Much further back, and even further back than that.
Florence, Italy. 1397. The day Giovanni di Bicci de’ Medici founded the Medici Bank.
There you will find the early framework linking banks, corporations and politics to consolidate wealth and power.
During the 15th century, the Medici family was estimated to be the wealthiest family in Europe. They owned vast amounts of land, gold, and art. And they used that wealth to gain political power, first in Florence, then throughout Italy and Europe.
Strategic marriages also increased the Medici family’s influence. For example, Catherine de Medici became Queen of France through her marriage to Henry II.
Not long after the Medici Bank was founded, the first real forerunner of modern central banking was formed. In 1407, the Banco di San Giorgio was founded. This bank served as the financial institution of the Republic of Genoa. Its original purpose was to bail out the government.
After years of war with Venice and a costly defeat at the Battle of Chioggia in 1381, the Republic of Genoa was bankrupt. After floundering for years, in 1407 Genoa’s ancient council authorized the Casa di San Giorgio to establish a bank to facilitate the repayment of Genoa’s debts.
This was the beginning of the Banco di San Giorgio, the forerunner of modern commercial and investment banking, which lasted for almost 400 years (1407-1805). It was also the prototype for the Bank of England, the central bank of England, which has been in operation since 1694.
Personal Interests
The Federal Reserve, the central bank of the United States government, has been in operation for over 110 years. During that time, it has overseen a long-term decline in the value of the U.S. dollar and engineered numerous booms and busts.
The Fed tries to smooth out the economic cycle by playing with the money and credit supply, at the behest of the U.S. Treasury, and also by financing government debt with credit created out of thin air.
But what is particularly important to understand about the Fed is that it works for the benefit of privately owned commercial banks through the 12 regional Federal Reserve Banks. Any efforts to improve the economy are secondary.
Understanding who is buttering whose bread is key to understanding the Fed’s words and its actions, especially since those words and actions don’t always align.
This week has been a busy one for Federal Reserve Chairman Jerome Powell. On Tuesday, he appeared before the Senate. On Wednesday, he appeared before the House. Powell’s confession It attempted to maintain a delicate balance between suppressing inflation and providing liquidity to banks.
“We know that tapering policy restraint too early or too much could halt or even reverse the progress we have seen on inflation. At the same time, given the progress we have made over the past two years in lowering inflation and cooling the labor market, higher inflation is not the only risk we face. Tapering policy restraint too late or too little could unduly weaken economic activity and employment.”
To be clear, economic activity and unemployment are not the Fed’s real concerns. What we mean is…
public debt
Powell and the Fed have put themselves in a corner. The real decision right now is whether the Fed should let inflation run wild and bail out the U.S. government, or suppress inflation and bankrupt Washington.
The reality is that Washington has borrowed too much money. The debt is too big. This is not a problem that can be put off for the future. The chickens are coming home to roost this year.
We’ve said it before, and we’ll say it again: The U.S. government plans to run a budget deficit. $1.9 trillion By fiscal year 2024, that deficit is piling up on top of a national debt that currently stands at about $34.9 trillion.
In theory, this debt should be repaid. At least the interest on the debt should be repaid. And right now, at this very moment, debt interest is taking up a growing portion of the federal budget.
Net interest expense on debt through June was as follows: $682 billion. That’s more than any other category except Social Security ($1.1 trillion). For perspective, health spending during that period was $670 billion, defense spending was $644 billion, and Medicare was $629 billion.
More than half of the $1.27 trillion in deficit spending so far in fiscal 2024 has gone toward paying $682 billion in interest on the debt. And as these massive deficits continue to pile up on top of that debt, more and more borrowing is needed to service that debt.
If this situation continues, there will be less and less money available for other budget categories.
Fed to end inflation fight before work is done
Simply put, relatively high interest rates are strangling the U.S. government’s finances. Paying net interest on the debt is choking the budget.
So Washington has to borrow more and more money to meet its past and current obligations, which only worsens the debt and debt financing problem, because it is impossible to borrow money to get out of a debt crisis.
At this point, the only possible remedy is for the Fed to lower interest rates. By lowering interest rates, the Fed can reduce the net interest on the amount of debt the Treasury is paying. But by doing so, the Fed is ending its efforts to curb consumer price inflation before it even gets to work.
This week’s CPI Report The consumer price index fell 0.1% in June. However, over the past 12 months, consumer prices have risen at a rate of 3.0%. The annual CPI increase of 3.0% reported in June is 50% higher than the Fed’s arbitrary 2% inflation target.
At an annual inflation rate of 3.0%, the purchasing power of the dollar halves every 23 years. That’s a steep climb for anyone trying to save and invest for retirement.
Wall Street blusterers took the latest CPI numbers as a signal that the Fed would cut rates later this year, a signal they had been waiting for for a long time. They had been pumping up the stock market for months in anticipation.
But the S&P 500 and NASDAQ were sold off in the CPI report. Of course, there were other factors involved. Correlation does not imply causation. But there may be a perception that the economy is a mess and stocks are grossly overvalued.
With the CPI reading above the inflation target, a Fed rate cut won’t immediately boost economic growth. But it could provide some relief to the Treasury’s debt budget line item. It could also trigger another spike in inflation. Gold has already surpassed $2,400 an ounce, although you may not have noticed it yet.
Simply put, the Fed’s fight against inflation is not over. The job is not done. Still, the Fed will soon declare “mission accomplished” as it moves to cut rates. Washington’s finances depend on it. Big bank finances depend on it.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how you can too.]
thank you,
MN Gordon
For Economic Prism
Return to Fed to End Inflation Fight Before Work on Economic Prism Is Done
