Who Gets the Pie?

Suppose a family of four was setting down to desert after dinner; a pie is cut into eight equal pieces. Each member of the family received two slices. Now, suppose one member of the family said, “Let’s create eight additional slices and split the pie into sixteen equal pieces.” Clearly, if each member of the family received four slices there would be no practical reason (other than a smaller serving size) to create the additional slices. The amount of pie each family member received would be exactly the same.

Suppose that the pie cutting member of the family has an ulterior motive. He wants more pie at the expense of everyone else. So after slicing the pie sixteen ways, he gives everyone the same two slices they previously had and keeps the eight additional slices for himself. Someone in the family might remark, “My slice of pie is smaller and less filling.”  “No, you are mistaken,” he lies. “You are receiving the same amount of pie you always have.”

This little story gives us insights as to why the Federal Reserve inflates the supply of money. Have you been trying to make sense of the incessant claims by policymakers and some economists that in order to save the economy the Federal Reserve has to engage in a new round of quantitative easing? The Fed tells us that our inflation targets may be too low and may need to be increased. You might be asking yourself the obvious question—how would more inflation help the economy?

The answer is, it won’t. In the pie example, after cutting the pie in eight pieces, each of the four people expected two slices. If you cut the pie into sixteen slices and gave everybody four slices, increasing the number of pie slices will have no effect. But when people expect two slices, if the pie cutter increases the number of pie slices to sixteen, the pie cutter will have slices to keep for himself or to give to other favored pie eaters—increasing the number of pie slices has an effect. And that is exactly what the Federal Reserve does. When the Fed increases the supply of money and credit, the new money is not injected equally throughout the economy. For some, due to inflation, their slice of the pie shrinks; others get more.

Admittedly my pie analogy is simplistic. I use it to help cut through the idea that we should leave policy to the experts. But how can an expert like Ben Bernanke be so wrong? Some say he is an innocent Chauncey Gardner character; others believe he is simply a puppet whose strings are pulled by his banking masters. The more likely explanation is that Ben Bernanke is who he seems—a bright but limited man being guided by incorrect theories that have taught him that bright men can and should control the economy.  The end result of our hubris will be suffering on a larger scale than we can imagine. No, our is not a typo—it is our collective hubris that empowers Bernanke’s personal hubris.

Regardless of Bernanke’s motives the question remains: who is getting the new slices of pie? Here are some recent examples:

This week the New York Times reported that “the real wage and salary income of finance industry employees based in Manhattan rose nearly 20 percent in the first quarter of this year. That surge helped make Manhattan the fastest-growing county in the United States in terms of terms of year-over-year gains in income.”

This week when asked about receiving bags of cash from Iran, Afghanistan  President Hamid Karzai said “This is normal…The U.S. gives us large bundles of cash as well.”

Of course, asset bubbles form as new money is injected in explosive amounts. Grain prices and other commodities have increased sharply with wheat and corn both up over 50% this year. If firms try to pass on their higher costs through higher prices, family budgets feel the pressure of the increase. When firms are unable to raise prices due to market pressure, they feel increased pressure to reduce labor costs and unemployment increases.

Bloomberg reported yesterday on the Fed-induced  bubble in junk bonds: “The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued.” No doubt after this bubble bursts, “for our own good,” we will be giving our pie to those who recklessly invested again.

Yet, we are told, if not for the heroic efforts of Ben Bernanke, we would have a terrible depression and no pie at all. Of course, a clear thinking child could see through the lies. A child might ask: “Has Ben Bernanke created even one new pie?” The answer, of course, is “no”—his policies have helped to redistribute the pie: Ordinary Americans who are not subsidized have given their share of the pie to the financial services industry, to contractors waging war in Afghanistan, to General Motors, to junk bond investors, and you name it.

This is an uncomfortable post to write. I have always taught that free market economies expand the supply of the proverbial pie. On a free market, there is no reason to see the world through win-lose eyes. Yet, we no longer have anything resembling a free market. For many Americans, their share of the pie is now contracting; a new round of quantitative easing will only reduce their share of the pie further.

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6 Responses to Who Gets the Pie?

  1. James D. says:

    We know where the “extra” pie is going…to the other “favored” pie eaters. No, our economy is no longer free, and we increasingly fight spending money where we need to, like improving education (not neccessarily in gov’t run schools!) To continue the analogy, as a parent I am likely to give my last slice of pie to my kids, not my neighbors. But our gov’t has decided that their neighbors and friends are more deserving of our pie than our kids. I want my pie back…my kids are a better place for it!

  2. Lyn says:

    Dear Barry,

    Thank you for this clear, simple metaphor explaining inflation.

    IMHO, the seeds of our market’s and our culture’s destruction have been planted long ago, in math education textbooks. (I hope you’ll pardon some personal storytelling, but it corroborates my assertion.)

    Back in the early ’80s, I was a math and computer science major. Having been heavily immersed in the for-majors curriculum for a couple years, I had gotten to the point where I was solving difficult calculus problems in my sleep. I ate word problems for breakfast. So when a friend of mine, a *math education* major, said she was having difficulty figuring out a word problem in a then-current middle school algebra textbook (a problem that she was scheduled to present to her peers), I confidently promised to help her out. I was horrified to find, after reading and re-reading the problem statement for a good long time, that it did not contain enough information to derive a solution.

    So when I hear young people say they hate math classes, I am unsurprised—they can only succeed with capable, activist parents and tutors. And when adults in our culture can’t understand the insidious nature of the inflation tax—or worse, the implications of compound interest on our national debt—sadly, I understand why. We have lost generations to mathematical (or merely arithmetical) illiteracy.

    And when our once-free press fails to provide a more critical analysis than the average viewer is capable of, regarding critical economic indicators such as the government’s published CPI and unemployment statistics, then the public who rely on mainstream media remain in the dark. In the broader view, one rarely hears a critique from the MSM on the efficacy of the Fed toward its purported goal of economic stability. All of this results in the systematic production of a significant population of economic “greater fools”—intended or not.

    Thanks again for your post; may its clarity and wisdom create understanding for a newer, larger audience.

    All the best,
    Lyn

  3. Chris C. says:

    And once again, to beat my favorite dead horse, a not-insignificant side effect of inflation’s “hidden” taxation is the additional distrust the whole process injects into the economy. When the people that are protrayed in the old media as being akin to philosopher-kings turn out to be somewhat less that competent at their jobs, and it is ever more obvious to many folks that they are lying like a kid caught with hand inside the proverbial cookie jar, the attitude of distrust and me-first-screw-the-rest becomes more widespread. Pretty soon, the politicians will have succeeded in factionalizing Americans into tiny, easily manipulated groups, each jealous of all the others and of their supposed perks and goodies. The pieces of pie will be a few crumbs with the flavor of the filling by then. And the question we’ll be asking ourselves is, “What are we doing in this handbasket, and why is it getting so hot?”

  4. Frankvv says:

    Barry,
    Maybe this new money policy is really aimed at helping to reduce obesity in America; a smaller slice of pie should certainly help the waistline. Of course your analogy suggests that the fat-cats are going to continue to get fatter, while the rest of society will be on a forced diet. Not a good situation for sure.
    I have my father’s stamp collection that he put together when he was a boy, and somehow he ended up with several pages of German stamps printed during the Second World War. What is noteworthy here is that many of the stamps have been over printed two or three times with different values on them; inflation was rapid so the government just printed money, but doing so continued to drive down the value of the Duetsche Marc (DM).
    The US dollar was once the golden standard for currency. Today not so much; pure gold has come back in vogue.
    Several years ago my daughter-in-law’s mother, who is from a well-to-do Chinese family, was getting on an airplane. My daughter-in-law asked her mother, “What do you have in the bag, gold bricks? This bag weighs a ton”. Her mother replied, “Shhh, don’t tell anyone!”
    At the time everyone thought she was a little eccentric; both for owning gold and for transporting it in her hand-luggage. Today I have a different opinion; she was (is) as smart as a fox. She never invested her family money in paper, but rather kept it in hard assets; namely gold. As I watch my retirement portfolios disappear, the value of my house evaporate, and the buying power of the few dollars I have left erode, I can’t help thinking that my daughter-in-law’s mother had a much smarter investing strategy than me.
    Two years ago I had a little extra cash and I was debating buying myself a investment car; a 1955 Ford Thunderbird. I didn’t. Instead I invested in mutual funds in my 401K and in 12 months lost that, plus a lot more. If I had bought that Thunderbird (collector car, not a driver) I would still have the car, and its value would still be intact! After all it is the fat-cat’s that buy these types of toys, and that population is clearly continuing to grow!

  5. Lyn says:

    Chris, thanks for your comment, and of course you’re right. TV’s storytelling — “non-fiction” “news” — has two major themes:

    1) Bread and Circus (Note the percentage of tabloid-esque celebrity-gossip pieces in CNN’s “news” coverage. And let’s not get started on “reality” series.)

    2) Divide and Conquer: Republican vs. Democrat; left vs right; everyone vs the Tea Party; smart vs stupid; pro-family vs gay rights; rich vs poor; religious conservative vs atheist; Judeo-Christian vs Muslim; pro-life vs pro-choice; citizens vs (il)legal immigrants.

    Judge, label, caricature, polarize … dehumanize everyone. Push the hot buttons; keep everyone off-balance, and on the defensive.

    It’s getting hot in this handbasket.

    Best,
    Lyn

  6. Mike L says:

    I never understood why the Fed strives to obtain a consistent level of inflation. My great-grandfather was born in Germany after WWI. He told me the story that when he turned 18, he went to the bank to cash out a savings bond. Due to the post-war hyperinflation, he was able to use his savings to purchase two cigars. For some reason, that story has always stuck with me.

    Sadly, due to the inflation that is yet to come, there will be winners and losers. The winners will include the people who lived beyond their means as they watch their debt get ‘monetized’ away. The losers will include the folks who did everything right as they watch the purchasing power of their savings evaporate.

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