Week 10

Hello, this week I will be covering the federal reserves response to the pandemic.

In the United States, we do not have macroeconomic debates at the highest levels of politics. If you watch presidential debates you will not see disputes from the schools of Milton Friedman or John Maynard Keynes rather they will be ignored. Our macroeconomic status quo has become undisputed between the two major parties. Throughout the last two administrations, Jerome Powell has remained at the highest position in the Federal Reserve, his macroeconomic decision making is constant, and the effects always achieve the same target. This is key to understanding the policy choices that have been made, if there is no dispute over who is in control of the Fed, if there is no dispute over what the Fed does, then what interest is being served? 

The Federal Reserve acts with no criticism placed upon it and in doing so it acts based on macroeconomic strategies that benefit the wealthiest people in the US. If you look back at the choices they have made this is clear. In 2008 when the biggest banks in the US needed a bailout within a day the Fed typed numbers into a bank account and directly. The Fed did not enter numbers into the bank accounts of the people who lost their homes and livelihoods as a result of the crisis. They pick and choose who to help based on what will return the greatest positive impact for both the overall measurables of the US economy and the wealthy in America. Luckily for them, those interests happen to coincide as we have continued to hit new peaks of wealth inequality in no doubt due to the Fed’s continuous backing of our wealthiest. If you seek to grow the economy and accomplish your job deliverables of favorable overall economic numbers, you should seek to grow the pockets of the wealthiest people in this country because they are the ones with the most capital. If the wealthiest Americans make money then on the whole the averages and summation of American economic figures will be reported in a positive light. There will not be outcry nor protest because on the surface all is well. It is for this reason that the Fed has helped the elites of this country benefit, there is a mutual convergence of interest. When the wealthy benefit so does the Fed. Not to mention the fact that the Federal Reserve is already influenced by money through political donations which determine the outcome of elections toward the federal government and further towards those who make the appointments and delegations of government power. The Federal Reserve and the political system as a whole work together in mutual effort; they seek to benefit those who have already benefited the most. We have seen this express itself greatly since the onset of the Covid-19 Pandemic. 

When the United States first began to deal with the Covid-19 Pandemic we did what most nations do in times of crisis. We spent more to help lift ourselves out of recession and the potential economic collapse posed by the largest mass health event in the last hundred years. Our spending helped to turn around what could have been one of the greatest economic disasters of history into a six-month blip on the record. By the end of 2020, the economic implications directly caused by the pandemic had been solved. The economy was booming and so was US GDP, the natural recession caused by the total freeze on the economy was short lived and reversed within months. In 2021 the US completely reversed the economic effects by the numbers. We experienced nearly 6% GDP growth, the largest figure since 1984. If we analyze this without the perspective of Modern Monetary Theory we would understand this simply as a monumental accomplishment in economic management. Yet if we choose to look at those two years something becomes evident. 2021 and 1984 were two of the eras of the greatest change in US federal spending policy in history. In 1984 we were well into the Reagan era of high government spending. Which under the lens of MMT means that we were spending more money into the economy thus enriching the GDP. The same thing is true in 2021, while the type of spending that Reagan engaged in has become the norm, 2020 saw the highest levels of government spending outside of a major war. US deficit spending reached around 15% of GDP which means that the US Government was spending that money into the economy thus creating downstream economic benefits for the GDP. The problem with modern-day spending, however, is the parties that benefit. Rather than spend on social or physical infrastructure for the people, the US chooses policies that continuously benefit the wealthy. Over that timespan, the share of America owned by the wealthiest individuals continued to increase. The share of the stock market owned by the wealthiest one percent has peaked since Covid at 53.9%. The overall wealth held by the wealthiest one percent skyrocketed to 44 Trillion USD.

How does the Fed aid this process? Through the abuse of interest rates in favor of the wealthy. When the Federal Reserve raises interest rates, its main tool for controlling inflation like what we saw due to the supply chain problems after Covid-19, it expresses itself in a few key ways. The primary reason given is that increased Fed interest rates make borrowing money from bank to bank more expensive, effectively raising the cost of raising capital. Making it more expensive to take out a loan for any purpose. This should theoretically slow down the flow of capital, but in the inflation we experienced that is not necessarily true. This is because what we saw after Covid was not a general increase in prices for all markets rather it was in two key sectors. Energy and food, both of which had experienced a decrease in consumption and a shutdown of key supply chain infrastructure. When you increase the cost of a loan that does little to impact someone’s ability to purchase a meal. The monetary slowdown does not exist in that sector. The second key way that the Federal interest rate expresses itself is in the bond market. When the Fed raises rates they are also promising to give higher returns on any bond purchased from the US government. In theory this should also help to slow down the economy as people are allowing the government to hold their money for an extended period of time taking it out of circulation and decreasing the money supply. In practice, however, the dollars in the bond market are not that which would be spent on meals or gas. Bonds are held by the wealthiest people in this country as a form of safe investment. How do we know this? After the Covid-19 pandemic, the Fed’s outstanding liabilities (the summation of the money they owed on bonds) reached 8 Trillion USD. Regular people who were greatly impacted by the inflation in these sectors do not and probably will never have 8 Trillion dollars. That kind of capital only exists in the elite sectors of American society. Choosing to have high interest rates sets a minimum wage for wealthy Americans and directly allows them to profit. High interest rates set by the Federal Reserve are disgraceful, they serve as a form of wealth redistribution towards the wealthiest people in this country. They are built to boost economic figures by empowering those who already control so much. 

Thank you for reading.