Postcards: "1993" - The Massive Monetary Policy Error That Crushed the Middle Class

Americans ask the same question - "Why is everything so expensive?" To understand that, one must recall a simple decision in Washington policy, one that has made everyone feel poorer.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more [Postcards: "1993" - The Massive Monetary Policy Error That Crushed the Middle Class]( Americans ask the same question - "Why is everything so expensive?" To understand that, one must recall a simple decision in Washington policy, one that has made everyone feel poorer. [Garrett {NAME}]( Dec 21   [READ IN APP](   Market Update: It was an ugly day after a long, multi-week period. A major undercurrent of rotation from technology to energy stocks and geopolitical concerns are rising again. This was the first warning sign, a big jump in the VIX, and a short-term breakout in the SQQQ. Sell calls on existing positions. Dear Fellow Expat: For all I complain about Florida’s Seasonal traffic… for all my anger at the three-lane congestion clogging Tamiami Trail (Route 41) from Fort Myers to Naples, Florida… I forget. There is a road, my expat friends, that I’d forgotten. I shook its memory like a bar rag, swiped it into my brain's hallways, and then slammed it into a dark corner. But… those three lanes… are back. I’m talking about the white-knuckled journey down Interstate 83 to Baltimore. As you leave crowded Baltimore suburbs, a flood of cars - swerving along each asphalt tributary on-ramp - builds going south. Two miles from the city,  cars accelerate and pulsate. The road shakes like a struggling artery pumping life into an overburdened heart… nonstop… 250 workdays a year. My father made this drive each day to McCormick’s then-downtown headquarters. Even in 1989, the difference between arriving 20 minutes early or 45 minutes late depended on whether he left the house at 7:30 am… or 7:45 am. I had that experience this week, driving from Towson to Baltimore. This morning, I departed at 7:45 am… 10 minutes after I’d left the previous two days. What was twice a 15-minute commute devolved into a 45-minute logjam. So, what happened? A single car broke down in the left lane. One person… out of thousands of cars – clogged that road. Mornings ruined. Men and women gnashing teeth. Hundreds of conversations and meetings in the city started today with “Sorry, I’m late… but traffic… you know?” For all we know, someone lost a job today – because they were late again. That one person’s decision to not check the oil or the tire pressure… That’s the fragility of the road system – one overstretched and overburdened. Just one decision… not even made this morning… maybe last week or years ago, left a Honda Accord stalled as drivers side-eyed the car and banged the horn. That was just one decision… on one Wednesday morning… Imagine what happens when a single decision compounds for 30 years and affects everyone in America… Welcome to “1993.” [Upgrade to paid]( A Preface When I was 12, I rollerbladed up and down Coastal Highway in Ocean City, Maryland, listening to the Stone Temple Pilots’ album Core. It was 1993. Things were carefree then. But 15 years later, I walked up State Street in the Chicago Loop. It was just a few days after September 15, 2008, when Lehman Brothers collapsed. I watched hundreds of people pile out of banks, laid off, carrying boxes and careers. That was the week that Capitalism died. What followed in the months ahead from our government was a never-ending pattern of bank bailouts, massive monetary refinancing, centralized planning, and a system that still hasn’t been properly defined. They wouldn’t let the markets crash, or price discovery endure. The policy response - pumping trillions of dollars in fiscal and monetary stimulus - was unprecedented. This crisis revealed that the very thing created to stabilize financial markets and prevent market crashes and panics before 1913 had become the source of boom-and-bust cycles in the 20th century – The Federal Reserve. For two decades, I’ve been fascinated by any financial crisis. I’ve studied the origins of every major financial crisis dating back to the Roman Empire. The subject fascinates me. But today, I have no historical comparison to the response by the Fed in 2008/09 and the official government’s and central bank’s response since then. That should give us great pause. Because what comes after this? As we begin this journey together over the next two weeks, let me state this. No single person is responsible for the 2008 financial crisis, just as no one person is responsible for our current economic crisis. It is not a Left or Right issue. It is, however, a massive public policy failure. I circle the year 1993 to showcase the impact of six policy decisions and how each has accelerated the economic and social problems that America faces today. These include reckless monetary policy, massive economic inequality, insane regulatory burdens, a broken housing market, an unacceptable retirement imbalance, an entitlement crisis, and a culture of banking bailouts and no accountability. Of course, 1993 was the first of Bill Clinton’s presidency. But this is not an indictment of Bill Clinton. It’s not a story about partisanship. It’s a recollection of events and decisions made by people in charge. By Yale, Harvard, MIT, Vanderbilt, and other graduates of Ph.D. and other advanced degree programs. They are the self-appointed experts in monetary, fiscal, social, supply, energy, housing, and financial policy. Thirty years later, I will show you how six decisions made in 1993 allow every American to answer the question we see so often: “Why is everything so expensive?” It’s not “capitalism” that’s the problem – because the policies were not capitalistic. Instead, it is a long mathematical answer to flawed Washington D.C. policy. It reads: Flawed monetary + fiscal + regulatory + housing + financial + cultural policy = Today’s cost-of-living crisis. And so, we start with the first car in the economic trainwreck. A 1993 decision by then-Federal Reserve chairman Alan Greenspan and other policymakers. [Upgrade to paid]( Targeting Americans Deflation is the enemy of the fiat dollar system because the U.S. monetary system operates on debt. By 1993, we’d been off the gold standard for two decades - but the U.S. dollar itself had been on a steady decline in purchasing power since the inception of the Federal Reserve and its Reserve Note since 1913. Americans take out loans for their homes, cars, and other essentials in a dollar-based debt system. Debt instruments like bonds and other assets are priced in nominal terms. This is important because inflation and deflation impact two critical terms in economics. A nominal value refers to a current price without adjusting for inflation. Real value considers the impact of inflation, providing a more accurate picture. For example, a person makes $50,000 in a year in 2022. That year, the nominal and real salary is $50,000. But if inflation increases the following year by 5% - and the employee doesn’t get a raise - the nominal value is still $50,000… while the real value is $47,500. That buying power of the salary cannot afford the same level of goods that it once had. But what happens if the buying power of that salary increases from $50,000 to $52,500? Well, that would involve deflation. The real value has increased, while the nominal value has not. So… we could technically see companies aim to reduce wages to reflect the buying power better. It may move through the supply chains. We could see the value of homes decline because the buying power of that salary has increased, and thus, it’s not MORE money. Not because the house is worth less in real terms, but because it is nominally? Imagine that your home price goes down by $10,000, but your buying power goes up because everything else is falling in price. By cost of living standards, your salary is the same in nominal terms. But life got “less costly” in REAL terms. Your buying power increased. Now… let’s step back. I just explained that as clearly as I could. And if that’s confusing at all… that’s the point. [Upgrade to paid]( Americans Think Nominally Economist Larry Summers knew the average American would struggle with these concepts. He was the Chief Economist at the World Bank in 1991 and went to the Treasury Department in 1993. He would be Treasury Secretary in 1999. We see his concerns today. Americans look at the recent cost of eggs and tend only to see the price nominally, not that their real purchase power has deteriorated over time. Simply put, they don’t comprehend in real time that the massive amount of money printing in recent years devalued the real buying power of the currency - and their salaries haven’t kept up with this steep adjustment. This is why it’s easy for politicians and central bankers to blame greedy companies for raising their prices - which also reflects the decreasing buying power they experienced due to the significant amount of money printing after COVID-19. But here’s where 1993 becomes so essential. In 1993, Larry Summers wasn’t worried about people going on TicTok and wondering why things had gotten so expensive. He worried Americans would be angry that their nominal wages and home prices fell. Even if the real cost of everything else went down, Americans would freak out about their mortgages and the size of their paychecks if they took a new job. And there is good reason for this concern. Anyone with a home loan (especially at a higher interest rate) would potentially be – on paper – underwater because the debts were also issued in NOMINAL terms. Deflation is an enemy of a fiat-based debt system. If you have a $50,000 mortgage, but your nominal wages decline by 10% because of deflation, how do you obtain enough money to pay off that nominal debt? The short answer is that they likely cannot. This situation can create what is known as a debt-deflation spiral - and that’s relevant because it’s a situation that currently threatens the Chinese economy. Tech Deflation Needs an Antidote So, what drives deflation? A common deflationary factor is technology. Whether it’s a steamship in the 1770s, the railroads moving things faster across the country in the late 1800s, or the advent of semiconductors, technology can and will drive down costs. What costs? Primarily costs of moving physical goods, capital, or information, but also labor costs. For example, the value of the technology from a 1978 television has decreased by 99% in 35 years. Yet the median cost of a house is up at least 735% (More on that in a moment) in that period. In 1991… and then 1993, a major source of deflation on the horizon for the global economy was emerging. The internet. The internet has been a major source of deflationary costs across supply chains, from wages to eliminating waste… from e-commerce that requires less real estate and few workers. From digital banking and the elimination of banking tellers. But there was more to this decade. At the same time - in 1991, various politicians wanted the Federal Reserve to adopt a “zero-inflation regime.” That means… prices don’t go up… and they don’t go down. They stay flat. The problem is that some prices would go up… and some would go down. And some professional wages would thus go up… and some would go down. And as a result… some house prices would go up… and some would go down. Economist Robert Shiller recalls that Summers argued that Americans would display “irrational” resistance to falling nominal wages if the Fed targeted a “zero-inflation regime.” And Summers wasn’t wrong – especially from a political standing. Who wants the other political party to say that certain Americans’ wages fell 10% (from $50,000 to $45,000) even if they were just as well off because of deflation? There were two mistakes made outside of the bigger policy mistake. First, no one wanted to explain to Americans how any of this worked or do what former independent Presidental candidate Ross Perot did in his opposition to NAFTA: Take an hour on a Wednesday night to explain how inflation works… So… the Federal Reserve started a specific policy to address this threat of deflation in the debt-based system. That’s where the second problem emerges. They didn’t officially tell anyone about it for 19 years. [Upgrade to paid]( The Origins of Inflation Targeting After the inflationary crisis of the 1970s, the Fed altered its monetary strategies to address rising prices. The policy would set a specific target for growth in the money supply – which had been abused badly after the U.S. abandoned the gold standard – and the Fed would adjust interest rates to reach those targets. These policies were called “Monetarist money-growth targets.” But in 1993, Federal Reserve Chairman Alan Greenspan declared those policies dead. The New York Times boasted, [“Fed Abandons Policy Tied to Money Supply.”]( [The article reads]( “The Federal Reserve gave up targeting the money supply because the relationship between monetary aggregates (such as the money supply) and other economic variables was becoming unreliable.” The key term here is unreliable. Because what followed was just as unreliable and theoretical… if not worse. And it’s been the first cause within a chain reaction that brought us to today’s system of exponential debt, among so many other problems. Like many other central banks, the Fed began an "inflation targeting process.” This process works differently than what they had been doing. Of course, it’s supposed to work – in theory. The central bank sets a target inflation rate for the nation’s economy and adjusts its monetary policy tools, like interest rate hikes and asset purchases, to achieve that target. The Federal Reserve may not have set an official target number then. But many other central banks did, like the Bank of England and the Bank of Canada. The Fed would later adopt this number as its official target rate publicly. But why 2%? It could be because they are trying to spur economic activity and get people to spend if they know that the value of their currency will be worth 2% less in the year ahead. Or it could be that 2% is just enough inflationary theft that the average person doesn’t notice. Or it could be that it’s an arbitrary, theoretical construct with no concrete purpose. I will go with Number Three here. I say this because “Inflation Targeting” at a 2% rate is arbitrary. If the Fed is trying to get people to spend, it’s a theoretical belief that people expect their money to be worth less in a year for now. If they expect this, they might buy things or want higher wages, driving higher prices. But they might also invest the money to get a better rate of return. And if the money is locked away and people aren’t spending… then what? The fact that people expect inflation – as [Jerome Powell tried to gargle a few months ago]( – is hogwash. A 2021 Fed paper trashed the idea of inflation expectations, saying it relied on “shaky foundations” and such faith in it “could easily lead to serious policy errors.” “Could easily lead?” Has. There’s Another Issue Here Meanwhile, the desire to tackle 2% - or a set number – is a problem. It sacrifices economic stability for theoretical dogma. We have witnessed the Fed’s commitment over the last year to bring down inflation – but at what cost? We won’t know that answer for another nine months, the typical lag of the latest rate decision to target inflation. But here’s what’s worse, as you’ll soon see. The Fed didn’t tell everyone that the central bank had adopted this strategy. It wasn’t mentioned until a 2003 speech by Ben Bernanke, a massive proponent of this policy, long before he became Fed Chair. That 2% target wasn’t officially adopted until 2012. The people in the know have used this knowledge to their advantage in the equity markets for 30 years. The average American was left behind – not realizing that the single best place to take advantage of inflation targeting was in the stock market. People who understand how monetary policy works know how significantly the central bank has driven asset prices for over a decade. They have done well. Retirees and pension holders? Not so much. Policy Decisions Much of this inflation targeting started in theory as part of efforts to bring inflation DOWN. Inflation targeting became popular after the Bank of New Zealand’s fight to bring down inflation in the 1980s. They set a policy to get inflation between 0% and 2%, then adopted a policy up to 3%. It worked. The country was able to get inflation down to 30-year lows. But then things changed. Robert Shiller says that Google searches show that “inflation-targeting” became popular in the early 1990s. The economist says the goal of driving up or bringing positive inflation— later defined as price stability— began after the 1991 recession. As I pointed out in a Luckbox article]( Summers worried about how deflation could impact the economy. The important thing was the impact on nominal housing and wages. Remember that most Americans’ nest eggs were in the bricks and sticks. And therein comes the policy decision of upward inflation targeting. What happens when the Fed can’t consistently get inflation UP to its target? In that case, the Fed can buy assets and slap them onto their balance sheet. You’ll know that the Fed has bought bonds and mortgage securities, putting money into the financial system to spur economic activity and, thus, inflation. This policy is cheap money – from almost nowhere. When the economy is under duress… the Fed can also cut interest rates - more cheap money. And when deflation becomes a threat – like, say, during a liquidity crisis… or when a major technological wave can bring down prices – the Fed needs to provide “support” in its targeting practices. The Fed effectively papers over deflation with cheap money and low interest rates. After the 2008 crisis (the biggest in 80 years with massive deflationary pressure on it due to the deleveraging in the system), the Fed’s 2% target involved nearly a decade of VERY low interest rates and buying lots of assets to the point that the balance sheet ballooned to almost $9 trillion in 2022 (The Fed was even buying assets while inflation was rising above its target that year, making the situation worse). The Fed’s Balance Sheet… Nothing to See Here. Do you see where we’re going? Deflation and weak economic activity requires… inflation targeting to the upside under this program advocated by Ben Bernanke - who became a Fed Governor in 2002 - and helped kickstart the heavy use of that balance sheet. Whether it’s a fiscal crisis or a technological breakthrough that brings down costs… the dollar-denominated, fiat debt system requires a central bank to pump lots of money into the system and keep interest rates low to create… inflation and prevent a debt-deflation spiral. That is how low rates and so much cheap money pump into riskier assets. Technology drives prices down. Economic weakness reduces inflation expectations. The Fed papers over the entire thing with an arbitrary target in mind… But people don’t stop eating, driving, or paying rent because of deflation or economic weakness. With deflation, the price of things that matter - like food and shelter- may go down, too. But our debt-based system requires more debt to pay off the loans for cars, homes, and whatever Americans want. The inflation targeting argument is part of a broader effort to inflate away existing debt, all while ignoring that increasing the amount of money in the system will ultimately increase the amount the nominal costs of the things that matter (unless we engage in massive amounts of supply-side policy to increase the amount of those goods). Otherwise, we have more and more money chasing a finite amount of goods. It is the Fed that fears deflation, not the American public, for the system itself. One More Time for the People in the Back Again, while TV prices go down, the prices of things that matter – the things we need as part of our survival - increase in nominal terms. All that new debt, spending, and targeting creates more money chasing essential goods… Housing… food… education… energy… the things that matter. This is how inflation targeting in a debt-based, fiat system works. It will not end… especially with AI now on the horizon as a generational deflationary force. So, the Fed can either let asset prices crash (alongside defaults on debt), or they will keep engaging in this arbitrary game and pump more money… until it breaks everything. Alan Greenspan shifted U.S. monetary policy in 1993. And since 1993, the stock market has gone up 764%… all while the value of the American consumer’s purchasing power in the dollar has dropped by 50%. Here’s the chart from Charlie Biello last week. Of course, the results of that market rally over multiple quantitative easing efforts haven’t been shared equally. Why? Well, that also involves two other decisions in 1993 that created our current living crisis. The first – a “good intention” to address surging CEO pay that backfired drove up  CEO pay from 87x the average worker’s pay to 395x in six years. We’ll talk more about that on Friday.   Tomorrow, we’ll recap what’s happened in the last 24 hours in the markets and what we want to do in the energy sector now. Stay positive, Garrett {NAME} Secretary of Defense You're currently a free subscriber to [Postcards from the Florida Republic](. For the full experience, [upgrade your subscription.]( [Upgrade to paid](   [Like]( [Comment]( [Restack](   © 2023 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()