WHO STOLE HALF YOUR PAYCHECK?

Good morning, someone pulled a fasty and managed to steal half of everyone's paycheck. Productivity and salary SHOULD track, but ever since 1971 they stopped. Lets talk about that.

1. Who did it and where did the money go?
2. How did they manage this sorcery?
3. How can we get it back?

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If you ask a socialist, they'll tell you this was stolen by greedy CEOs, but like most socialist rambling this explanation doesn't stand up to even the slightest bit of scrutiny. In order to believe this, one needs to believe that before 1971 there were no greedy CEOs - as though greed was *invented* in 1971.

If you think this guy has something to do with it, your instinct is good. In 1971 Nixon closed the gold window and ended the era of a nominally gold-backed dollar.

But still there's a lot of explaining to understand how preventing foreign governments from redeeming USD for gold would affect the income of Americans.

So who really stole the money? Well, the government did. Technically they borrowed it, but government borrowing money is like an abusive boyfriend with a gambling addiction borrowing money - don't expect to get it back.

This "borrowing" had been going on since around 1950 but was covered up by the fact that they defended the currency with gold.

On the previous chart, it looks like they didn't do any significant borrowing at all until after 1971, but that's only because the chart is dollar-denominated and so it goes parabolic as the value of the dollar is destroyed.

The government was not the only one devaluing the US dollar, in 1971 they had around $370bn of debt, but the money supply was around $640bn - and this gets to the other bad guy in the room: The Banks.

The banks were allowed to create new US dollars based on the amount of US dollars in their vault. Of course this creates a perverse situation where a bank can lend money and then if the money they lend is deposited with them, they can lend more money.

Unlike this pretend fractional reserve system, the US treasury was operating under a real world fractional reserve system. They had approximately $9bn worth of gold and $640bn worth of liabilities. About a 1.4% reserve ratio.

So foreign governments were right to demand gold for their dollars, and when Nixon "paused withdrawals", effectively defaulting, everyone who hadn't turned in their dollars took a significant loss.

Today the M2 money supply is reported at 21 trillion, up by approximately 33 times the 640bn of 1971.

If you think about inflation as raw growth of the money supply, then the US currency inflated by 33x, but when you look at cost inflation, it hasn't grown by more than 10x, so how'd they manage to print another 23x the money supply without creating equal inflation?

This is where they robbed you.

The Federal Reserve has two guns pointed at them at all times - one from the politicians who want to "borrow" (heh) money to fund their stupid ideas. The other is from the banks who (if left to their own devices) will lend money to anyone with a pulse, as long as they think they can get an interest payment. The FED's job is to keep inflation under control, and they do this by setting the interest rate which the government and banks must pay for the money they borrow.

But nobody wants a high interest rate, it wipes out the stock market, it cools off the housing bubble, and eventually even causes a recession. So politicians who want to get re-elected have a very simple mandate: KEEP INFLATION LOW. If they can do that, then the bank will keep interest low and everyone will be happy.

How can you reduce inflation?
1. Make things cheaper
2. Make people poorer

An extreme example of making things cheaper is just adding sawdust to the bread USSR style, but a more subtle example is making food products with more low cost mass produced foods like chicken, grains, seed oils, and corn syrup while paying "scientists" to "study" potential health risks of foods that are difficult to mass produce like beef.

But even if you can manufacture cheaper products, you still need someone to do it without demanding too much salary. But to keep salaries low, you need unemployment.

The best way to increase unemployment and lower average prices is to attack small businesses. Small businesses will typically offer premium products which command higher prices from discerning customers - but this drives inflation. So the clever bureaucrat will regulate them out of existence and replace them with big box stores selling bottom price slop.

Remember that people will also work practically for free, if they're in prison.

The next thing which will help reduce inflation (while printing obscene amounts of money) is inequality. When common people have money, they bid up the price of eggs and beef - driving inflation. But when the super rich have money, they bid up the price of Rolexes and Maseratis - not driving inflation.

So the bureaucrat who is tasked with reducing inflation will prefer to promote the creation of a cadre of super-wealthy oligarchs who control most of the money.

But while these tricks work for most things, one thing which stubbornly resists monetary slight-of-hand is the price of energy, particularly oil.

From 1950 until 1971, oil was about $3.55 per barrel. 33x3.55 is 117 and you can see that oil has only touched that number on occasion, but is in the right neighborhood.

When you see oil plotted against gold (orange line), you can see that the "petrodollar system" really only existed until 1979. Since then, it's more fair to say oil is priced in gold than anything else.

And just after 1971, energy consumption plateaued. First by the necessity of oil becoming unaffordable and later with an ideology attached (first peak oil, later climate change). This plateau was only disrupted by the rise of China after 2000.