Easy Money and the Fed's War on the Middle Class

The Federal Reserve's monetary policies burden American middle class families as they endeavor to retain their quality of life, financial prospects and social standing. While Fed officials talk about the importance of driving down unemployment, they are focused on protecting economic growth: a phenomenon not synonymous with middle class prosperity. In a context where banks are leveraged to the economy and exposed to considerable risk if asset prices decline, the Fed sees economic growth as an imperative. If financial stresses upon families are a necessary byproduct of easy money-driven economic growth, the Fed is willing to accept the burden as a necessary complication.

America's central bankers received a dual mandate from the U.S. Congress in 1977. This mandate instructs Fed bankers to balance so-called price stability with something approaching full employment: two economic outcomes that tend to work against each other. Truth be known, many Fed officials (and members of Congress) are enamored with the mandate, as the directive for full employment serves as strategic cover for relentless monetary stimulus on behalf of large banks and their high end (campaign-funding) clientele. The bogeyman is the stable-price directive. Taking its cue from U.S. Supreme Court interpretative tactics, the Fed has chosen to redefine stable prices as two percent consumer price index (CPI) inflation, thus buying room for greater monetary stimulus.

The Federal Reserve is not content with two percent per annum inflation unless economic growth is robust. In seeking to boost economic growth the Fed rationalizes measurement tactics that conceal or ignore as much CPI inflation as possible, thus increasing its power to doctor the economy. Granted, some Fed officials complain about a lack of fiscal stimulus from the U.S. Congress, claiming they would do less if Congress would do more. Obviously, not all Fed officials are alike, either strategically or in terms of the constituency groups they serve. Nonetheless, most Fed officials are mentally conditioned toward driving economic growth and subsidizing inflationary pressures up to a point.

Some Fed officials probably sense that the central bank's delusive methods of tracking consumer price inflation work as a subsidy for those who financialize the economy. Some might protest this situation were it not for the lamprey-like zeal of many economists to ridicule as heretics those who deny the profession's dogmas. Bound tightly to misguided metrics and a quasi-religious economic ideology that substitutes for objective reason, Fed officials drive middle-income workers out of middle-class lifestyles. Consistent with the concerns of many Bernie Sanders fans, it is a recipe for demo-plutocracy where the public good is merely a mirage.

Stealth Inflation

Marketwatch's chief economist, Irwin Kellner, has written considerably about stealth inflation and the Fed's blind eye. Granted, Kellner is a fan of fiscal stimulus over monetary stimulus, and for good reason. He fails, however, to understand how wise fiscal policy can stimulate constructive CPI deflation: an oversight common among economists. Back in 2012 Kellner observed how standard products were shrinking, from the size of soap bars to toilet paper rolls. He also saw diet plans for services, such as six weeks of kid's summer camp offered at a price that formerly bought eight.

In 2013 Kellner intoned that the measurement of inflation was "rotten to the core," noting that while increases in the price of food, energy and health care are apparent, price increases in categories like insurance, cable service, air travel and local government services can be difficult to track. Indeed, it takes but modest sleigh-of-hand to alter services or redefine future benefits such as liability coverage.

Inflation shoves people into higher tax brackets. It changes the buying behavior of many, inducing them to retreat to lower quality goods. Central banks have a natural bias in favor of controlled inflation as it increases the versatility of banking tools and underwrites the risk exposure that comes with leverage. It also reduces macro-economic risks by shrinking the government's burden of servicing the national debt. While manufacturers and service providers may not like inflation, they have been taught to accept it as a growth propellant. Central to the calculus is the protection of profit margins: a duty which keeps executives in the good graces of investors and directors.

The manner in which corporate profit margin growth in recent years has outstripped productivity growth suggests a good deal of stealth inflation concealed in the design and provision of goods and services. Without increases in ingenuity, productivity, business efficiency and revenue, it is difficult to increase profit margins. There is no free lunch. Sacrifices to intrinsic and relative value are concealed, often with cheap bells and whistles.

Inflation from the Gaming of Consumers

Service intensive corporations have trained managers to respond tactically to whatever markets will bear. For example, dynamic pricing by airlines works to game the public by raising prices during parts of the day, week or month when buyer psychology will accept higher prices. While careful and lucky shoppers still get deals, consumers on the whole pay inflated prices. Were this not the case the techniques would not be employed. Increasingly, post-purchase customer service is shifted to low wage countries, the quality of the support oftentimes compromised. As consumers frequently discover, they must upgrade their service plans to retain the post-purchase benefits they previously took for granted. For example, today's consumers find it necessary to buy extended warranties on products that formerly lasted at least a decade but now break in relatively little time. Today's electronically controlled devices are expensive to repair and often develop problems not long after the extended warranties expire. Calculated warranty inadequacy is an expression of price inflation that the Fed ignores.

Consider the situation with time-share companies. The ability of travelers to use their points or weeks advantageously has declined considerably in recent years. This inflation is not expressed in dollar signs but by means of a dilution in the prospect of getting what travelers want in a reasonable time frame. Consider, too, what has happened to frequent traveler rewards for credit card users. Reward dilution is rampant. Indeed, some big hotel brands keep reclassifying their locations to higher categories, increasing the points required for a stay by up to 50%.

Everyone knows about the rising costs of water, sewer, heating and cooling. Does the Fed actually track the cost of cable TV for home owners who fail to switch into competitors' plans to get the advertised prices? What about the loss of summer watering discounts that many cities formerly offered? Or the way that home insurance costs are soaring for people in good neighborhoods? Or the growing necessity of maintaining considerable personal liability coverage in today's lawsuit crazy world? How about the growing social expectation that children carry their own cell phones?

Appearances Trump Reality

The Fed not only advocates consumer price inflation in the U.S. (something it has done brazenly since 2009), but it does so with near impunity, especially among economists. The Fed is content with pretense and outward appearances in its supposedly sophisticated metrics for calculating CPI inflation.

As a high level organization that manipulates monetary apparatuses, the Fed merely feigns concern about inflation as a theoretical risk. It is willingly ignorant of the ways in which the American middle class is collapsing, its vitality sapped by hidden inflation. The Fed pretends that the problem is a lack of wage growth, viewing wage growth as a means of paying for the mountainous debt it has created. But the real problem is the escalating cost of a middle class way of life: inflation running much hotter than the Fed admits, goosed by easy money policies. The impact of wage growth sufficient to deal with this problem would boost CPI inflation well beyond even the Fed's tolerable bounds.

In sum, the Fed has painted itself into a corner. It must either sacrifice the middle class (which it is doing), or undermine the asset inflation upon which the health of an excessively financialized global economy is dependent. Wittingly or not, central bankers have set up the entire world for a sweeping reset of politics and economics. A decade will not pass before sufficient catalysts appear.