Why the Fed wants to crush workers
The US Federal Reserve has two imperatives: keeping employment high and inflation low. But when these come into conflict — when unemployment falls to near-zero — the Fed forgets all about full employment and cranks up interest rates to “cool the economy” (that is, “to destroy jobs and increase unemployment”).
An economy “cools down” when workers have less money, which means that the prices offered for goods and services go down, as fewer workers have less money to spend. As with every macroeconomic policy, raising interest rates has “distributional effects,” which is economist-speak for “winners and losers.”
Predicting who wins and who loses when interest rates go up requires that we understand the economic relations between different kinds of rich people, as well as relations between rich people and working people. Writing today for The American Prospect’s superb Great Inflation Myths series, Gerald Epstein and Aaron Medlin break it down:
Recall that the Fed has two priorities: full employment and low interest rates. But when it weighs these priorities, it does so through “finance colored” glasses: as an institution, the Fed requires help from banks to carry out its policies, while Fed employees rely on those banks for cushy, high-paid jobs when they rotate out of public service.
Inflation is bad for banks, whose fortunes rise and fall based on the value of the interest payments they collect from debtors. When the value of the dollar declines, lenders lose and borrowers win. Think of it this way: say you borrow $10,000 to buy a car, at a moment when $10k is two months’ wages for the average US worker. Then inflation hits: prices go up, workers demand higher pay to keep pace, and a couple years later, $10k is one month’s wages.
If your wages kept pace with inflation, you’re now getting twice as many dollars as you were when you took out the loan. Don’t get too excited: these dollars buy the same quantity of goods as your pre-inflation salary. However, the share of your income that’s eaten by that monthly car-loan payment has been cut in half. You just got a real-terms 50% discount on your…