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Posts Tagged ‘Fed’

The Fed’s Real Mandate

Posted by M. C. on October 8, 2022

The current “dual” between the two mandates is to reduce price inflation by increasing interest rates to increase unemployment and kill businesses to choke off aggregate demand.

https://mises.org/wire/feds-real-mandate

Mark Thornton

The Federal Reserve has a legal dual mandate to minimize unemployment and price inflation. The current “dual” between the two mandates is to reduce price inflation by increasing interest rates to increase unemployment and kill businesses to choke off aggregate demand. This has been the most important economic and investment issue this year and this dual minimization procedure has dominated Fed policy for at least three-quarters of a century.

This is odd given that the Fed is in the business of creating money, the cause of price inflation, and it is responsible for all the largest surges in unemployment since its founding in 1913. Employing an army of monetary economists, macro theorists, and statisticians, the Fed appears to be pursuing its quixotic quest of the Phillips curve sweet spot of minimizing inflation and unemployment.

The real mandate of the Fed is serving its masters, the political elites, by financing government spending and debt, bailing out cronies, and supporting the political process, including the Fed’s own interests. Everything else, including the inflation and unemployment rates are derivative of the primary mandate. The so-called dual mandate is just subterfuge to protect the Fed’s “confidence game.”

The Quest of the False Mandate

In The Fed Explained: What the Central Bank Does, we learn how control of the Fed is “decentralized.” This might sound good to some supporters of the free market. However, any hint of decentralization, such as the importance of District Banks, is long gone and the remnant is merely a diversion or historical curiosity. Of the twelve votes on the Federal Open Market Committee (FOMC) there are only four of twelve rotating District Bank presidents voting, plus the President of the New York Fed. The central Board of Governors in Washington DC has seven voting members who are appointed by the President and confirmed by the Senate and has nearly twice the voting power over interest rate decisions. Plus, the Chairman (Powell) has the power of the bully pulpit and is the consensus builder on the FOMC.

We are also told of the balancing of public and private (banks’) interests controlling the Fed and some free-market supporters latch onto the influence of the private sector as an effective check on the Fed’s enormous economic power. Big banks do work directly with the Fed in “open market operations” and interact in the day-to-day business of banking regulation. Commercial banks have some voting power within the District Banks. However, this influence is contingent on political goals and even the big banks can be pawns in the Fed’s political chess game. Their shares are “nonnegotiable” and are nothing like shares in private corporations. Banking interests are clearly derivative, and the Fed has thrown such interests overboard when necessary, such as with the Savings and Loan Crisis or Lehman Bros. In any case, the union of public and private interests is the ultimate source of corruption and can be the greatest threat to human liberty. Such private interests are clearly not a bulwark of liberty.

It is true that the Federal Reserve Act of 1913 was established and intended to be a cartel device for the banks and some banks are better protected than others. Marx and Engels (1848) called for the establishment of central banks and thereafter Americans were increasingly duped by socialist ideology. This socialist influence was an important force during the so-called Progressive Era (1890–1920). History textbooks make the Federal Reserve Act appear to be the result of a coalition of popular interests. However, the big banks and their academic technocrats controlled by political elites, created and controlled the legislative campaign with their “independent” National Monetary Commission.

A final and critical canard about the Fed is its “independence.” We are told that the Fed must be independent of political power to carry out its mandates and be effective. In this vein, if the Fed were to succumb to political pressures, then it would continually increase the money supply and suppress interest rates below market determined levels, especially before elections. This they tell us would destabilize the economy and might lead to hyperinflation the way it does under dictatorships where central banks do not have independence. I’m sure the Fed would love to be independent, but they are controlled by powerful office holders who are in turn controlled by the elites. As Ryan McMaken reminds us, “Fed independence is a fairy tale academic economists like to tell their students” and they are biased toward the inflationary mandate.

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Looking at the Economic Myth of the “Soft Landing”

Posted by M. C. on September 14, 2022

If inflation is defined as increases in the money supply rather than increases in prices, then it becomes clear that all that is required to counter it is to close all the loopholes for the generation of money out of “thin air.” The increases in the money supply and not increases in prices inflict damage to the wealth generation process.

Originally, paper money was not regarded as money but merely as a representation of gold. Various paper money receipts represented claims on gold stored with the banks. The holders of paper receipts could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper receipts to exchange for goods and services, these receipts came to be regarded as money itself.

https://mises.org/wire/looking-economic-myth-soft-landing

Frank Shostak

According to commentators, countering inflation requires monetary authorities to actively restrain the economy, with “experts” believing that higher interest rates need not cause an economic slump. Instead, they believe that the Fed cab orchestrate a “soft landing.” It is questionable, however. that a soft-landing scenario is possible.

Money Printing Creates Economic Damage

If inflation is defined as increases in the money supply rather than increases in prices, then it becomes clear that all that is required to counter it is to close all the loopholes for the generation of money out of “thin air.” The increases in the money supply and not increases in prices inflict damage to the wealth generation process.

Originally, paper money was not regarded as money but merely as a representation of gold. Various paper money receipts represented claims on gold stored with the banks. The holders of paper receipts could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper receipts to exchange for goods and services, these receipts came to be regarded as money itself.

By fulfilling the role of the medium of exchange, money enables something to be exchanged for it and this, in turn, enables the received money to be exchanged for something else, also by means of money. If the receipts for gold that are accepted as genuine money are backed by gold. there will be an honest exchange—i.e., something for something or wealth for wealth.

In contrast, receipts not backed by gold, which are employed in an exchange, set in motion an exchange of nothing for something. The unbacked receipts are not proper money, which is gold. By means of the unbacked by gold receipts, goods are diverted from wealth generators to the holders of the unbacked by gold receipts. This in turn weakens wealth generators and in turn weakens the process of wealth formation.

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Watch “Governments Will Turn The Recession Into A Depression” on YouTube

Posted by M. C. on September 7, 2022

When the Fed counterfeits dollars, creating an artificial economic boom, a recession is inevitable and unavoidable. Recessions are a return to economic reality; the antidote for The Fed’s poison. While recessions are unavoidable, depressions can be avoided. Depressions occur when the government interferes and tries to prevent a return to economic reality. Government implements “policies” that are meant to “help,” but only end up extending the economic misery into a depression.

https://youtu.be/qjBhbusOubY

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Fed Paper Admits Central Bank Can’t Control Inflation; Finger-Points At Federal Government

Posted by M. C. on September 1, 2022

Tyler Durden's Photo

BY TYLER DURDEN

THURSDAY, SEP 01, 2022 – 07:20 AM

Authored by Michael Maharrey via SchiffGold.com,

First, the authors acknowledge that the federal government uses inflation as a tool to handle its debt. In other words, it acknowledges that we’re all paying an inflation tax.

Second, the paper concedes that merely tinkering with interest rates won’t slay inflation if the government continues to spend far beyond its means.

https://www.zerohedge.com/markets/fed-paper-admits-central-bank-cant-control-inflation-finger-points-federal-government

It appears somebody at the Federal Reserve has figured out that the central bank can’t tame inflation, so it’s setting up a scapegoat – Uncle Sam…

A paper co-authored by Leonardo Melosi of the Federal Reserve Bank of Chicago and John Hopkins University economist Francesco Bianchi and published by the Kansas City Federal Reserve argues that central bank monetary policy alone can’t control inflation.

The paper’s abstract asserts, “This increase in inflation could not have been averted by simply tightening monetary policy.”

In a nutshell, Melosi and Bianchi argue that the Fed can’t control inflation alone.

US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.

Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.”

There are a couple of startling admissions in this single paragraph.

First, the authors acknowledge that the federal government uses inflation as a tool to handle its debt. In other words, it acknowledges that we’re all paying an inflation tax.

Peter Schiff talked about this inflation tax in an interview on Rob Schmitt Tonight.

Inflation is a tax. It’s the way government finances deficit spending. Government spends money. It doesn’t collect enough taxes, so it has to run deficits. The Federal Reserve monetizes those defiticts – prints money. They call it quantitative easing, but that’s inflation. Government is getting bigger and bigger, and families across America are going to have to bear that burden through higher prices.”

Second, the paper concedes that merely tinkering with interest rates won’t slay inflation if the government continues to spend far beyond its means.

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Inflation Hits 9.1 Percent after Months of Empty Talk at the Fed

Posted by M. C. on July 14, 2022

With this latest CPI inflation data, however, pressure will only mount on Powell to push through a full 1 percent rate hike. That, however, would make government debt much more expensive to service, tank the real estate industry, and lead to many household defaults on mortgages and auto payments. Unemployment would follow, and then what sliver of data would the Fed use to convince us that the economy is doing swell?

https://mises.org/wire/inflation-hits-91-percent-after-months-empty-talk-fed

Ryan McMaken

The US Bureau of Labor statistics released new Consumer Price Index inflation estimates this morning, and the official numbers for June 2022 show that price inflation has risen to 9.1 percent year over year. That’s the biggest number since November 1981, when the price growth measure hit 9.6 percent year over year. The month-over-month measure surged as well, with the CPI measure hitting 1.4 percent. That’s the highest month-over-month growth since March 1980, when the measure hit 1.5 percent. 

June marks the fifteenth month in a row during which CPI inflation has been more than double the Fed’s 2 percent target inflation rate. CPI inflation has been more than triple the 2 percent target for the past nine months, and year-over-year growth in CPI inflation has been near forty-year highs for the past eight months. 

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How Bad Were Recessions before the Fed? Not as Bad as They Are Now

Posted by M. C. on June 30, 2022

The continental was turned back en masse, as it now held no value. Those who trusted the continental over gold were left with nothing. Certain Founding Fathers, after witnessing people’s livelihoods ruined by fiat paper money, decided to make provisions to make sure this mistake would not happen again.

Article 1 Section 10 of the US Constitution states:

No state shall make any thing but gold and silver coin a Tender in Payment of Debts.

This section would be violated throughout US history, from the Civil War to 1933, when President Franklin Roosevelt confiscated US citizens’ gold and prevented them from exchanging the dollar into gold. 

https://mises.org/wire/how-bad-were-recessions-fed-not-bad-they-are-now

John Kennedy

With a recession looming over the average American, the group to blame is pretty obvious, this group being the central bankers at the Federal Reserve, who inflate the supply of currency in the system, that currency being the dollar. This is what inflation is, the expansion of the money supply either through the printing press or adding zeros to a computer screen. It has gotten so bad that in the last twenty-two months, 80 percent of all US dollars in existence have been printed, from $4 trillion in January 2020, to $20 trillion in October 2021.

This is always how recessions start: the expansion of easy money, the creation of bubbles, and heightened prices caused by the devaluation of the currency supply. But recessions occurred long before the Fed’s establishment in 1913.

Were these market failures, as many are taught to believe, or were they still the fault of a central bank or government policy? How bad were pre-Fed recessions? Did they rival the Great Depression or 2008?

The Continental Dollar

During the days of the American Revolution, the Continental Congress convened to figure out how to finance the Revolution. In June 1775, Congress issued six million paper currency notes known as continental dollars in order to pay for the new army and the supplies needed to fight a war. Those who supported the Revolution would jump in line to support this new fiat currency, as it was the patriotic thing to do.

By 1780, the amount of continentals in circulation had reached 241 million, and the continental had done its damage. The patriots who bought into the fiat dollar suffered the most, while people like David Hall, who by order of Congress was permitted to print out fiat bills, and the Loyalists, who kept their gold and silver specie were able to stay financially afloat.

The continental was turned back en masse, as it now held no value. Those who trusted the continental over gold were left with nothing. Certain Founding Fathers, after witnessing people’s livelihoods ruined by fiat paper money, decided to make provisions to make sure this mistake would not happen again.

Article 1 Section 10 of the US Constitution states:

No state shall make any thing but gold and silver coin a Tender in Payment of Debts.

This section would be violated throughout US history, from the Civil War to 1933, when President Franklin Roosevelt confiscated US citizens’ gold and prevented them from exchanging the dollar into gold. 

It’s clear what caused the failure of the continental: Congress and printing presses. This, however, would not be the last economic problem that would face America, the next major downturn came in 1819.

The Recession of 1819

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In Defense of Defaulting on the National Debt

Posted by M. C. on June 23, 2022

Apart from not paying perpetual interest on ever-increasing debt, another benefit of default, rarely mentioned but arguably one of the most important from the antiwar libertarian perspective, is that it would essentially end Washington’s ability to practice unbridled military Keynesianism. Slapping pointless wars and military buildups on the credit card has become Congress’s standard operating procedure. It is not a coincidence that our annual trillion-dollar deficits are approximately equal to the trillion dollars dumped into the the military-industrial complex black hole each year.

https://mises.org/wire/defense-defaulting-national-debt

Joseph Solis-Mullen

With the acknowledged national debt now a politically and economically unpayable $30 trillion (in reality, its unfunded liabilities are far greater), Americans should start to become acclimated to the realities of the United States’ eventual, inevitable default. While it may seem unfathomable, and the results too catastrophic to imagine, in fact the likely damage to everyday Americans would be minimal in the short term and unquestionably a net plus in the long term.

This is far from surprising and not a new problem. As Carmen M. Reinhart and Kenneth S. Rogoff detail in their comprehensive review of the subject, history shows that great powers defaulting on their debts was long the rule, not the exception, and that the long-term implications of various regimes’ repudiations of their external debts in particular were minimal or a net plus, depending on the circumstances.

As a way of starting, it is helpful to contextualize the current numbers we’re talking about, because, frankly, they would have been unfathomable previously. As the old math joke “What is the difference between a million and a billion? Basically, a billion” illustrates, the orders of magnitude under discussion are scarcely comprehensible. But the reality is that trillion dollars is $999 billion plus another billion.

The present debt level has only been manageable because of the artificially low interest rates provided by successively accommodating Federal Reserve chairs dating back to Alan Greenspan. With both fiscal and monetary policy having been run heedlessly off the rails for twenty years, the reckoning of a higher interest rate environment necessarily awaits. Short of cuts in annual spending drastic enough to produce large running surpluses (not likely), default is the only sensible option toward which to encourage policy makers.

For context, consider that when Ronald Reagan and the Democrats controlling Congress started running budget deficits that hadn’t been seen since the Second World War, the national debt was running in the hundreds of billions—eventually jumping into the low single-digit trillions.

In the 1990s, as the unipolar moment was beginning, successive administrations and Congress seemed to recognize the foolishness of their previous policies. Compelled by grassroots activism and insurgent Republican candidacies, George H.W. Bush and Bill Clinton both made deals to cut spending and raise taxes. By the time Clinton left office, the country was running a budget surplus and the national debt was projected to be paid off by the end of the decade.

Then came George W. Bush and his disastrous wars of choice. The size and scope of the government grew at the same time that historic tax cuts were enacted. The words of then vice president Dick Cheney should have spooked foreign buyers of US debt more than they did. He was of the opinion that “deficits don’t matter.”

Nor did they matter to Barack Obama, his successors, or their congressional partners—to the point that the mere $30 trillion in openly acknowledged debt amounts to over $80,000 per American.

Nor did the regular trillion-dollar deficits matter to the Fed, which with its accommodating and regularly mandate-violating policies has raised the stakes of the coming financial oppression orders of magnitude higher than they would have been had interest rates been determined formulaically or purely by market forces.

The good news, at least for ordinary Americans, is that we personally just don’t hold very much of the debt. Fully two-thirds is held between the Fed, various other US government entities, and foreign governments. A US government default wouldn’t be the first time the latter have taken a haircut (Alexander Hamilton and Richard Nixon both undertook such necessary actions), and our own government has spent the money so poorly that no coherent argument can be made that justifies paying them back. They would just continue in their profligate ways. As for Wall Street, they’ve lived on corporate welfare long enough to justify their taking a one-time bath.

Apart from not paying perpetual interest on ever-increasing debt, another benefit of default, rarely mentioned but arguably one of the most important from the antiwar libertarian perspective, is that it would essentially end Washington’s ability to practice unbridled military Keynesianism. Slapping pointless wars and military buildups on the credit card has become Congress’s standard operating procedure. It is not a coincidence that our annual trillion-dollar deficits are approximately equal to the trillion dollars dumped into the the military-industrial complex black hole each year.

With foreign investors temporarily alienated, the Fed would be faced with the choice of either absorbing the entire amount of “defense” spending with its own balance sheet (thus sparking a drastic inflationary bout that would visibly discredit the unconstitutional institution) or forcing Washington to give up the myth of global military indispensability.

Either case is preferable to the current course.

It is in the interests of the American people, our children, and our grandchildren, and would arguably do more for world peace than any other realistic scenario imaginable.

So, contact your representative today and tell them you support defaulting on the debt.

Author:

Joseph Solis-Mullen

A graduate of Spring Arbor University and the University of Illinois, Joseph Solis-Mullen is a political scientist and graduate student in the economics department at the University of Missouri. An independent researcher and journalist, his work can be found at the Ludwig Von Mises Institute, Eurasian Review, Libertarian Institute, Journal of the American Revolution, Antiwar.com, and the Journal of Libertarian Studies. You can contact him through his website http://www.jsmwritings.com or find him on Twitter @solis_mullen.

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The Fed Can’t Replace The Market To Find The Best Interest Rate

Posted by M. C. on June 18, 2022

The failure of central planning is manifesting in our world again, this time from The Fed. There’s no “right way” to plan the economy, or to manipulate interest rates, or to counterfeit money. It’s all wrong and destructive! The only fix is to End The Fed and to use sound money once again.

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The Fed Is Winging It: A 75 Basis Point Hike “Seemed like the Right Thing”

Posted by M. C. on June 17, 2022

When asked to quantify how a 75-point hike is better than a 50-point one, Powell had no answer. And will it work? Powell could only say “we’ll know when we get there.”

https://mises.org/wire/fed-winging-it-75-basis-point-hike-seemed-right-thing

Ryan McMaken

The Federal Reserve’s Federal Open Market Committee (FOMC) today announced an increase of 75 basis points to the target federal funds rate, raising the rate to 1.75 percent from 1 percent. June’s meeting today was the third meeting this year at which the FOMC has raised rates. Coming into the March meeting this year, however, the FOMC had not raised the target rate since March 2020, even though price inflation began to accelerate during the second half of 2021.

fomc

Today’s 75 basis point increase is the largest increase since late 1994, when the FOMC raised the target rate from 4.75 percent to 5.5 percent.

Notably, however, this increase comes mere weeks after the Fed chair Jerome Powell slapped down the idea of a 75 basis point increase in June. As Reuters reported on May 4, Powell had insisted “a 75 basis point increase is not something that the committee is actively considering.”

That didn’t last long.

The fact that the Fed was forced to hike the target rate by more than it had suggested was even possible earlier in the year is a reminder that the Fed and its economists are simply in a reactionary mode when it comes to the US economy’s problem with mounting price inflation.

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Even When There Is Inflation, the Fed STILL Fights Falling Prices

Posted by M. C. on June 15, 2022

 Instead, the central scenario is surely that the Fed has flooded the system with so much money (only some of the excess removed during the period of hawkish turn and taking account of cumulative price rises) that the natural downward rhythm of prices will not show up in outward reality. Rather, the Fed will use the relief from symptoms of inflation in the consumer price data to double down on monetary inflation. This would show up at first in a new episode of asset inflation.

The more government helps…

https://mises.org/wire/even-when-there-inflation-fed-still-fights-falling-prices

Brendan Brown

Under any remotely sound money regime the aftermath of war and/or pandemic is highly likely to feature a sharp decline in the prices of goods and services on average. Even under unsound money regimes there are powerful forces operating towards lower prices once the war/pandemic recedes. Strong injections of monetary inflation, however, can overpower them.

The Fed and all the foreign central banks which follow its lead and/or doctrines are apparently of the intention that this time the decline in prices will not take place. Instead, they state the aim of their monetary policies, to be achieved within two years, as a decline of the inflation rate from present near-term highs to 2 percent.

In combatting the powerful “natural rhythm” of prices downwards in the aftermath of pandemic and war we should expect the Fed and foreign central banks to marshal a tremendous amount of monetary power. That will occur beyond an intermission where central banks are ostensibly trying to rein back the monetary inflation which has reached its peak virulence in 2021–22. 

Precise measurement of monetary inflation, including its stages, is impossible under the present monetary regime where the supply and demand conditions for monetary base—and the attributes of base money—have been deeply corrupted. In thinking about the next monetary inflation injections, history provides considerable insight.

The aftermaths of supply shocks are full of inflation danger, even though recession intervenes and mitigates this for some time. Monetary inflation has accompanied all the great supply shocks and sometimes preceded them as in the present case of pandemic and war. Here monetary inflation stretches all the way back to 2012/13.

In the aftermath of World War I and the Spanish flu pandemic (1918–19), US consumer prices fell by around 20 percent (from mid-1920 to end-1921). The fall in prices stemmed both from deliberate monetary deflation (starting in late 1919 as the Benjamin Strong–dominated Fed sought to reverse the monetary inflation in the half-year following the armistice) and the easing of supply restraints (with huge gluts developing for many primary commodities). 

After World War II there was an almost 5 percent decline in CPI from mid-1948 to the end of 1949, overlapping the recession of November1948 to October 1949. There was no sudden substantial monetary policy tightening during that time. But the around 30 percent rise of consumer prices during 1946–47 coupled with the constancy in outstanding supply of high-powered money stock meant this shrunk far in real terms. Accordingly, the overhang of excess money supply dwindled. 

Towards the end of the Korean War (1950–53) and into its aftermath consumer prices were relatively flat (mid-1952–55), having risen by almost 12 percent between mid-1950 and the end of 1951. That was despite the McChesney Martin Fed following an inflationary monetary policy as evident first in asset inflation and later in an eruption of consumer price inflation (the second half of the 1950s). In effect the “natural rhythm” downward of prices as wartime constraints eased and a sustained leap in productivity growth got under way meant that monetary inflation did not produce at first the symptom of consumer price inflation.

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