Memo To The Fed: It’s Back-To-The-Future Time

What passes for central banking today is really a perverse form of Wall Street-pleasing monetary manipulation. It employs the vocabulary of central banking, but in practice it fundamentally undermines main street prosperity, even as it showers the top 1% with unspeakable financial windfalls.

For instance, since 1990 when the modern era of relentless money-printing real took off under Greenspan, the net worth of the top 1% grew by 9.0X, from $4.9 trillion to $44.4 trillion. That $39.5 trillion gain over 33-years amounts to $30 million per household among the wealthiest 1.3 million households at the tippy-top of the economic ladder.

By contrast, total wage and salary payments over the same one-third century period rose by just 4.3X or $9 trillion. That’s a gain of just $56,000 per worker among the the 161 million employed Americans during 2023.

Index of Employee Compensation Payments Versus Net Worth Of The Top 1%. 1990 to 2023

Stated differently, virtually everything the Fed does for the alleged benefit of the American economy is both unnecessary and a ruse. The Fed has actually become a captive of the Wall Street traders, gamblers and high rollers, and functions mainly at their behest.

The proof of this proposition starts with the startling historical fact that the post-war US economy did just fine without any interest rate targeting, heavy-duty bond-buying or general macroeconomic management help from the Fed at all. For all practical purposes today’s omnipresent Fed domination of the financial and economic system was non-existent at that point in time.

We are referring to the full decade between Q4 1951 and Q3 1962 when the balance sheet of the Fed remained flat as a board at just $51 billion (black line). Yet the US economy did not gasp for lack of monetary oxygen. GDP grew from $356 billion to $609 billion or by 71% (purple line) during the period. That’s nominal growth of 5.1% per annum, and the majority of it represented real output gains, not inflation.

Change in Federal Reserve Balance Sheet Versus GDP, Q4 1951 to Q3 1962.

As it happened, this halcyon span encompassed the immediate period after the so-called Treasury-Fed Accord of March 1951, which finally ended the WWII expedient that had pegged Treasury bills at 0.375% and the long-bond at 2.5o% in order to finance the massive flow of war debt.

The effect of the WWII pegs, of course, was that the Fed had been obliged to absorb any and all US Treasury supply that did not clear the market at the target yields. Not surprisingly, the Fed’s 1937 balance sheet of $12 billion had risen by 4.3X to $51 billion by the time of the 1951 Accord, thereby reflecting what amounted to the original version of backdoor monetization of the public debt, which was justified at the time by the exigencies of war.