The Monetary Basis of the Imperial Economy: Part 1
The Big Picture
In this inaugural edition of Withhold Unto Caesar I wish to take a look at what drives the US Imperial Economy. In doing this we can gain a better perspective of the nature of the US Imperial Economy. We need to start with this evaluation, and more importantly the causes of the current situation, if we are to have any hope of redirecting resources away from the warfare state. It is also helpful to understand the state of the economy to protect our financial selves as best we can.
In order to make this a reasonable length essay I will need to break this topic into three parts. First, I will look at the domestic sources of the core of government control of economic life. Then I will look at the international aspects of U.S. government control of monetary policy. Finally, I will make the case with data that these policies have done great damage to the U.S. economy.
It’s All About Inflation
The foundation of the Imperial Economy is inflation, as defined by an increase in the money supply. This steady debasement of the currency has all sorts of damaging consequences, not the least of these is an increase in the price level. How much such an increase in the money supply impacts the price level depends upon several factors, but mostly the demand for money. The real damage, however, is in how such an increase in the money supply redistributed wealth from the bottom to the top.
The zenith of any government’s power is control of the money supply. This allows them to control the economy to a high degree. The zenith of a government’s influence internationally is to have its money achieve the status of the Reserve Currency, which I will deal with next week.
Inflation: Cui Bono
First, let’s look at who benefits from inflation. Obviously, the government itself benefits from inflation by the fact that it can extract more resources from productive society than it would be able to through direct taxation. That inflation is a tax cannot be gainsaid. It is the shifting of resources from the productive sector to the non-productive governmental sector, nothing less. It is done much more surreptitiously than direct taxation and without the political unpopularity of direct taxation. The key is which interest groups the government can work with to achieve this shift.
It is how the money enters the system that confers maximum benefit on the powerful interest groups that control U.S. economic policy. The government does not simply print money and distribute it to everyone equally. If they could magically increase everyone’s cash holdings by say 5% overnight, it would in due course probably raise prices by about 5%. In the process, no one would be any better off vis a vie anyone else. That being the case, why would the government undertake such a policy? Governments don’t act unless someone benefits from the activity, period.
So, who benefits most from an inflationary policy? Primarily the first receivers of the newly created money benefit the most. If the money supply is increased, then whoever gets it first has an advantage over those who get it later. This is because they get the benefit of additional purchasing power before the effects of the inflation have taken hold. As time goes on prices will tend to rise. As the inflation ripples through the economy the later receivers will have suffered the effect of higher prices before any increase in purchasing power.
Who then are the first receivers of newly created money? Investment banks, commercial banks, financial services firms (the mutual fund and hedge fund complex), government contractors and government employees. Who loses? Most egregiously those on a relatively fixed income: pensioners; social security recipients and welfare clients. As outlined by the economist Murray Rothbard:
In any economy not on a 100 percent commodity standard, the money supply is under the control of government, the central bank, and the controlled banking system. These institutions issue new money and inject it into the economy by spending it or lending it out to favored debtors. As we have seen, an increase in the supply of money benefits the early receivers, that is, the government, the banks, and their favored debtors or contractors, at the expense of the relatively fixed income groups that receive the new money late or not at all and suffer a loss in real income and wealth. In short, monetary inflation is a method by which the government, its controlled banking system, and favored political groups are able to partially expropriate the wealth of other groups in society. Those empowered to control the money supply issue new money to their own economic advantage and at the expense of the remainder of the population. Yield to government the monopoly over the issue and supply of money, and government will inflate that supply to its own advantage and to the detriment of the politically powerless.
The U.S. Version
This is exactly how it works in the U.S. system. The Federal Reserve creates new money by simply entering it on their books electronically. They inject that money into the economy by buying U.S. Treasury Bonds. They do not buy them directly from the Treasury itself the way you or I could. How would that benefit a key constituency? The Treasury first sells the bonds to a group of about 20 “Primary Dealers” such as Goldman Sachs. These investment banks then turn around and sell these bonds to the Federal Reserve. However, they do not do so in a competitive way designed to get the government the best deal. No, the Federal Reserve announces what it is going to buy and when. This allows the investment banks to front run the Federal Reserve and sell the bonds for maximum profit (and maximum detriment to the public). This is executed by the New York branch of the Federal Reserve which has had consistent connections with the investment bank community over the years.
In this way, the government injects money into the system in a way that benefits the politically connected crowd on Wall Street. The money then ripples out from there. Now that the money is in the financial services and investment sector it makes its way to hedge funds and mutual funds and insurance companies selling life insurance and annuities. This has the effect of pushing up asset prices such as stocks, bonds and other investment products. This will also tend to push up home prices, particularly at the high end. All of this benefits the already wealthy. I will delve further into this area, with data, in the third part of this series.
This, of course, does nothing for those who receive the new monies late or never. Particularly hard hit are pensioners and the elderly who are on fixed incomes. This is a double whammy on these individuals because this policy pushes interest rates down artificially and they tend to live off interest income. Which then means they need to take greater risks to generate the same dollar income, which can lead to the loss of their investment capital.
This is a policy which also creates and fuels debt since it makes the interest rate so much lower than it would otherwise be. This does not, however, help the poor. Those most able to get a loan and go into debt are the wealthy since they are the most solvent and creditworthy. This has been borne out by the massive increase in debt by both middle- and upper-class individuals as well as corporations over the last 40+ years.
That in a nutshell is the core of who benefits most from U.S. economic and monetary policy. That these policies benefited this sector of the economy is clear by the increasing “financialization” of the United States economy, which I will detail with data in Part 3..
The drive to use inflation as an unrighteous enrichment tool is a cause for the drive to governmental control of the economy on behalf of the power elites. This is also how the government shifts resources to its favored ends. Next week I will explain how the U.S. status as a “Reserve Currency” is both the source of the drive for international hegemony and the means by which the U.S. carries out its war policies.
Praise Be to God
