Guest Post: Say Goodbye To The Purchasing Power Of The Dollar

Tyler Durden's picture

Submitted by Adam Taggart of Peak Prosperity blog,

On a long solo car trip last week, I listened to several podcasts to pass the time. One was a classic: The Invention of Money, originally released by NPR's Planet Money team back in January of 2011. I highly recommend listening (or re-listening) to it in full.

The podcast is an effective reminder of how any currency in a monetary system is a fabricated construct. A simpler way to explain this is to say it has value simply because we believe it does.

Through the centuries in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today's United States, whose Dollar fiat currency exists primarily in digital form "money" is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange).

But what happens when a society starts doubting the value of its money?

Fed, the Great & Powerful

The podcast goes into the mind-blowingly simple process by which new money is created in America by the Federal Reserve (or the "Fed"). That is to say:

  1. The Fed holds a meeting
  2. Those in the room decide how many more dollars they think the world needs
  3. Someone walks over to a computer and adds that many dollars to the banks, with a few clicks of the keyboard

The banks then, if they want to, lend this new money out into the economy on a fractional basis, adding even more "thin air" dollars to the nation's money supply.

This unique ability in America lends the Fed enormous power. The power to create new money from nothing. With no limit.

And with that power, the Fed can control and/or influence economies and markets the world over.

Should such power exist? And if so, should a single private entity owned by the major players in the banking system be allowed to wield it?

Such power certainly has its dangers.

Back in 2011, the Planet Money team described the normally staid Fed as having "gone to central-bank Crazytown". Panicked by the global credit contraction, the Fed began a series of programs intent on combating the deflationary force of credit defaults. It essentially force-fed liquidity (a.k.a. freshly-printed dollars) to the world, using ham-fisted tactics that it had fastidiously eschewed over the previous century:

As the financial crisis unfolded, the Fed created...trillion[s of] dollars, which it lent out as emergency loans to all the big names on Wall Street: Goldman Sachs, Morgan Stanley, huge banks like Citigroup and Bank of America. The Fed lent money to private equity firms, hedge funds, and even regular companies like Verizon, GE, and Harley Davidson.

And it wasn't just the recipients of that cash that were new. It was also what the Fed was requiring in return: the collateral.


In the past, in the rare instances that the Fed used its powers to serve as the lender of last resort, it demanded the highest quality collateral in return. Assets that were safe and would hold their value.


But in 2008, the Fed started accepting all sorts of...collateral that just months ago it never would have touched.


The sheer amount of new money that the Fed created was unprecedented. From the time we went off the gold standard of 1933 until 2008, the Fed had created a net total of $800 billion. In the months after the financial crisis, that number nearly tripled to almost $2.4 trillion.


[The Fed was] spending more newly created money in just 15 months than [it] had created in its entire history up until 2008.

And what effect did this fast-and-loose money-printing bonanza have? The big banks were able to recapitalize their damaged balance sheets while continuing to pay themselves record bonuses. Commodities, priced around the globe in U.S. dollars, became much more costly as many more dollars competed for the same amount of real assets. And financial assets, like stocks and bonds, marched upwards, raised by the unrelenting rising tide of Fed liquidity.

Notice however, that the economy itself did not fundamentally improve in the way the Fed had hoped it would. While a collapse of the system was averted (delayed?), economic growth has remained sluggish, unemployment high, and real wages stagnant or worse.

Of course, the reason for this is simple. Money is not wealth. It is merely a claim on wealth.

You can't print your way to prosperity. History is abundantly clear on that. 

With the clarity of hindsight, it's now obvious how the Fed has now painted itself into a corner. Here's how the stock market has fared during the Fed's rescue efforts:

They say a picture is worth a thousand words. In this case, the picture above is worth several trillion dollars (some would argue as much as $9 trillion).

The financial markets have become dependent on new Fed dollars. If you look at the few gray segments of the chart, the stock market swoons nearly immediately once the Fed halts its balance-sheet expansion.

For whatever reason (perhaps because it's owned by banks?), the Federal Reserve has chosen to use the price of financial securities as the signaling device that its efforts are yielding results. But the markets, like any junkie, demand greater and more frequent infusions to reach new highs. Note how the trend of successive Fed programs yields smaller and shorter-lived boosts.

The Fed lives in fear of re-entering recession while unemployment and wealth inequality remain stubbornly elevated. With so many families teetering at the edge, things could get ugly very quickly if a fall in asset prices were to create a "reverse wealth effect" that triggered another recessionary slowdown. So as long as low single-digit GDP growth persists, the Fed's hands are tied. It must continue to print.

No matter that the rising price of financial assets grossly benefits the top classes namely the 1% who own 40% of the entire nation's wealth. In stark contrast, the bottom 80% of Americans own only 7%.

No matter that the Fed's money tsunami is creating asset bubbles (again) in stocks, bonds, college tuition, housing, commodities, etc. further eroding that bottom eighty percent's ability to form capital to fund its future.

The Fed has gone "all in" here. There is no Plan B.

Should We Place Our Faith in the Fed?

Perhaps I'm being overly pessimistic.

Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face.


As for the talent, the key body that makes decisions on the money supply is the Federal Open Market Committee (FOMC). Many of its members have only had academic and/or government positions throughout their working careers. Voting members with actual business operating expertise, or experience running a commercial bank, for that matter, are rare.

And as for tools, the Fed only really has one: the interest rate. It can move it up or down. But the effects take time to be felt in the markets. And it is a blunt, imprecise tool, at best. Again from the Planet Money podcast, where interviewer Alex Blumberg is talking with Gerald O'Driscoll, former vice president of the Dallas Regional Federal Reserve:

Alex Blumberg: I sort of think of it like a joystick. You move it too far in one direction, you get out-of-control inflation. You move it too far in the other direction and then you can really sort of put the brakes on the economy. Is that too simplistic a way of thinking about it or is that?


Gerald O'Driscoll: I mean, it's okay to think about it that way. I winced a little when you said that, because the joystick presumes a very precise control, which is exactly what they don't have.


Alex Blumberg: Right.


Gerald O'Driscoll: It's more like you're moving a super tanker and you start moving the wheel and there's no effect that you can see for quite a while.

In fact, the inner sanctum itself, where the all-important FOMC meetings takes place, seems much less like the rarified Olympian god-chamber we'd expect, and more like the conference room from Office Space:

Whatever you imagine the room looks like where you can create one and a quarter trillion dollars, this is not it. It is not grand. It is not ornate. It is not ceremonial. It has four grey cubicles, it has computer screens, and there's no other way to say this: It's a mess. There are papers and notes scattered around. There is a yoga ball someone has been sitting on. And there is a basketball net, possibly Nerf brand. This is where the magic happens.

The reality is, the Federal Reserve is like any other organization. Human. And fallible.

And like any other organization, it makes its best assessment of what the future holds and places its bets accordingly.

For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; I humbly ask you to watch the following:



Cyprus: Are Things Different This Time?

In Hollywood, they say you're only as good as your last movie. By that metric, the Fed's latest sanguine prognostications should be taken with a huge amount of salt(ed popcorn):

Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.


The Fed chief told reporters that the central bank was monitoring the situation in Cyprus. "At this point, we're not seeing a major risk to the U.S. financial system or the U.S. economy," he said.


And while the cheap money supplied by the Fed has pushed up stock prices, Bernanke said the central bank isn't measuring the success of its policies against moves in stocks.


He also said the recent advance was not out of line with historical patterns. "I don't think it's all that surprising that the stock market would rise given that there has been increased optimism about the economy and...profit increases have been substantial," he said.

Sound familiar? Are you feeling comforted yet?

So, how much confidence can we really have in the Fed to navigate these yet uncharted monetary waters, with so many variables and unknowns, and its less-than-spot-on record? Honestly, we'd be fools to assume much.

Cyprus has awakened the world to the reality that central planners can appropriate their money with the bang of a gavel. And while we don't yet know with certainty how things will unfold in Cyprus, we can project that events there have shaken society's confidence in the soundness of fiat currency in general. If we know it can be confiscated or devalued overnight, we are less likely to unquestioningly accept its stated value. This doubt that strikes at the very foundation of modern monetary systems.

Cyprus is meaningful in the way that it shines a light on both the importance of hard assets and the risk it poses to market stability. It certainly increases the risk of our prediction of a 40%+ stock-market correction by September, as investors begin to realize that current high values are simply the ephemeral effect of too much money, instead of a sign of true value.

At this point, prudence suggests we prepare for the worst (by parking capital on the sidelines, investing in our personal resilience, etc.) and add to our hard asset holdings (like precious metals bullion, productive real estate, etc.) as insurance to protect our purchasing power. The dollar may strengthen for a bit versus other currencies and perhaps the financial markets, but the long-term trend is a safer and surer bet: Dollars will be inflated. There will be more of them in the future than there are today. So, while our dollars still have the purchasing power they do, we should use the window of time we have now to exchange paper money for tangible wealth at today's prices.

Those with a shorter time horizon, higher risk tolerance, and capital to spare may want to start considering a strategy for going short the financial markets.

Next stop: Crazytown!

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localsavage's picture

It's the evil speculators.....

cifo's picture

Here you have it: Good bye.

Stackers's picture

A Dollar is a unit of measure like an inch.

You have an inch. .... an inch of what ?

You have a dollar .......a dollar of what ?

tenpanhandle's picture

Unfortunately, we all know what the "inch of what" is and where we're getting it.

flacon's picture

Don't you love it when the Fed talks so pompously about it's "TOOLS" as if that imaginary idea has any validity what so ever? Imagine you on your job interview talking about your imaginary "TOOLS". You'd get laughed right back to your car with no handshake. 

toys for tits's picture


Especially if you admitted your tools were only experimental.

All Risk No Reward's picture

Guys, the false narrative is put out to deceive us.  So is the "opposition" false narrative.  And every other media narrative.  False.

The Fed is controlled by the mega-banks that are TBTF&Jail - talk about incestuous right out in the open.

The mega banks are controlled by THE OWNERS - Biggest Finance Capital.

The mega banks tell Bernanke what that they want their little B* to do and say, and that little puppet does it  He wasn't wrong about the housing market - he was selling the top of the bubble on purpose to jack as many people as he could.  Yeah, he's that evil - and he enjoys it, the sick f*.

Now, ask yourself the following:

1. If you were the mega banks and you were going to tell the Fed to destroy the value of the dollar, would you lend 30 year money at 3%?  If so, why?  If not, why?

2. If you owned trillions in cash personally and in your front corporations, would you hyperinflate it away? If so, why?  If not, why?

3. If you owned trillions in debt and your front corporations owned trillions in debt, would you hyperinflate it away?  If so, why?  If not, why?

Why are the mega banks (their OWNERS, actually) issuing so much debt based currency such that they're speculating is causing prices to go up on goods society needs?


4. Are you worried about a 10% decrease in purchasing power when you double your cash position through looting?

5. Is looting sustainable forever?  Nope.

The real question is...  what happens when the cost benefit to looting is deemed unsatisfactory?

Basic human nature SCREAMS at you that they will rescind credit, bust those they've criminally duped into unpayable debt AND THEN TAKE ALL THE DEBTORS' REAL CHIT.

How to be a Crook

Once these mofos own the world, then they don't care about the value of their societal asset stripping debt money value, so they'll hyperinflate, balance their books and call it even.

They will also bankrupt and consolidate all their competition for pennies ont he dollar.

They will own it all, the serfs will own nothing, they will toast to Darwin and society will be their b* if they want that crumb from the table.

It is in neon lights, people.

 "If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
by: Robert Hemphill
Credit Manager of Federal Reserve Bank, Atlanta, Ga.
Source: In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

Debt Money Tyranny

Thomas's picture

Speaking of the Fed's tools, Bernanke gets married and on his wedding night in the honeymoon suite he disrobes. His highly disappointed wife says, "who are you going to satisfy with that puny thing? Bernanke responds, "Me."

Dieselclam's picture

A "dollar" is not like an inch in any way. Dollars have floating, relative, subjective values based on God-only-knows-what. Inches are measurable and traceable to an EXACT, unchanging physical standard kept in a vault at the National Institute of Standards and Technology. There is no subjectivity with measurements- they are an exact science. I only WISH "dollars" were pitted against such a standard. When the closest thing (the old CPI) got too painful, they changed that standard, all the while an inch today is the same length it was prior to December 1913

Dick Gazinia's picture

How many elephants can you fit into an hour?

Libertarian777's picture

a dollar is 371.25 grains of fine silver.

What that green piece of paper that looks like a silver certificate, with the word 'dollar' printed upon it is... I have no idea.

All Risk No Reward's picture

You should learn what it is because it is the Debt Star - a societal asset stripping mechanism that uses 3rd grade math to destroy entire planet economies.

Debt Money Tyranny

How to be a Crook

GubbermintWorker's picture

Silly, that green piece of paper is " LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE"!

So says the Wizard of Fed!

Abraxas's picture

What is China? I'll take Currency Wars for 800 bitcoins.

dick cheneys ghost's picture

My name is Ben and I'm a PRINTAHOLIC

kaiserhoff's picture

Some of ya'll know way too much about..., happy hour.

nmewn's picture

lol...kaiser, if I couldn't have fun doing what I want, I wouldn't bother getting out of bed my brother ;-)

DoChenRollingBearing's picture

I can hardly wait until Jim Willie comes out with his next piece...

Arrowflinger's picture

Jim gives the money mavens the willies. I knew things were bad when Jim Willie was proven so right that one had to give him credibility. Now he gazes out like some sort of Prophet.

chubbar's picture

His last piece came out last night. I stayed up half the night reading the damn thing. My only quibble is he thinks that Russia will prevail and Cyprus will leave the EU. Obviously that didn't happen. Of course he probably could not have foreseen that the fucking Russkies had all week to withdraw their funds and don't give a shit about whether Cyprus stays in the EU or not! Too fricking funny! What a bunch of asshats these idiots running the ECB are! All this knashing of teeth over nothing, the targets were already long gone!!!! Fucking bozos!

LuchadorChumba's picture

Ah DCRB, you could have been a Luchador malvado! Instead, you go and tell everyone about this gold stuff.

ya know…if you’re in a pure fiat system…then its your obligation paisano (y necessity) to borrow on credit with the full intention of never paying a single peso back…uh i mean dollar.

Come on, crawl between the ropes, get back into el cuadrilatero con me.

Oh, that Willie guy, he better watch his nalgas.


Iocosus's picture

But mom! Everybody's debauching their currency through similar programs to quantitative easing so we won't get in trouble! I swear! And like, seriously, mom, we've got the bullies on our side just in case someone gets out of line. Now can I have $50? I want to go out with my friends to Gino's Pizza for a slice.

Sudden Debt's picture

at least the energy is back to it's 2007 highs... I filled up my car this morning: 140 euro's... that's a lot.

Kirk2NCC1701's picture

$180 US for a tank of gas!?  What do you pay per liter?

pop goes the weasel's picture

I filled my van £115 yesterday and car £105 this morning £1.49 a litre diesel and £1.42 petrol both were on fumes

MachoMan's picture

Holy shit.  No wonder you poor bastards can't afford straight teeth.

nmewn's picture

They can, they just all fall out over time waiting on a dentist to see them.

toys for tits's picture

Look at the bright side, you get better mileage because you don't have shitty corn in your gas.  Additionally US gas is subsidized by about $3 per gallon by the taxpayer for ethanol.

nmewn's picture

Good point.

But we're trying to do something about that down here (Oregon too) least on the demand side.

"In Florida, a bill to repeal the requirement that all gasoline offered for sale in the state contain a percentage of ethanol is being considered in the Florida House. Currently, the Florida Renewable Fuels Standard requires that all gasoline sold or offered for sale by a terminal supplier, importer, blender or wholesaler in Florida contain 9%–10% ethanol, or other alternative fuel, by volume. SEMA is supporting both measures."

Ethanol destroys small engines (motorcycles, boats, lawnmowers etc) and (as you say) less mileage per gallon.

DosZap's picture


Florida contain 9%–10% ethanol, or other alternative fuel, by volume. SEMA is supporting both measures."

Ethanol destroys small engines (motorcycles, boats, lawnmowers etc) and (as you say) less mileage per gallon.

Well good luck sticking to 10%, the EPA Mandate is calling for 15% Ethanol(and they are not budging),and that will destroy ALL engines.

Ask me how I know.

toys for tits's picture

Ok, what's the punch line?

Key-Rick's picture

Ethanol's a joke. more energy to produce than it yields. A retard can figure out the problem with that equation. It's mandated to be in gas by the Monsanto/Cargill corn overproduction bullshit lobby. I have to find marine gas for my boat or it will fuck up my engine.

nmewn's picture

As I understand it (correct me if I'm wrong) the state bill is to repeal the mandate on retailers for ethanol.

The over-the-top, eco-freaks at the EPA can call for whatever it wants and be shown to the people for the nanny-statist destroyer of their property & lives that it is.

There is nothing like the skeletal remains of a family being stuck in the middle of the Gulf with an ethanol burnt up engine to turn the tide of public opinion.

Too graphic? ;-)

A Nanny Moose's picture

...but it creates jobs in corn production, and engine production/repair.

dunce's picture

I am sorry to say that both parties were in on the midwest vote buying scheme of ethanol. They did not not discover that it was not a new source of energy after the fact, they knew it was a pork project from the gitgo. As usual what got them re-elected had priority over what was best for the country. The whole thing is a wealth redistribution plan, the left never whinges about the huge subsidy involved though they know as well or better than most that it does not work no matter how you look at it. Their ultimate goal is mass transit so anything that causes private transportation problems is a step in that direction.

Diogenes's picture

In Canada I pay over $100 to fill up my minivan and that isn't a lot. A pickup truck costs $200.


Today gas is down to $1.27 per liter (quart).

nmewn's picture

Squire nmewn and I were just having that conversation...about why we didn't go with the metric system.

Grandpappy nmewn was right ;-)

DosZap's picture

In Canada I pay over $100 to fill up my minivan and that isn't a lot. A pickup truck costs $200.


Today gas is down to $1.27 per liter (quart).

Barely a dollar over what it is in the US.(89 Octane)

91 Octane is more, closer to .$50 a gal.

thisandthat's picture

Gas in Eu is 95 or 98io (and up), although I think they use different index standards than in the US. Most of the cost is taxes, though; 95io price before taxes avg .70/.75 €:

Gief Gold Plox's picture

Diesel here is 1.381 eur/l Costs me about 80 eur to fill up.

Sudden Debt, what do you drive mate? Or better still how big is your gas tank?

kaiserhoff's picture

Long term, sure, the dollar is toast.

But with the yen being forced down and the Euro run by a bunch of syphilitic idiots (not that there's anything wrong with that), how is the dollar not the best looking horse in the glue factory?

Not advocating it as a store of value, but a lot of ye old spondoolics has to be kept in paper.  If not the dollar, what?

Vashta Nerada's picture

If the government wants it badly enough, they can confiscate wealth in any form, not just bank accounts. 

LawsofPhysics's picture

When fraud is the status quo, possession is the law.  Shit, any person or corporation can take whatever the fuck they want if they have the firepower.   Thanks for the info captain obvious.

little buddy buys the dips's picture

"They're welcome to try." (...he says as he racks another round)

Kirk2NCC1701's picture

Don't shoot me and sorry to bring you the 'joyous' news, but they DO get you every time you open your wallet, pay a bill online, or even buy the ever more expensive G&A.  It's called inflation and price-manipulation of anything/everything.