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The Fed's Constitutional Right to Create Stagflation

Updated on October 19, 2012
The Equity Market provides refuge from monetary inflation.
The Equity Market provides refuge from monetary inflation.

Safe Havens From Monetary and Price Inflation

At its September FOMC Meeting, the Fed announced that it would be embarking on a programme of Unlimited Quantitative Easing. The Fed has explicitly stated that this latest round of Quantitative Easing will not translate into jobs; however it will prevent an economic decline. This statement begs the question of what Unlimited Quantitative Easing will actually achieve. The evidence suggests that it will create the scenario known as Stagflation.

Liquidity provided by the Fed will first leak into assets that are deemed to be good places to hide from the ravages of monetary inflation. If and when this monetary inflation appears to be raising the general price level, assets will be sought that have inflation pricing power. Gold Bugs and Equity Bulls have therefore capitalised on this hunt for safe havens from monetary inflation. A painful bout of price inflation, followed by tight monetary policy would however cause an exodus from both these asset classes. It is always better to travel to, rather than to arrive at a price inflation conclusion.

The Impact of Stagflation

Housing and Transporation Costs Rise Above Incomes
Housing and Transporation Costs Rise Above Incomes
Housing and Transportation Cost is Highest for the Poorest
Housing and Transportation Cost is Highest for the Poorest
Housing and Transportation Cost is Highest for those with Mortgages
Housing and Transportation Cost is Highest for those with Mortgages
The Fed's Non-Selected Leave the Labourforce and Subsist on Foodstamps
The Fed's Non-Selected Leave the Labourforce and Subsist on Foodstamps

The Fed's Stagflation Mandate is in the Constitution

Back in 2006, when US Home Prices and Oil Prices were booming, the Center for Housing Policy (CHP) and the Center for Neighborhood Technology (CNT) released a study which showed that housing affordability and transport costs were inextricably linked.

These prescient findings have been conveniently forgotten by the Fed. Six years on from the original study, it has been found that the same conclusions apply. In fact ,the burden of related housing and transportation costs has expanded beyond income levels of a rising number of Americans. As the Fed has targeted house prices to save the banks and the asset owning classes, it has raised the cost of housing and transportation above the income level of many Americans. By admitting that Quantitative Easing does not create jobs, the Fed is admitting that its policy is designed make homes and transport unaffordable to certain members of American society. This implies that the Fed is deliberately applying a policy that in general contradicts its dual inflation and growth mandates. The Fed is applying its Dual Mandate selectively to some; at the expense of others.

The latest study found that the burden of housing and transportation fell disproportionately on those with lower incomes. The Fed is therefore selecting economic winners and losers from the population.

In addition, the study found that those with mortgages are actually the most hardest hit. Thus even though the Fed says that it is targeting the housing sector, it is actually creating conditions that will prevent those at entry level and lower levels on the housing chain of ever getting a stake.

To conclude therefore, the Fed's strategy seems to select those with assets, that are distressed and therefore are putting the banking sector at risk, to be saved and supported at the expense of the taxpayer and the prosperity of the non-selected groups. By executing this strategy, the Fed is creating conditions of slow growth and rising inflation aka Stagflation. This Stagflation is the cost of Quantitative Easing. The cost is not evenly spread across the American population; it is harder on those who are poorer. The Fed is at liberty to continue with this strategy, until the political constituency that bears the cost disproprationately has a significant voice in the polity of the United States. The Fed therefore has a Stagflation Mandate rather than its dual Inflation and Growth Mandates. In addition, the Fed clearly has the mandate to politically select winners and losers within American society. Fed independence enshrines this political autonomy; and totally undermines the democracy of the United States.There are signs of late that some politicians have become aware of this political automony that emasculates them; so the Fed is now under threat from Congress.

The result of the Fed's strategy is that employment opportunities decline whilst the cost of living continues to rise. The class of Americans not selected by the Fed, or who become disqualified through legal debt foreclosure, simply drop out of the labour-force and subsist on social security and welfare benefits.The situation is clearly represented by a graph that tracks food-stamp usage against labour-force participation.

The findings of the survey should come as no surprise. America is a capitalist society, which constitutionally protects and serves the interest of private property. Private property and its value have been threatened by the Recession; so the Fed is simply serving the interests of this constituency. Stagflation is therefore inevitable. One can also conclude that Stagflation is as Constitutional as the Right to Bear Arms.

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