How “Funny Money” Poisoned the U.S. Economy and Politics

I recently discussed how America’s deindustrialization has led directly to the political and social disorder we see today.

But now we ought to go deeper and ask what enabled that deindustrialization at a national scale… and why has it fractured society so badly?

If you want to discover why our nation is in such poor shape, there’s one place to look.

So today, let’s identify what really drove U.S. deindustrialization…

There are the usual suspects, of course…

You can blame deindustrialization on decades of high taxes, overregulation and surly unions, which combined to make it tough to run many a shop here in the U.S.

Blame business schools, too. They’ve spent the past 40 years teaching students to suck up to Wall Street by spending company cash on dividends and share buybacks. The next step is to borrow money and do it some more.

With the drive to appease shareholders at all costs, it became kind of a “thing” for business executives to brag about ditching U.S. workers, closing domestic plants and reopening in China or Mexico, etc.

It all translated into disinvesting at home and moving U.S. factories to foreign shores. Entire American towns and cities were left to fend for themselves in the shadow of idle plants and cold smokestacks.

Still, none of these are truly the root cause of the problems. There’s something much deeper at work — a single factor that enabled the rest.

Here’s a hint…

Thanks to the coronavirus, the U.S. government has just engaged in a $4 trillion spending blowout over the past few months.

Where did the money come from? It wasn’t taxes, that’s for sure. Nor sale of government bonds.

No… All the funds for the bailouts and such originated from the Federal Reserve.

Economists call it “money supply.” The Fed simply created all these new funds out of literally nothing.

This magic trick comes courtesy of Congress, per the Federal Reserve Act of 1913. Congress delegated to the Fed the Constitutional “power to coin money” and “regulate the value thereof.”[1]

One key mission of the Fed is to provide an “elastic currency” when the economy requires liquidity to keep the gears turning. So, that’s how we get dollars out of thin air.

But there are problems with Fed-style liquidity… Once people and governments get used to it, they need more and more. There’s never enough cash flowing from the Fed.

And of course, the Fed’s “money supply” is not backed by anything tangible. It’s just a bookkeeping entry.

Cynics say that over time, the Fed acts like a drug pusher with a sack full of heroin. It’s always available to pump smack into national and global veins of commerce.

Bill Bonner, who owns our company, has a particular fascination for the Fed’s unchecked power.

In a recent note[2], Bill briefly alluded to U.S. deindustrialization over the past 40 years. He recalled August 1971, when President Nixon “closed the gold window” — halting the redemption of foreign dollar holdings for gold held by the U.S. Treasury.

Before Nixon’s announcement, an ounce of gold was worth a hard $32.  After the announcement, a dollar was worth… another dollar.

By closing the gold window, Nixon cut the mooring lines of the U.S. currency to anything of true value. His action opened the spigots for endless, future “money creation” by the Fed.

“Then came the funny money,” says Bill. “Over time, U.S. money creation forced the productive part of the economy to shift jobs overseas. It was just easier and cheaper to buy things from overseas with fake money than it was to make them in the U.S.”

Bingo!

Simply put, the Fed’s “money creation” primed the American economic system to ship jobs overseas.

In other words, the Fed created a monetary policy in which it foreigners performed the factory work and dripped the sweat. In the U.S., the economy was geared just to take those Fed-bucks and buy other people’s stuff.

The secondary effect was that the Fed kicked the ladder out from under the American working class. They lost access to a world in which they could earn a living by making “real” things.

This process of Fed-sponsored money creation reigned supreme in the 1970s, ’80s, ’90s. It persisted through a variety of economic ups and downs, eventually leading to the Crash of 2008. And then, beginning in 2009, the Fed spooled its money-machine into even higher gear, with zero interest rates and ample liquidity to fund Wall Street bubbles and government deficits.

Over the past decade the U.S. experienced a massive transfer of wealth to the top few percent of banks, businesses, hedge funds and well-off households.

For a decade, stock markets rose. Wall Street, big banks and companies that played the money-game made out well. Real estate in certain areas moved upwards. Other kinds of hard assets did well, like fine art, antique cars, etc.

The bad news is that the economy became more and more financialized. And while Wall Street benefitted, Main Street suffered.

As wealth parked itself at the top of the social ladder, more and more working people were stuck on a treadmill to nowhere. They earned stagnant or declining wages, faced diminished purchasing power and, in many instances, buried themselves in debt… or they killed themselves with alcohol and drugs.

It reflects a point I made a while ago, comparing the U.S. situation to the Chinese concept of “one nation, two systems.” Except instead of the two systems being Mainland China and Hong Kong, the U.S. is one nation with a growing underclass and rising wealth for the top dogs who live in pricey ZIP codes.

Recently, a foreign acquaintance quipped that the U.S. has transformed into a “Third World country in many respects, with a large number of struggling people and a small number who still walk around flashing their Rolex wrist watches.”

This is a recipe for social problems… which gets us back to the protests, riots and general social breakdown of the American public square that I mentioned earlier this week.

As you’ve doubtless noticed, it’s vicious out there.

In the streets, people and political parties — and their enabling media accomplices — are fighting tooth and nail over who will control the levers of power within the nation. Who will write the history, if not rewrite it…

Yet no one seems to realize that a big part of the degenerating political atmosphere is due to that endless flow of “money supply” from the Fed.

That is, the Fed has created a national landscape of monetary dry tinder that’s now erupting into conflagration. Partisan fighting has exploded because the rewards of winning political power are so great.

Anymore, the winning side of elections can distribute favors from the largest pile of cash and credit in history, thanks to the Niagara of money that flows from the Fed.

Now, in the long wake of the Fed’s money-pump over the past decades — certainly, over the past ten years — we’ve reached the fateful point where each side has promised so much to so many that they cannot afford to lose.

They can’t “afford” to lose in any sense of the word…

Think back to the election in 2016. Candidate Donald Trump was “not supposed to win,” per conventional wisdom. Polls had Hillary comfortably ahead. News media were generally head-over-heels in favor of Hillary. In other words, the election was structured around Hillary winning. She was supposed to continue the power trip for all the usual Democrats who make policy from high positions.

But Trump convinced just enough people to pull his lever; and it was a squeaker.

Just barely enough voters bought into Trump’s issues for him to win. The next morning a lot of people were crying… Because they stood to lose a lot of money after Hillary, their favored candidate, had lost.

From day one, post-election, Trump’s opponents plotted against him. Obviously, Trump’s opponents don’t like him. Perhaps it’s personal…

More likely, though, it’s the money. Simply by winning an election, Trump has blocked many former insiders from unfettered access to the Fed’s “money supply.”

Even Trump’s ostensible “friends” never warmed up to him, and again it’s about the money.

As a political outsider, Trump wasn’t beholden to the Republican Party or its “Conservative, Inc.” gang of fundraisers, consultants, think tanks and other grifters.

Trump serves his own interests. He need not honor decades worth of deals that were supposed to hatch when a Republican again occupied the White house. But post-election in 2016, Trump owed nothing to anyone. He self-funded his campaign and could take the ancien regime or leave them…

Yes, Trump has spent plenty of the Fed’s money in the past three years, record amounts. But Washington and Wall Street insiders still resent him because he’s just not their man. They don’t trust him to follow the script, so to speak.

Now, consider Trump’s likely (so far) opponent in the 2020 election, former Senator and Vice President Joe Biden.

Biden failed at several past runs for President. He’s uncharismatic and dyspeptic, although just now, from deep inside his basement bunker he’s being framed as a sort of elder statesman (with emphasis on “elder” for sure). On his best days, Biden clearly suffers from… issues, which is the nicest way I can say it.

No doubt, Biden has lost the old political fastball from his glory days as the dutiful errand-boy for Delaware corporations and banks. (Why do you think that in a world of “low interest rates,” bank credit card fees are so high? Or why is it that young people cannot discharge student debt in bankruptcy? Ask Joe Biden…)

But still, despite his past – if not based on it – Biden is reliably up to his eyeballs in the political payola racket. He knows where the Fed-money needs to go…

Biden will raise funds, pay off party debts, fulfill promises “if” he wins, put the right kind of people into the right kinds of jobs — especially that all-important Vice President pick — and sign whatever papers land in front of him.

In that sense, Biden is low risk… He’s a safe money bet who will benefit a lot of insider  bank accounts, courtesy of lucre from the bottomless Fed.

If you are a mere voter and taxpayer, you’re just a sheep to be shorn by the political class. But to people with the shears, it matters quite a bit who does the honors.

American politics is all about the money, especially access to the magic spigot that flows from the Fed.

American politics has always been a tough game. But now, in the age of multitrillion-dollar deficits, Fed-money has become utter poison to the basis of governance, and to finding a national direction for the future.

Sad to say, the dogfight over who controls the Fed-funds is the new political norm of our fractured, deindustrialized society.

On that note, I rest my case.

That’s all for now…  Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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1 Article I, section 8, Clause 5 of the Constitution says that “Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

2 On Juneteenth, A Conversation of Reparations, Rogue Economics

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