Jerome Powell, the current Chairman of the Federal Reserve Banks, has announced a fundamental shift in the operation of money.
“Following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” the Fed now says.
What that means is Powell in practice will take measures that increase inflation not to 2%, but 4% or 5% and “for some time.”
In effect, money ‘easing,’ as in printing, is to continue and at an accelerated rate, with this whole framework now effectively amounting to the Modern Monetary Theory (MMT). Mohamed A. El-Erian, a distinguished economist, said:
“Even more central bank stimulus: That’s what markets–across the board–have taken away, at least for now, from Fed Chair Powell’s remarks on changes to the Monetary Policy framework.
With that, the initial reaction is a la MMT: higher prices for stocks, bonds, gold, etc,” bitcoin, eth, defi, houses, bread as well.
The Modern Monetary Theory is a new suggestion that argues the government’s income comes not from taxes, but through money printing, borrowing.
They say the government is the primary driver of growth or contraction and the primary actor on economic management.
The government therefore should borrow and spend, which is what makes money enter circulation, and to keep inflation at bay, through taxes, licenses and fines, it takes money out of circulation.
In this way there is no constrain on the government, and the government effectively becomes the economy, which effectively amounts to communism, but of course don’t call it so.
More importantly, the effects of this are super regressive taxation or even in practice almost total taxation for the poor and the middle class, and zero for the rich.
That’s because all else being equal, inflation is the result of an increase or decrease in money supply and of the velocity of money.
If people spend a lot and all at once, even if the money supply does not move, you still get inflation because it’s more money chasing the same amount of goods.
Targeting high inflation therefore forces people to spend more and all at once. Thus, a loaf of bread that used to cost $1, rises to say $4. Meaning every family has been taxed $3 per bread they buy.
The middle class and below therefore would be paying higher taxes, potentially even erasing any savings. While for those above middle class, they generally have savings which they invest, and therefore any increase in prices would be cancelled or better by gains from their investments.
Where overt taxation is concerned, people earning as low as $10,000 still have to pay some taxes like insurance and the like, when they should be receiving grants to cancel out the inescapable inflation tax.
Therefore communism is not quite the appropriate term here. Aristocracism may be a more appropriate one as unless you have savings, then you’re feeding those above you for no appreciating gain to yourself.
This unappreciated effect may actually explain why despite much money printing for the past decade, inflation still remained low.
That’s because if new money does not appropriately enter circulation, then there’s less circulation of money where the productive economy is concerned, like buying cars, because through a different sort of inflation people have less money.
Housing is the biggest cost by far for most amounting to at times as much as 70% of one’s income. As much of this new money has gone to assets like housing, house prices have ballooned, and therefore rent costs or mortgage installments have gone through the roof, and therefore people have less money to spend because they being taxed in a super regressive manner.
While at the other end, someone that earns $1 billion is taxed the same as someone that earns $1 million, and if it is capital gain taxes, they pay even a lesser tax rate.
Therefore where assets like bitcoin are concerned, this yeeha money policy is great news, but where it concerns the economy more holistically, billionaire Ray Dalio may well turn out to be right about his claim that the dollars has entered its last phase.