Fed Monetary Policy Feeds Political Controversies: Mike Gatto

By Gatto, Mike | Daily News (Los Angeles, CA), August 21, 2014 | Go to article overview

Fed Monetary Policy Feeds Political Controversies: Mike Gatto


Gatto, Mike, Daily News (Los Angeles, CA)


There is a large, shadowy force behind current political debates, and it's not Rush Limbaugh. It's our unorthodox federal monetary policies. Not only have they upended the intuitive economic principles many Americans hold dear, but they are also increasingly driving political controversies, almost imperceptibly.

To understand modern politics, a review of contemporary economic idiosyncrasies is necessary. Economics 101 taught us that excessive money printing leads to inflation. The U.S. completely abandoned the gold standard in the 1970s, adopting fiat currency, and the Federal Reserve has printed trillions of dollars in the last decade. Conventional wisdom dictates that this will lead to significant inflation. Another traditional conception of inflation views it from a price perspective, that is, the cost of goods rising over time. When your grandparents tell you that a loaf of bread used to cost a nickel, it is inflation they blame for the price increases.

But these truisms no longer tell the whole story, because the economy has changed. Whereas a century ago, people primarily bought basic goods, now they consume more diversely. Commodities like gasoline are a bigger part of the economy. Larger percentages of the population own assets like stocks and real estate. Vastly more young people take out student loans. And traditional inflation indicators don't include many of those costs. This is one reason why, despite lots of money printing, official inflation rates remain low.

But the cost of living has indeed risen. A gallon of gas cost about $1.50 when the Fed began its easy-money policies in the early 2000s. Now, the cost hovers at over $4. The cost of an education has similarly skyrocketed. And then there is asset inflation. Home and stock prices have risen enormously in the last two decades. So whether you describe it as life costing more, or a diminished dollar buying less, it is clear that conventional wisdom is right: inflation has occurred in many sectors. And many of those larger costs, particularly education and fuel, have become serious political issues.

Two sectors have remained mostly unaffected by the money printing. They are the cost of traditional goods (things like toys and microwaves) and, sadly, wages. Therein lies the gap between the rich and the poor that is in the headlines, and which many predict will increasingly dominate political debates. …

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