How the Federal Reserve inflated stocks, Bitcoins, corporate monopolies and decimated the 99%

Revised and slightly adapted from https://www.democracynow.org/2022/1/27/federal_reserve_interest_rake_hike_march

How the Federal Reserve inflated stocks, Bitcoins, corporate monopolies and decimated the 99%

Chris Leonard interviewed on his Jan 2022 books, The Lords of Easy Money: How the Federal Reserve Enriched Wall Street & Broke the U.S. Economy

Amidst growing concerns about inflation in the U.S., the Federal Reserve announced Tuesday it will start hiking interest rates in March. To look at what this will mean for working people and everyone beyond the 1%, we’re joined by Christopher Leonard, longtime business reporter.

Welcome to Democracy Now! It’s great to have you with us, Christopher. If you can start off with a Federal Reserve 101: What does it mean to lift interest rates? And why do you say it’s broken, the American economy?

CHRISTOPHER LEONARD: Yes. Thank you. Great question. And, you know, the Federal Reserve can seem obscure and highly technical institution that only matters to Wall Street. I really think that’s not the case. It is critical to understand what this central bank does and how it has affected our economy.

One of my central preoccupations as a business reporter is trying to understand growing income inequality in the United States. Why do we live in this sort of funhouse-type economy where we see stock markets breaking records, corporate debt markets breaking records, while the middle class is really treading water with stagnant wages and falling further behind?

What the Federal Reserve has done over the last decade explains a great deal of why this is happening.

Long ago, we created the Federal Reserve as the central bank to do one key thing: creates a national fiat currency. The Federal Reserve literally creates and manages our currency. What we call a U.S. dollar is in reality a Federal Reserve note. The central bank’s job is to make sure the dollar retains its value. This is why you always hear talk about, how the Federal Reserve hiked interest rates today, or it cut interest rates today. What they’re doing is expanding or contracting the supply of money.

Why does this matter? Well, here’s why. Over the last decade, the Fed has really moved itself to the center of American economic life. The Fed has engaged in an unprecedented series of experiments in printing new money. Consider this comparison. In the first century of its existence, the Fed expanded the pool of base money — what the economists called the monetary base. The Fed expanded the pool of money to about $900 billion. That’s one trillion dollars in printing money over a century. Then, after the crash of ’08, between 2008, 2014, the Fed prints $3.5 trillion. This is three-and-a-half centuries’ worth of money printing in six years.

Now, money is not a neutral force. When the Fed creates new dollars, it doesn’t create them in the checking account of normal people, right? It creates new dollars on Wall Street in the bank accounts of 24 select institutions. These are the folks you’d suspect: JPMorgan, Goldman Sachs, Wells Fargo. The Fed creates these new dollars in those 24 accounts. [Theoretically what should have happened, in a world where income equality was a national goal, is the Fed pours money into banks, the banks pour out investments to make new factories for needed goods; and, companies raise wages. This way everyone benefits, a rising flood of dollars lifts all boats. What happened? Banks did not loan. Instead they bought stocks and Bitcoins. Companies did not raise wages. Instead they used their windfall dollars to fund stock buy-backs. ]

The Fed’s policies over the last decades have stoked the world of Wall Street, the world of non-productive, abstract, financial assets. The trillions of dollars pumped into the banking system inflated the market for stocks, for bonds, for Bitcoins and cryptos. This then drives income inequality. Why? Because only the tiny 1% at the top of our wealth ladder controls 40% of all the assets, whereas the bottom half of Americans, you know, those of us who earn a living by getting a paycheck rather than by owning abstract assets — the bottom half of Americans only own about 5% of all the assets.

In this way the Fed’s policies enriched the very rich, the biggest of the big banks, thru inflating stocks and financial assets, while doing nothing to lift the middle class.

Now we find ourself in quite a dangerous moment, in 2022. Let’s talk about the other kind of inflation, the rising prices of real goods. We’re seeing price inflation of real goods like food and commodities like energy start to increase dramatically.

So, the Fed is being forced to tighten the money supply and to try to back off these programs it’s created which stimulated the stock market. The real risk here, for everybody in America, is as the Fed does this, as it hikes rates and pulls back on the stimulus, it’s going to cause those asset markets to fall. To put this in common parlance, it’s risking creating a financial market crash as the Fed is forced to hike interest rates. Again, to me, one of the key problems with this is over the decade of these easy money policies, the middle class has really been left out. And once again, if we see another financial market crash, it will be the middle class who has to pay the bill again as in 2007–2008.

One key thing I would like to point out, I learned while reporting this book, is we should, think about two kinds of inflation. There’s inflation of prices, which is what we’re talking about right now, really sharp increase in the price of food, fuel, television sets, cars. That’s price inflation. Different from this is the inflation of financial assets, which is what the Fed has been pushing so hard for decades. This includes the rise in the value of homes, stocks and corporate bonds. So we’ve actually had runaway asset inflation for a decade, but we haven’t seen price inflation. We’re starting to see it now.

NERMEEN SHAIKH: Well, Chris, could you respond to what we see everywhere in the media, namely how inflation rates now are almost at 7%, higher than they’ve been since the 1980s? Price inflation also impacts the vast majority of Americans adversely. What other steps could be taken to reduce inflation?

CHRISTOPHER LEONARD: As you point out, price inflation can frankly, be devastating for the middle class, if wages don’t keep up with the increase in prices — which, unfortunately, is exactly what we’re seeing now. Wages are kind of creeping up a little bit, but we’re seeing this runaway increase in prices, which presents us with a terrible dilemma. To be blunt, the Federal Reserve is responsible for the price inflation, at least to a certain degree, by pumping all of this money into the financial economy, with little thought about or real investment in, the manufacture of real goods.

So, your question remains, how can you fight it, and what can you do?

Ideally with leadership from the White House, Senate and House you:

- Crack down on and break up unnecessary monopolies,

- Improve the supply chain (enforcing anti-trust, etc), and

- Shift government and bank investment into real goods, and real jobs, and increased wages.

If we do none or too little of the above, one of few ways the Fed has to address price inflation is to hike interest rates. This is likely to create damage to our economy. So, we’re going to see interest rates hiked, and it’s going to be a bumpy ride.

AMY GOODMAN: Well, we clearly have to come back to this conversation, Christopher Leonard, business reporter and author. New book out this week, it’s called The Lords of Easy Money: How the Federal Reserve Broke the American Economy.