Have monetary scientists solved the mysteries of alchemy? While the ancient alchemists sought (and failed) to turn lead into gold—the currency of the day—their modern counterparts have done something far more incredible: creating money from debt. But just as King Midas’ touch proved less a blessing than a curse, so too is this modern marvel.
At first glance, our fractional reserve banking system overseen by the Federal Reserve (the Fed) seems ingenious and perhaps even avant-garde. In short, the system allows financial institutions to lend out more money than they have on hand, so that borrowing money miraculously becomes a creative act. As the Fed loans money to the Treasury, the money is created out of thin air. Likewise, as a bank loans money to an individual—in the form of a mortgage, on a credit card, or any other debt instrument—the money is created out of thin air.
This Midas Complex has a mien of prosperity about it, like the multiplication of the loaves and fishes. It seems to be a win-win scenario. Afterall, aren’t we better off with more money? And what could be an easier way to create it than by taking on debt? Money can be created with no effort.
If only the story ended there.
Despite the robust growth at the end of 2020, economic forecasts have turned decidedly bleaker. The White House is correctly predicting shortages for the end of the year, especially in consumer goods. Meanwhile, industrial production has fallen and is no higher than it was four years ago. The economy is expected to have barely grown in the third quarter of this year.
Meanwhile, prices are surging and, contrary to what the White House says, that is not “a good thing.” These widespread price increases are called inflation, and it is the hallmark of the Midas Complex—the transmutation of debt into new money. Far from making the country more prosperous, this flood of money is a harbinger of economic malaise.
There are shortages of nearly everything, from computer chips to cars, from gasoline to glass bottles, from shipping containers to carboard, and more. The shortages are largely a result of bad fiscal policy. Paying people to not work has caused labor shortages and bottlenecks in an incredibly lean supply chain.
The federal government handed out trillions of dollars over the last year and a half, allegedly in response to the pandemic. But where did the government get those trillions of dollars from? They borrowed about three-quarters of it from the Fed, which created it out of nothing.
Ordinarily, if people do not work, they are not paid. If people do not produce, they earn nothing and can buy nothing for themselves. But this time, the Fed has turned trillions of dollars of government debt into new money, which people continue to spend, driving up prices.
It is not supply shortages themselves which are causing price increases. Imagine the nation suddenly produces half as many cars while only half as many people have jobs. The supply and demand for cars in this example are both cut in half, since the unemployed have no incomes and cannot afford vehicles. Prices remain about the same in this theoretical example.
But in our current environment, excess money is flying around the economy, bidding up prices of increasingly scarce goods and services. The prices which producers and wholesalers pay have risen at record rates, and those price increases will be passed on to consumers. That means inflation is not going anywhere.
As the Midas Complex once again bears its diseased fruit, perhaps people will see that this new alchemy is no more successful—and far more destructive—than its progenitor from long ago.