECIOUS METALS came into being. Naturally scarce; nearly impossible to create frauds of. Keep forever; and they're compact.

On to today. It's more than the people just not THINKING of gold and silver; it's that they reject it for its lack of "convenience." We're at an age where even paper money is viewed as inconvenient...waving your card at an optical scanner, or your phone at a code-patch, is the preferred way.

Except we're seeing, first, where that power, given to the central-bank and government, leads; and what that chaos represents to the average worker-bee.

We will have to go through a period of societal de-programming; and, sadly, the only thing that can force the issue, is a lot of pain. As in, monetary collapse and famine.

 

[JayDubya]

"A record-breaking share of auto loan applicants say they’ve been rejected for loans this year, according to the Federal Reserve Bank of New York. Based on surveys collected in February, June and October, an average of 11% of automobile-loan applicants said they had been rejected,..."

Do y'all remember a few years back when this was all the rage?

“We will give a loan to anyone who can fog a mirror.” That quote comes from former Countrywide Financial Services executive, Michael Winston.

According to Winston, in 2006 Countrywide wanted to write as many loans as it could. He asked one executive about what to do if the would be borrower had no job. The reply, “Fund ’em.”

If the borrower had no assets? Same answer, “Fund ’em.”

If the borrower had no income? Again, “Fund ’em.”

That didn't end well. So, I much prefer people having their loan request rejected.

 

[pmbug]

...
So, I much prefer people having their loan request rejected.

Lending standards are a good thing. The point of the news item though is that more and more people are not able to meet current lending standards. Either people don't have the income or assets to borrow against or inflation is pricing autos increasingly out of reach for the middle class. The other telling point of that news item was that at the same time that rejections were rising, applications were falling. Less people are even trying to finance an auto and rejection rates are still climbing. Inflation wins, the bottom 75% lose.

 

[JayDubya]

I actually almost typed a qualifier statement "while I understand the point the article is making"...

 

[chieftain]

It makes sense (and is of immense benefit) to one group of people.

 

[Goldhedge]

A debt money slave system... Who knew?

 

[pmbug]

... discontented citizens in a number of countries are losing patience with monetary frameworks that enrich those closest to the spigot while debasing the coinage of the realm and repeatedly failing in their one main job of preventing economic calamity. ...

Angry Citizens Are Losing Patience With Monetary Frameworks That Enrich Those Closest To The Money Printer | ZeroHedge

ZeroHedge - On a long enough timeline, the survival rate for everyone drops to zero

www.zerohedge.com

Perhaps frogs can develop awareness that they are sitting in boiling water.

 

[pmbug]

Inflation may affect everyone but it does not affect everyone in the same way. Differences in wealth composition, salary or consumption patterns may lead to quite different outcomes for different individuals. The aim of this paper is to cast some light on the different channels through which inflation affects wealth inequality.

We study three key channels that shape how inflation affects wealth inequality: (i) a wealth channel through which inflation redistributes from lenders to borrowers; (ii) an income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets.
...
We show that the wealth and income channels are one order of magnitude larger than the consumption channel. Middle-aged individuals were largely unaffected by inflation as they are typically nominal borrowers due to mortgages. Older individuals suffered the most as their pensions, deposits and cash savings lost value.
...

The heterogeneous impact of inflation on households' balance sheets

We identify and study analytically three key channels that shape how inflation affects wealth inequality ...

www.bis.org

36 page .PDF:

https://www.bis.org/publ/work1152.pdf

 

[pmbug]

A tale of two economic strata...

Inflation has created a dark cloud over how everyday Americans view the economy

Anger about higher prices appears to outweigh the benefits of a hot labor market in the minds of consumers.

www.cnbc.com

 

[pmbug]

BIS study reinforces fundamental understanding of central bank fiat money systems: Don't be poor.

...
We find two main results. First, negative effects of a contractionary shock at the ZLB fall disproportionately on wealth-poor households, exacerbating inequality. Second, inequality makes monetary policy non-neutral in the long run to a significant extent. A lower inflation target makes spells of ZLB more likely, raises households' precautionary savings and thus leads to a reduction in long-run real interest rates. We show that a drop in the inflation target resembling the drop in average inflation between 1980 and 2015, tied to a rise in wealth inequality resembling the increase in the Gini index in the early 2000s, implies a substantial drop in long-run real rates. According to our new theory, the natural rate of interest depends on the central bank's inflation target.
...

Inequality and the zero lower bound

We find two main results. First, negative effects of a contractionary shock at the ZLB fall disproportionately on wealth-poor households, exacerbating inequality. Second, inequality makes monetary policy non-neutral in the long run to a significant extent...

www.bis.org

 

[nickndfl]

Whoever bought all those longterm 1% treasuries are now bagholders. Same thing happened to commercial real estate. I wonder if they intentionally inflated residential real estate to absorb all the foreclosures from 2008-2016? What asset class will be next? Would they risk the DOW where the political class washes $? Will it be Bitcoin?

 

[pmbug]

Fiat is fannnntastic /central bank

 

[pmbug]

This paper is from last year, but I am just discovering it (and sharing it) now (bold emphasis is mine):

Abstract

As a matter of arithmetic, the trends of US government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it? This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially those related to the banking system) if fiscal dominance became a reality?
...
As the money supply is forced to grow by fiscal dominance, inflation rises, which creates a new means of funding government expenditures via "inflation taxation." ...
...
... because many people are unfamiliar with the concept of the inflation tax (especially in a society that has not lived under high inflation), they are not aware that they are actually paying it, which makes it very popular among politicians. ...

Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements | St. Louis Fed

When will the debt ceiling require new policy?

research.stlouisfed.org

Fiat magic money is an enabler for the political class to engage in fiscal malfeasance.

 

[Casey Jones]

Or Elites' criminal fantasies.

Such as Malthusianism. Democide; augmented by population-replacement.

Bottom line, though, is: It only works once, in every Strauss-Howe Generational Cycle of 80 years; and it only ends one way.

Collapse and chaos; and generally, bloody retribution.

 

[pmbug]

While my article focused on the immorality of planned inflation, I should have spent a little time covering the role of fractional reserve banking in expanding the money base (acting as a force multiplier on the central bank's work). This topic has beem covered in this thread:

AEP: End fractional reserve banking

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined. The conjuring trick is to replace our system of private bank-created...

www.pmbug.com