The Fed vs. Widows

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Your widow will not get the deal my mother has. My father started working for the Federal government in 1951 at the age of 33. He had served in the military from 1941–45. He retired at age 53 in 1971. For the next 38 years, he received a pension that covered all of his expenses. It was indexed to price inflation. He lived in middle-class comfort. He also had a unique medical care plan: 100% of all expenses. My mother is 93. She receives 55% of his pension and full medical coverage. She lives in a comfortable retirement facility.

Nothing like this is available to the vast majority of Americans. There are a few Federal pension programs like this, at least for senior officials and high-ranking officers in the military. The question is: Will these pension obligations be fulfilled? There are good reasons to believe that they will not be.

There are millions of retired bureaucrats living on pensions issued by state and local governments. It is becoming clear that most of the obligations will not be met. The governments will experience tax revolts from voters who will find it easy to elect officials who will formally take the governments into bankruptcy protection. The public employees’ union lawyers will fight this. The judges will fight this. But the reality is this: democracy will triumph. Tomorrow’s voters will decide to stiff yesterday’s employees. That’s the easy way to get rid of $3 trillion in unfunded liabilities. Several states are already in deep trouble. If you want to see how bad it is in your state, use the interactive chart here:


The Federal Reserve System has begun another round of monetary inflation, as we know. This “quantitative easing” program is officially supposed to hold down U.S. Treasury bond rates. The opposite has happened. The Treasury Department’s own chart tells all!

Federal Reserve policy is based on the idea that the free market cannot be trusted. This means that the decisions of lenders and borrowers cannot be trusted. The FED exists because the bankers who run the largest commercial banks want to be relieved of any threat of bankruptcy due to a refusal of large institutional depositors to roll over short-term deposits at their banks. The FDIC insures the little people’s deposits. It does not insure the institutional deposits. The Federal Reserve System does that — unofficially. This was why the FED intervened in October 2008 to swap its liquid Treasury bills for illiquid, now-unmarketable IOUs held by the top ten banks. It supplied no such swaps for the other 8,000 or so. It bailed out Fannie Mae and Freddie Mac, recently nationalized by Hank Paulson.

Today, the FED is monetizing Treasury bonds. The FED’s holdings of all sorts of debt has turned up since early November. This is not confined to T-bonds.

So, what we have here is not what the FED had in mind. It has increased the monetary base in order to buy government debt, all in the name of creating jobs. Traditionally, economists have offered this explanation of cause and effect. The Federal Open Market Committee buys Treasury debt. This lowers the rate of interest: greater supply of money flowing to the Federal government, which spends it, thereby increasing employment. Also, this reduction of rates is supposedly followed by reduced rates in the market for private bonds. This leads to greater borrowing by businesses, which leads to greater employment. Problem: Treasury bond rates are rising.

The FED is trapped. Its traditional policy of increasing the monetary base is not working as expected, i.e., as Keynesian textbooks predict that it will. It is behaving as if lenders are expecting rising price inflation, and therefore refuse to lend the government money unless they are compensated for a falling dollar by rising rates.

The country is not yet experiencing rising prices because commercial banks refuse to lend. The money is not flowing into the hands of entrepreneurs. Businesses are still either refusing to borrow or else are unable to persuade bankers to lend.

So, the FED gets the benefit of not being blamed for price inflation. It can continue its program of monetary inflation. But the number of people at work today is no greater than in 1999. Bernanke never mentions this fact.

If the FED can inflate the monetary base without raising price inflation, it will . . . and is.

If Congress can borrow $1.5 trillion a year for the foreseeable future, without raising interest rates so high that the economy slows, it will . . . and is.

If the largest commercial banks can make their money by borrowing at 0.15% (the federal funds rate) and lending long-term at (say) 4%, they will . . . and are. That’s called the carry trade. It is risky if runs begin at these banks, as they did in 2007 and 2008, but the Federal Reserve is there to bail out the biggest banks.

So, what is the threat? Why not just keep doing more of the same?

Will it be Zimbabwe or Japan? (Sing it, Merle!)


The Japanese approach to the retired widows problem is to continue to borrow money from households still in the labor force. The wives of workers lend at low rates to the government. This goes on, decade after decade. So, Japan runs a trade surplus. It does not rely on foreign central banks to roll over its debt. The United States relies on foreign central banks, mainly Japan’s and China’s, to roll over half of its publicly held debt.

The central bank has refused to expand the money supply by very much. So, retail prices in Japan have been flat for almost two decades, though not deflationary, contrary to Keynesian hype in the English-language financial press.

The government’s ever-increasing debt has raised concerns about its ability to repay this debt. It owes twice the annual GDP. Yet the Japanese government has almost always repaid its debts. This is why the housewives trust it. At some point, there will be a default in Japan, as in all other nations in the West. But Japan has resisted this scenario for two decades. This default is unlikely to be inflationary. The central bank resists the government’s rhetoric to expand the money supply. It occasionally loosens, but it always returns to slow-growth policies.

This means that the housewives in Japan at some point will find that they get short-changed by the government. The government will raise the age for collecting the government’s pension program. The debt cannot go on forever. Politicians kick the can in Japan, just as they do here. Voters never catch on. But they will at some point.

The voters will not accept price inflation. They also will not accept outright default, which would be dishonorable. But the government refuses to cut back on spending. Thus, we can see what is coming: default in stages. The government will raise the retirement age, thereby taxing younger families to support existing recipients. There is no other way out, given Japanese attitudes toward inflation and outright default.

Japan has suffered from low economic growth. Capital that has been absorbed by the government does not become available for investment. Japan’s miracle of 1950–90 has been an ever-more-distant memory for two decades.

Japan will hit the brick wall before any other Western nation because of its low population growth. Unlike other Western nations, Japan refuses to solve its demographic problems by allowing immigration. Europe imports Muslims from North Africa and eastern Europeans in search of higher wages. The United States lets immigrants from Mexico cross the border illegally. There is no concerted effort to put a stop to this. But Japan has no way to fill empty jobs with cheap labor. So, productivity has stalled. Japanese businesses can export jobs to Asia, and they have. This lets businesses defer the day of reckoning. But those jobs are not going to younger Japanese workers. The remaining workers’ ability to support the aging population will continue to decline.

Then there is the last piece of the puzzle. In Japan, it is normal for the son’s mother to live in his tiny Japanese home. This is unthinkable in the United States. While sons’ mothers do live with their sons in some cases, they live in separate parts of the house. The garage apartment is mother-in-law central in the United States. In Japan, there are few garages, and Japanese park cars in them.

Is this America’s future? It could be. That decision is in the hands of commercial bankers for as long as the FED allows banks to pile up excess reserves at the FED. If the FED finally decides to place a penalty fee on excess reserves, the banks will lend, M1 will rise, the M1 money multiplier will rise, and prices will rise. But, until then, we seem to be on Japan’s pathway: no price deflation, but slower economic growth, and the de-capitalization of industry due to the money pit known as Congress.


This is the fear of most hard-money analysts. They see the Federal Reserve as the ultimate engine of hyperinflation. It could become this, if its senior decision-makers use Robert Mugabe as the model. I do not think The FED’s Board will do this. Mugabe is the laughing stock of the world. No one in the West wants to go down in history as the equivalent of Mugabe.

The many books that predict hyperinflation ignore this. They assume that what happened after World War II in Hungary or after World War I in Germany and Austria is in some way typical of what Central banks do. It is in Latin America. It is in African tribal cultures. But it isn’t in Western industrial societies. To be labeled a South American central banker would be a mark of failure in the West. No central banker wants to wind up in the footnotes as his country’s equivalent of Dr. Gono, the head of Zimbabwe’s central bank in its time of hyperinflation. (He received his honorary doctorate from the University of Zimbabwe.) Its website barely functions. It tells you what its policy is in a series of PDFs that download very slowly and which provide such wisdom as this:

13.1 Zimbabwe’s full recovery and growth prospects are bright. 13.2 Concerted efforts must be invested in cultivating the sustenance of a conducive environment for the deepening of business and investor confidence.

In short, it is a joke. The only person in the West who does not get the Joke is Ellen Brown, the Greenbacker. She is an apologist for the bank.

Gono has done very well, of course. Wikipedia describes his lifestyle.

Gono and his wife live in Borrowdale Brook, a northern suburb of Harare. They have just completed on construction of a new “castle-like” house, equipped with: 47 en-suite bedrooms; a glass swimming pool with underlights; a gym; mini-theatre; and landscaped gardens. Estimated to have cost USD $5 million, it is equipped with iris-scanning security measures as well as extensive camera coverage aiding perimeter control. It is also, perhaps conveniently, just a short drive away from (and indeed larger than) President Robert Mugabe’s own private residence. Like many of Mugabe’s inner circle, Gono also owns numerous farms which were confiscated from localised white farmers. One is near Norton, which, when the seasonal weather is dry, draws clean water through a 25-mile-long pipeline linked to a reservoir, which is supposed to supply water for the people of Harare. Gono also owns property in Malaysia.

There is no way that Dr. Bernanke has profited, or will profit, to this degree. What is standard practice in Zimbabwe is not acceptable in the West. So, central bankers must satisfy their plans for personal success with applause from their academic peers, plus the legislature.

This means that the Federal Reserve is not going to serve as the lender of last resort to the government — only to the four largest banks, which control over half of the nation’s bank assets. The FED is not going to oversee the destruction of the dollar, along with the purchasing power of the FED’s retirement portfolio — fully vested — of its employees. They know where their bread is buttered. Take a look at the FED’s retirement plan’s portfolio.


Jesus gave a parable of the poor widow, who was reduced to poverty. She gave her last two coins — not much more than pennies — to charity. She was a holy woman.

But what if she had planned on a secure retirement? Who will be to blame if the government cannot afford to pay what it owes her?

The officials in every Western nation insist that this can never happen. But the statisticians all report figures that say it will happen, unless the government finds other ways to raise revenue or cut expenses. The widow seems to be politically untouchable, but push has not yet come to shove.

The trend is clear: there will be a bankruptcy in every Western industrial nation, including Japan. There is no pathway out that voters will accept today. But they will accept major changes when the government digs too deeply into their wallets.

The politicians will go after the wealthy first: means testing. “No promised benefits for you!” Then the government will keep lowering its definition of wealthy.

The process will be relentless, because all of the governments’ deficits are relentless. Promises were made when promises were cheap. They are getting more expensive.

Widows had better figure this out before they are widows.

February 9, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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