Welcome to the “Hunger Games economy,” Living in Bernanke’s Box

Hunger games cc

For those who don’t know, The Hunger Games is is a series of very popular books, the first of the books was recently made into a movie.

In a “Hunger Games” economy the capital cities flourish while the hinterlands languish. This to a large extent is the situation in the United States presently.

I regularly travel into Washington DC, and as we have documented many times, DC is a shining city filled with big money, very expensive cars, and well made suits. There is dinero in Washington and to a large degree it is your dinero. Washington has effectively aggregated more and more of the nations wealth into a handful of counties straddling the Beltway. DC is by far and away the wealthiest metropolitan area in the United States.

Wealth DC cc

It is here that lobbyists ply their trade, and government employees often make 6 figure salaries with extremely generous lifetime pensions once they leave. It is in Washington DC that the military industrial complex centers itself, long made fat from taxpayer funded contracts. There is a reason, as we’ve noted before, why there are Ferrari, Maserati, and Lamborghini dealerships at the end of the long stretch of mirrored defense contractor buildings in Loudoun County Virginia.

In the DC metropolitan area (at least most of the area) money flows. It flows in other capitals too. New York, Boston, San Francisco, all are doing fairly well.

Why? A number of factors, but proximity to the printing machine at the Fed is an important (probably the most important) factor. It is in these cities where the new money the Federal Reserve creates out of nothing hits the economy first. As such the mandarins in finance and academia and government and the military industrial complex do well. They have fresh money coming in all the time and it hits their pocketbooks before prices rise in the rest of the economy. “Capital city money” buys more than it will down the road for people in other areas as the easy money spills (in the present case slowly) into the provinces.

The Fed is now presented with a dilemma. Things are getting hot in some metropolitan areas. The funny money is starting to spark inflation even now in consumer goods (beyond just houses and financial assets). Yet the areas in flyover country continue to limp along, at best. If the Fed stops printing money the economy in the middle of the country, in the Fed’s estimation, will dip from already depressed levels. On the other hand if it keeps printing the spark of inflation could turn into a flame starting in the capital cities and then spreading from there.

The Fed for all its talk and gyrations and printing over the past 5 years, is still in a box. Sadly a new Chairman probably won’t do what is needed to bust out of Bernanke’s Box.

What is needed over the long term is honest interest rates. Rates should be set by the market, not the Federal Reserve. Markets naturally solve pricing problems. Many powerful people (and unfortunately in the short term many not so powerful people) may not like the solution(s), but at least the economy is allowed to heal and we can move on.

We must get back to real pricing in this economy. The longer we continue as we have, with interest rates which do not reflect reality and which distort all the other prices in the economy, a system which feeds crony capitalism, the closer this country will move to a truly “Hunger Games economy.”

(From CNBC)

“We really have a ‘Hunger Games’ economy in the U.S., where the low end is doing very, very poorly, the top 20 percent is doing very well,” Schlossberg told CNBC Asia’s Squawk Box on Friday. “I wonder if they may hold off on tapering if they begin to feel the bottom end of the scale is just not recovering as well as they think it should be.”

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