“What is the difference between banking and politics?” a pointed old witticism goes. “Banking is borrowing money from the public and lending it to your friends. Politics is taking money from the public and giving it to your friends.”
The current American government has a new twist on this, however: Politics is borrowing money from the Federal Reserve and giving it to your friends. Clever, eh? The Fed can print up all the money it wants and the government can borrow it and pass it out. Except that, eventually, you find out that this depreciates the nation’s currency and brings high inflation.
So now we have the ‘Biden Inflation’, which I calculated as running at an annualized rate of more than 7 percent from the end of 2020 through June.
Let us state the obvious facts which everybody knows about a 7 percent rate of inflation. It means that if you are a worker who got a pay raise of 3 percent, the government has made your actual pay go down by 4 percent — that is, plus 3 percent minus 7 percent = minus 4 percent. If you got a raise of 2 percent, the government cut your real pay by 5 percent.
If you are a saver earning, thanks to the Federal Reserve’s policies, the average interest rate on savings accounts of 0.1 percent, then with a 7 percent rate of inflation, the government has taken away 6.9 percent of your savings account.
If you are a pensioner on a fixed pension or annuity, the government has cut your pension by 7 percent.
In a sound money regime, in order to spend a lot, the politicians have to tax a lot. They then have to worry about whether workers, savers and pensioners will vote for those who escalated their taxes.
With the borrowing from the Federal Reserve ploy, the politicians avoid the pain of having to vote for increased taxes but they still savor the pleasure of voting for their favorite spending. Nonetheless, all the money for the politicians to give their friends has, in fact, been taken from the workers, the savers and the pensioners. It has just been taken in a tricky way by using the Fed.
In a previous generation, when the Federal Reserve was led by William McChesney Martin, for example, the public discourse was clear about this. Martin, who was Fed chairman from 1951 to 1970, called inflation “a thief in the night.” He also said, “We can never recapture the purchasing power of the dollar that has been lost.” This was long before the Fed newspeak of today, which pretends that inflation at 2 percent forever is “price stability.”
But not even today’s Fed can languidly face a 7 percent rate of inflation. So while still planning to create perpetual inflation, it keeps repeating, and hoping against hope, that the very high inflation is “transitory.”
However transitory the current high inflation may be, the money of the workers, the savers and the pensioners has still been taken and won’t be given back. If the rate of inflation falls, their money will still be being taken, just at a lower rate. If inflation speeds up further, as it may, their money will be taken faster.
William McChesney Martin was so right.
Alex J. Pollock is a distinguished senior fellow emeritus at the R Street Institute, former principal deputy director of the U.S. Treasury’s Office of Financial Research, and the author of “Finance and Philosophy — Why We’re Always Surprised.”