Federal Reserve: 100 Years of Destroying the Purchase Power of Money?

100 Years of Destroying the Purchase Power of MoneyNearly 100 years ago, on December 23, 1913, the Federal Reserve was created. The central bank was created for many reasons, such as minimizing the impacts of panics, becoming a banker of last resort and “smoothing” economic cycles.

But along the way to keeping the monetary system stable, something happened: the value of money deteriorated.

What you could buy for $1.00 in 1913 costs $23.59 today. (Source: Bureau of Labor Statistics web site, last accessed December 11, 2013.) A simple calculation would show that prices have increased by 2,259% over the last 100 years.

Something else to ponder: there have been more erratic movements in inflation since the Federal Reserve was created than in the century prior to then, when the Fed didn’t exist! Since the Federal Reserve was born in 1913, there were 10 years when inflation in the U.S. economy came in at more than 10%. Between 1800 and 1912, there were only four years when inflation in the U.S. was greater than 10%. (Source: Federal Reserve Bank of Minneapolis web site, last accessed December 11, 2013.)


“What’s your point, Michael?”

The unprecedented amount of paper money the Fed has created (out of thin air) since the Credit Crisis of 2008 will come back to haunt us—that’s my fear.

The Federal Reserve’s balance sheet has grown to about $4.0 trillion. M2 money stock, that’s the supply of paper money in the U.S. economy, has gone up 27% since 2009. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 11, 2013.)

And through its “quantitative easing” program, the Federal Reserve continues to print $85.0 billion per month in new paper money with no end in sight. On top of this, it’s kept interest rates artificially low for years.

All this “printing” will eventually devalue the U.S. dollar and further destroy the buying power of Americans. Our lesson in history has been that the more dollars in circulation, the less those dollars buy. Sure, the official numbers don’t show there’s a problem with inflation (yet), but ask the average American Joe, and he won’t tell you his cost of living is going down.

We are living in unprecedented times. We’ve never had a situation in which the Federal Reserve printed so much new money. Many people are unfazed by this because it doesn’t really make a difference in their everyday life…right now.

But two serious risks have developed: 1) the stock market has become so dependent on the “easy money” policies that prevail today, that should the money printing stop or be significantly tapered, the market could crash; 2) inflation is “chomping at the bit.” Yes, I understand the “official” figures don’t show it, but by the time they do, it will be too late. The damage will already be done.

Bottom line: be very cautious about the stock market and prepare for some serious inflation.