Return to the Overcoming Consumerism Index
Public "ownership"of energy--just as with water or schools
Access to loans for photovotaics, solar water heating, wind and
micro-hydro generators, and other forms of energy-generating and
energy-saving technologies--just as those purchasing automobiles have
access to loans
Reinstitution of tax credits and rebates for renewable-energy
investments, with conscientius licensing and quality-control
procedures to guarantee customer satisfaction
Net metering and rate-based incentives, so that independent,
home-and business-based electricity producers are paid the same price
that they would be required to pay for th egrid power they are not
Massive public- and private sector investment in renewable-energy
technologies and building techniques, to reestablish the U.S. as the
preeminent leader in this economic domain
Partnerships between industry, government, and local communities
to oversee the new "green" industries, in order to make sure that the
public knows what is being produced in a factory, by what means, and
how the wastes and by products will be managed
Scholarships and retrainig for displace fossil fuel and nuclear
workers, and small-business loans to support the new solar
Congressional hearings to examine why none of the above is federal
or state policy Return to
the Overcoming Consumerism
...The program of the devotees of fossil fuel is a formula for further concentrations of wealth and power: keep society hooked on petroleum and uranium: delay the solar transition until the oil and gas are too costly to recover: then burn up the coal and slap a meter on the sun. The antidotes to perpetual fossil-fuel dependencey are democracy and community self reliance, along with respect for good design and skilled work. if citizens are to transcend their dependency on fossil fuels, they must learn to use their intelligence and live within their means. We have the techical means now to provide all of the power we need for a sustainable world.
AN UNHOLY ALLIANCE: Most of the money for [The] National Resource Defense Council's work with Electric utilities comes from the Energy Foundation, which has made NRDC its largest grant recipient. Tracing back the money trail raises the next quesiton: Who are the benefactors of the Energy Foundation? The answer is, Three giant foundations: the John D. and Catherine T. MacArthur Foundation, the Rockefeller Foundation,and the Pew Family Trusts, which together fund the Energy Foundation to the tune of $10 million per year.
The endowment of the Pew Charitable trusts is now worth about $34 Billion, reported journalists Alexander Cockburn and Ken Silverstein in their book Washington Babylon, and together the 7 Pew Trusts invest about $20 million per year in the environmental movement. Even more important, Joshua Reichert, the chief of the Pew Trusts' environmental sector, helps coordinate the Environmental Grantmakers Association, which together donates about $350 million per year. "Pew never goes it alone" write Cockburn and Silverstien, "which means no radical opposition to its environmental policies can get any money."
Just one of the 7 Pew trust funds, the Pew Memorial Trust, earned $205 million in "investment income" in 1993 from holdings in Weyerhauser,forest products and paper ($16 million); Phelps Dodge, mining ($3.7 million);International Paper($4.6 Million); and Atlantic Richfield, which is eager to open the Alaskan Artic to oil drillling. ($6.1 million).
Evidently, the working assumption of NRDC has been that private utilities and the investment banks behind them are powerful, immortal institutions that must be placated rather than confronted. The strategic alliance between the utilities, NRDC, and the Energy Foundation was supposed to make the utilities as bankable in the new sphere of conservation and efficiency as they had been in the palmy, pre-oil shock years of 7 percent annual increase in electricity consumption. The alliance presumed that private utilities would remain in control of the production of electricity, and that the relationships between investment banks and utilities-dating back a century to the days of J.P.Morgan and Samuel Insull--would remain intact.
Today the environmental movement receives about $40 million a year from three oil companies which operate through front groups politely described as private foundations. The top two are the sun Oil Company and Oryx Energy. (The latter has vast holdings of natural gas in Arkansas, and thoroughout the oil patch.) The Pew family once entirely controlled the two companies and still has large holdings in both of them; Oryx shareholders recently sued the Pew operation for insider trading. Alexander Cockburn and Ken Silverstein. 1996
...A public truce seems to have been struck: the major environmental groups now encuorage "energy efficiency" programs under the control of utilities, who will pocket the generous investment "incentives" (extra profits) in the bargain. Apparently by consensus, solar energy has become unmentionable until the utilities choose to contemplate solar technologies in their own good time, most likely as a result of generous public subsidies. Meanwhile, the utilities continue to promote the perception among benighted millions of electricity consumers that solar power is "not yet cost-effective."
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The End of the Road, the world car crisis and how we can solve it.
Wolfgang Zuckerman, Chelsea Green Publishing Company. Dewey Decimal # 303.483
"When you stood on main street (in small town U.S.A.) you could tell yourself "this is the center, the point on which all things converge" and feel the inexplicable but nonetheless vital comfort that results from knowing where you stand in the world and what the score is. On the shopping mall, people know they're standing not at the center but somewhere on the edge where the center has failed to hold." Russell Baker.
"The shoppers in this segregated imitation city lack a central focus toward which they will be drawn. They drift from shop to shop like ghostly images in an oppressive dream, without energy or central purpose. Just beyond their imitation city lies another one with exactly the same shops, the same names, the items for sale, and the same prices. According to social scientist E.V. Walter, people are for the first time in human history systematically building meaningless places..."
"Enormous profits are made by industrial organizations and retailing businesses if production strategies concentrate on a small number of dispersed sites to reduce expensive inventory. Trucks then become the new warehouses, and the entire burden formerly carried by inventory is thrown onto the roads."
(See the Planning Commisioner's Journal on our resources page for more information on town planning and resurrecting the American Main Street.)
The following is fair use as a review:
Secrets of The Temple:How the Federal Reserve Runs the Country. William Greider, 1988. DDN# 332.11
The fundamental weakness of the 1920s prosperity, was not that Americans were profligate, spending too much and savings too little, but the opposite. "We did not as a nation consume more than we produced--far from it [David] Eccles declared.'We were excessively thrifty.' The maldistribution of incomes guaranteed that millions of potential consumers--workers, farmers, everyone who did not earn enough to join the ranks of accumulating wealth--would eventually exhaust their purchasing power. 'While the national income rose to high levels,' Eccles explained, 'it was so distributed that the income of the majority were entirely inadequate and business activity was sustained only by the rapid and unsound increase in the private debt structure, including ever-increasing installment buying of consumption goods.' When the consumer's chips were gone, when they could no longer borrow to buy things, the producers would naturally curtail their production of goods too. More factories were closed; more people lost their incomes. The game was over. "
"The Fed's Disciplinary system, in practice, punished the weakest, smallest players first and most severely, while the largest and more powerful enterprises could evade the ill consequences. Many families, businesses and financial institutions were compelled to alter their behavior swiftly---but others were privileged to continue business as usual."
"The real cost of higher interest rates fell unevenly on citizens, banks and businesses, depending inversely on their level of incomes and profits. The wealthiest and most successful suffered least;struggling businesses and families of limited income paid the highest price. That was the most elementary point of political inequality, and it stemmed not simplyfrom Federal Reserve policy but from how high interest rates interacted with the U.S. tax code. Every taxpayer, large and small, was entitled to deduct interest payments from his taxable income, but these deductions naturally became more valuable if one was in a higher income-tax bracket and was taxed at a higher rate.
A Corporation saved, for instance, 46 percent of its interest costs on its tax bill. A wealthy individual, paying the maximum tax rate, would recover 50 percent of his interest payments in tax savings or as much as 70 percent if all of his income was from stocks and bonds an other investments. This effectively cut the higher cost of real interest rates in half for them--while others paid the full freight. This difference was always present, but it became magnified as interest rates rose."
"In addition, many members of congress were themselves involved in finance. More than one fourth of the congress owned a direct stake in financial enterprises. In 1980, 129 House members and 38 senators reported that they earned part of their income from stock shares in commercial banks, S & L's and other financial institutions. As a private interest of congressmen and senators, ownership of financial institutions far exceeded their holdings in manufacturing, law firms, or oil and gas. Even some elected representatives were engaged in finance beyond the passive ownership of bank stocks. Forty House members and four senators were active as directors, officers or partners of commercial banks, S & L's and investment companies."(our emphasis)
"Inflation damaged well-fixed families by eroding the value of their accumulated financial assets, but inflation also spread wealth widely--enabling the broad middle class to enjoy a higher standard of living and to acquire greater net worth, largely through borrowing and repaying their debts in depreciated dollars. Deflation reversed the process: anyone who owned financial assets automatically enjoyed greater wealth as prices fell. Their dollar assets could purchase more in real goods: the value of their accumulated capital was steadily increased. Citizens with little or no savings, debtors who depended solely on their own productive labor for their livelihoods, saw their incomes shrink--and the real burden of their debts grow larger....In every era of history, regardless of the changing political language, the money question was, inescapably, the bedrock of political choice. The debate over 'hard money' and ' easy money,' falling prices or rising prices, inflation versus deflation, was really an argument about which economic class must suffer, creditors or debtors, and which one would benefit, those who derived their income primarily from their accumulated financial wealth or those who earned their livings by 'the sweat of their brow'....."
"Louis O. Kelso, a San Francisco banker with libertarian values, tirelessly promoted a modern equivalent of the subtreasury plan that he had devised--a money-and-credit system that would use the central bank to distribute the ownership of new capital democratically and thus restore the economic autonomy that so many had lost. If everyone owned capital, each would be more free--less dependent on both concentrated wealth and the liberal welfare state."
"Kelso's invention--employee owned stock trusts that held stock in corporations (better known as ESOPs)--was gradually spreading in use, especially among thousands of smaller or embattled companies. But few politicians or policy analysts would listen to Kelso's more radical proposition: the Federal Reserve's money-creation powers could be harnessed directly to the need for new capital, channeling low-interest credit to new enterprises, provided that the stock ownership of these companies was distributed broadly among workers and communities, indeed to all citizens. Instead of only buying government securities when it created money, the Fed would also buy the debt paper of employee-owned or community-owned trusts, which financed new capital formation. When the new ventures paid off the debts on their new machines and factories, the loan paper would be retired and ordinary citizens would hold title to the new capital stock. Over a generation or longer, without confiscating or nationalizing anyone's property, the ownership of wealth would become more broadly distributed."
"As [Thorsten] Veblen explained, the corporate managers were not entirely free to choose. A sensitive CEO, mindful of the human damage caused by unemployment, might postpone a plant closing for a time, but eventually his softheartedness would be punished. Sooner or later, the stockholders--'the absentee owners', as Veblen called them--would see that he was sacrificing the company's net gain (and their dividends) in order to keep his employees at work and they would simply withdraw their capital--by dumping their stocks. As the stock price declined, shareholders would begin clamoring for new management."
"The corporate decisions were also intimately supervised and disciplined by the managers of credit, the banks and brokerages that provided capital and operating loans. In many cases, important bankers sat on the boards of directors of major corporations so they could watch their money more closely. If the banks withdrew their approval and would lend no more, the corporation was doomed to fail."
"The principles of "sound business" were thus maintained by a hierarchy of disciplinarians, from the humblest stockholder to the ultimate governor on the credit system, the Federal Reserve. The banks were the overseers of business prospects and, at the same time, they were guided in their propensity to lend and in the terms they set in the overall expansion of credit, the monetary policy set by the Fed...."
The net gain in money values [Veblen wrote] is a more convincing reality than productive work or human livelihood. Neither the tenuous things of the human spirit nor the gross material needs of human life can come in contact with this business enterprise in such a way as to deflect its course from the line of least resistance, which is the line of greatest present gain within the law
In the era of Volker and Reagan, the wage share shrank much further-to its lowest level in fifty years--as a larger and larger portion of total U.S. income was claimed by the incomes produced by money, dividends and interest payments. By 1983, wages and salaries accounted for only 60.7 percent of total personal income. The following year, the wage share would shrink further--to 59.5 percent --the lowest level since 1929....
The well to do, one could even say, led the nation to recovery. They bought expensive cars and luxury vacations, jewelry and watches and artwork, boats and bikes and pleasure aircraft, second homes at the beach or in the mountains. Home builders who had nearly gone broke a few years before building moderately priced subdivisions discovered a rich new market in resort condominiums. This upward tilt in the composition of consumer spending was fostering what some business economists called a "two-tier-economy," a subtle breakup in the mass consumption patterns that had driven the American economy since World War II. Fortune magazine [(Nov 28, 1983)]summarized the implications for its business readers:
"The mass market is splitting apart. Most businessmen don't realize it yet, but the middle class--the principle market for much of what they make--is gradually being pulled apart. Economic forces are propelling one family after another toward the high or low end of the income spectrum. For many marketers, particularly those positioned to sell to the well-to-do, this presages good times. For others used to selling millions of units of their products to middle-income folks, the prospects are altogether darker."
[p423] "The economic victims were chosen at random, but mostly from among the weaker groups in society. The methodology employed by the Federal Reserve to induce contraction--rationing credit by raising its price--insured that the strongest individuals and enterprises would be able to evade selection. There was this hierarchy within democracy--a hierarchy of vulnerability.
Many victims ignorant of society's larger purpose, innocently protested. Such was the power of economic faith that some victims accepted their fate and even endorsed it as necessary. The moral justification was expressed in Schumpeter's ringing phrase, 'creative destruction,' which suggested that , from time to time, capitalism must burn off its dead and obsolete parts in order to grow freely again. The implication was that only deserving victims would be destroyed, punished for their inefficiency. But this article of faith did not corresponded to reality. It would be more precise to say that the victims were punished for not being stronger or larger. For the most part, their inefficiency consisted of not having the accumulated financial resources to protect themselves."
[p653] "For most American families, there were two major purchases in life--the car and the house--and no other transaction was as important to their sense of well being. Yet something strange was happening in the Reagan recovery: Americans were not buying as many houses and cars as they used to buy. Amid the general euphoria over the revived prosperity, this was like a well kept secret. The newsmagazines and other media focused, instead, on chronicling the emergence of the Yuppies, a new class of young urban professionals with high incomes and luxurious tastes. As a representative group, the Yuppies could not have been more distant from what was really happening to the patterns of American consumption.
The mass market was shrinking. Automobile sales were booming, of course, in 1984--up 50 percent from Detroit's low point in the recession. Yet the auto industry, including the rising sales volume captured by foreign imports, never recovered the same market that it had enjoyed in the 1970s. As a percentage of the driving-age population, the sale of autos and trucks was actually 16 percent below1978 and 22 percent below 1973, Morgan Guaranty reported. Compared to the historic consumption patterns, Detroit and Japan and Europe were competing for shares of a smaller market.
The 1980s should have meant, if anything, record car sales. For one thing, the working-age population now included that swollen generation from the 'baby boom', new consumers with their own incomes, forming their own households. Furthermore, gasoline prices were declining steadily in the eighties,instead of the steep price increases of the seventies that had raised the cost of owning a car and discouraged buyers. The potential was there, but unfulfilled.
The retreat from home buying was more striking and more fundamental to the American standard of living. The housing industry surged and ebbed month to month during the recovery, usually following changes in interest rates, but home builders never came close to reaching the potential of new home buyers in the 1980s. The lost customers in housing naturally extended to durable goods like refrigerators and washing machines that new homeowners would purchase.
Housing starts reached a robust total of 1.7 million units in 1984, nearly double the lowest point of the recession. Yet, during the 1970s, when the pool of potential buyers was much smaller, the housing industry had surpassed 2 million starts a year four times and set a record of 2.4 million new homes in 1972. The decade of the eighties should have broken that record, since the 'baby boom' was adding an extra 12 million young families to the pool of potential first-time home buyers. Where did all these buyers go?"
'During the 1980s, we have the largest number of new people added to the age group that typically buys homes." said Michael Sumichrast, chief economist for the home builder's association. "The problem is a lot of these young people cannot afford to buy houses. They have no choice buy to rent or double up."
These were the people priced out of the housing market by the high mortgage interest rates or by personal incomes that were too depressed to support a mortgage or by both. Millions of younger families found they could not afford what their parents or even their older bothers and sisters had been able to enjoy prior to the 1980s. If home ownership was the essential element of the "American Dream", the dream was becoming more selective.
For the first time in forty years, the percentage of American families that owned their own homes actually decreased during the Reagan presidency. Though no one talked about it much in the political campaigns, this was a most significant turning point for the pattern of American life. Rising levels of home ownership had been a given since 1940. Stimulated by federal subsidies of various sorts, including the govenment-imposed ceilings on interest rates, the rate of home ownership among Americans had increased steadily from 44 percent in 1940 to 66 percent by 1980. Starting in 1981, home ownership began to decline for the first time since World War II. By 1984, it was down to 64.5 percent. By 1986, it would fall to 63.9 percent."
"Although the annual declines have been small, they cumulatively offset all of the gains in homeownership achieved during the boom years of the mid to late 1970s," the MIT-Harvard Joint Center for Housing Studies reported. In other words, if homeownership was a shared measure of national progress, then the nation had regressed to the pre-1973 level during the era of Reagan and Volker. [our note: Home ownership is back to 66 percent as of 1995, but much of this is fueled by the government's direct taxpayer subsidized promotion of home ownership preceding welfare termination, among minorities in center city areas:~still no relief for the middle class.]
Virtually all the lost ground was suffered by young people, families under thirty-five years old. except perhaps for the Yuppies, the young families that could buy got smaller homes for their money and were compelled to pay a much larger share of their incomes to keep them. At age thirty, the average household must now devote 44 percent of its monthly earnings to owning a new home--double what young homeowners had to pay a decade before.
Given this elemental setback in their living standards, it was particularly ironic that younger people voted so enthusiastically for the President, but then the Democratic Party was also largely silent on the subject. As a practical matter, both political parties had retreated from the goal of universal homeownership, first the Democrats, when they abolished interest rate controls in 1980, then the Republicans, by adopting an economic strategy that assigned a lower priority to providing homes for people. The decline of homeownership, if the government did nothing to reverse it, represented a major re definition of the American idea of prosperity.
Throughout the recovery, however, the trend of lost potential was masked by the general abundance of consumption. After all, consumer demand, as defined by economists, was quite strong. Personal income rose vigorously on average. The Reagan recovery was driven largely by personal spending (though, to be sure, a larger share of what Americans bought was imported from abroad). How could both be true-a pro consumption recovery that was simultaneously losing millions of the potential customers for cars, houses, and other goods?
Higher interest rates were part of the answer. The other explanation was the maldistribution of incomes. In the aggregate, and on average,the money income available to consumers for buying things looked more than ample. When one looked closer, it was clear that a huge share of the increased money income was going to upper-income families (including the celebrated Yuppies). A decreasing share of national income was going to all the families on the bottom half of the economic ladder, people who would also buy cars and houses and other nice things, if they could afford them.
According to the Bureau of the Census, the median real income of the bottom 40 percent had fallen from 1980 to 1984, about $477 per family, a loss of more than 3 percent. The top 10 percent, meanwhile, enjoyed an increase of $5,085 in their median income, an increase of more than 7 percent. The pivotal political decisions of the 1980s, from the Reagan economic program to Volcker's monetary policy, all contributed to the regressive shift in incomes. What was lost by those who depended on wage incomes was gained by those with interest incomes.
Not surprisingly, people whose real incomes were shrinking did not make very good consumers. The economy was carried forward by those who had plenty of money to spend, the upper half. The others, especially young people, simply had to settle for a scaled-down version of the old dream. In general, they were the Americans who were buying fewer cars and houses than they used to buy.
People with inadequate real incomes had one other option--they could borrow the money. By going deeper into debt, they could keep spending and hope that their prospects improved. Millions of families chose that option. Personal debt accumulated rapidly. The increased savings that supply-side economics was supposed to deliver not only did not occur but the savings rate fell to new lows. Families were inclined to borrow rather than forgo purchases, because it was difficult to accept the new reality of their reduced status--especially difficult when the clamor from politics and the news media insisted that Americans were embarked on a new era of prosperity.
The mass market was splitting apart as Fortune magazine had said, but it was also getting smaller. The emerging pattern had profound implications for the future performance of the American economy, not to mention family living standards, yet it did not become an absorbing question for economists. When economists calculated "consumer demand," it was not the sum of what people needed in their lives, the standard that Thorsten Veblen had proposed for an efficient economy. Consumer demand simply consisted of the total money available to the people who could afford to buy things.
For modern economists, the question of which people had the money or what they would spend it on seemed irrelevant. The fact that some families were buing second homes for vacations or third cars while others could not afford their first home or car was considered a social question, not a problem for the economy. Since most modern politicians relied on the economists' definitions, they perhaps did not perceive what had changed.
In the long term, however, if the trends were not reversed, the shrinking mass market would become a political question. Was this what average Americans expected from their economy? Or what political leaders had promised them? To use [Federal Reserve Board Governor] Lyle Gramley's word, the ' political implications were dynamite, waiting to explode.'"
"Given the choices made in Washington, deflationary destruction was virtually inevitable. The Federal Reserve was determined to drive the rate of inflation lower and lower, regardless of other consequences, and no one of any influence challenge the Fed's objective. Indeed, it was fully endorsed by both political parties. As a practical matter, in order to stabilize money' s value at zero inflation or as close as possible, some elements in the economy must be forced into negative levels--held in a state of perpetual losses--in order to offset the rising prices that other economic sections continued to enjoy. Maintaining the fight against inflation required continuing the liquidation.
The government, especially the Federal Reserve, could not very well acknowledge this unpleasant trade-off, but it was Frankly understood in the financial markets. With matter-of-fact directness, E.F.Hutton explained the logic to its investment customers.
'To our mind, pockets of deflation and an ad-hoc program of bankruptcy containment are as much a part of secular disinflation as are low inflation and declining interest rates. If disinflation in this cycle is to work, there must be losers--those who made or financed wrong bets. These negatives, however, are secondary.'
"There must be losers." The losers, as the Hutton newsletter noted, extended far beyond agriculture. They included the workers, managers and owners in many other sectors--real estate, basic commodities, energy. Labor and basic manufacturing could also be regarded as having made "wrong bets" The negative effects of the deflation however, were not "secondary" pockets, as the brokerage claimed. Taken together, the deflationary losses cut a wide and depressing swath across the American economy, from timber in the northwest to the oil patch of Texas, Oklahoma and Louisiana, on copper mines and cotton farms in the Southwest to grain states on the northern prairie and famous old industrial cities in the Middle West.
Georgia Pacific closed nine lumber mills, nearly a quarter of its production. Employment in the copper industry had declined by 63 percent since 1980. Firestone Tire & Ribber, in he same period, shrank from 107,000 to 55,000 employees as it closed plants and reduced management. Tire-industry prices had fallen 7 percent while costs rose by 4 percent. Lead, zinc, silver, orange juice and a long list of other products suffered the same fate as oil, wheat, corn and soy-beans.
Deflation, once started, fed on itself and would likely persist as long as the authorities did not alter the terms of money and prices. While the commodity prices were always subject to wide swings up and down, reacting to the seasonal shifts in supply and demand, the persistence of depressed prices exacerbated the condition. The decreased earnings led producers of all typed, from copper miners in Chile to grain farmers in the Middle West, to increase their production, and this response merely exaggerated the market surpluses, driving prices even lower.
Deflation gathered momentum gradually through 1984, and by 1985, it had become a fundamental disorder in the economy. food commodity prices peaked in the first quarter of 1984 and fell by nearly 12 percent over the next year and a half. The income losses for farmers (but not their shrinking collateral) were offset partially by the government price support payments (and the cost of federal subsidies for agriculture soared to more than $30 billion). Industrial raw material, unprotected by government programs, suffered a price decline of 16 percent over the same months. Overall, raw-material prices fell by 40 percent from their peak in 1980. With so many accumulated losers, the American economy could not be healthy.
The price deflation that unfolded in the 1980s closely resembled the deflation of the 1920s in its selective damage. The same victims were entrapped by surplus and falling prices in both decades, and their economic predicament was largely ignored--occasionally even applauded--by the rest of the nation. Older Americans remembered the Depression and the general price collapse that followed 1929, when virtually everyone's prices and wages fell dramatically, but this episode was not like that. Instead, the overall price level, reflected in the Consumer Price Index, remained remarkably stable, rising at about 3 percent or less a year, and the economy in general continued to expand modestly, concealing the simultaneous depression under way in its structure."
"The market and its investors enjoyed an enviable position of influence: they profited directly from their own supposed anxieties about the future. In the mythology of economics, markets were treated as disinterested arbiters of reality, individual buyers and sellers who collectively made rational judgements based on the best available information. That is how the Federal Reserve looked upon the bond market. yet, in the actual scheme of things, the bondholders were not disinterested. They were profit-seeking individuals and institutions that were rewarded handsomely for imposing their priorities on others. Indeed, they had little incentive to relent.
Easier money and a free-running economy threatened the wealth of the bondholders and the Fed's tight money enhanced it. In the present time, the investors enjoyed the higher earnings provided by the high interest rates. For the future, the high interest rates effectively blocked the economy from regaining the vigorous growth that might eventually lead to a new condition of rising prices. In short, the bondholders and other financial investors won both ways. They collected the bonus income of high real rates. Meanwhile, the value of their money was not only protected from the dilution of inflation, but their financial wealth was actually magnified in value as monetary policy drove the prices of real assets lower.
Given the exceptional rewards, it was perfectly natural that the bondholders were reluctant to give them up. Endorsing a more moderate monetary policy would have put their own profits at risk. In their own defense, long term investors would argue that they must defend themselves against potential inflation somewhere off in the future, even if prices were falling at present. No one could say, of course, what might happen to money's value 10 or 20 years hence, but this amounted to protection against a distant tomorrow that was provided no one else in the economy. Short term investors could not even make that argument. Their extraordinary returns on six-month or one year notes were collected right now-paid in "hard dollars" that were utterly unthreatened by price inflation.
Even for the long-term investors, the question was how much insurance they required. By 1985, bond investors had accumulated a huge store of profit against the possibility that inflation might someday return. According the the Shearson Lehman Government/Corporate Bond Index, which added interest income and price appreciation, bond returns had averaged 18.5 percent in the four years since 1981--the most profitable era for bondholders in the twentieth century. Naturally they did not want to see the good times end.
The preferred status to the bondholders and their influence over the Fed's monetary policy were another way of describing the political triumph of money. The bondholders were preoccupied with one thing--preserving the value of wealth accumulated in the past. That was more important to them than fostering the economic possibilities of the future. The Political system, by embracing stable money as its preeminent goal, by allowing the Federal Reserve to set the government's economic policy on its own, was unwittingly deferring to the bond market too--and acquiescing to the same reactionary values. In the name of stability, the past was defended, the future was denied."
We hope that you have enjoyed, and learned, from these quotes from Secrets of the Temple; How the Federal Reserve Runs the Country, by William Greider. Dewey Decimal #332.11. Get it from, or for, your public library.
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