The Foolish Fed

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The three Federal Reserve Mandates.  Yes, there are three.  It is a “tri” mandate, not a “dual” one.

“….conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest ratesarrow-10x10.png

Maximize Employment

 ”34.3%: Share of Americans over age 16 who say they don’t want a jobarrow-10x10.png, up from about 30% two decades ago.” 34% of Americans without a job, don’t want one?  How much Fed pumping and Quantitative Easing does it take to change this?  And how much will it take to get the percentage of the people in the work force moving up again off a 35 year low? And how much Fed pumping will it take to get manufacturing back from China and the Pacific Rim?  Answer to all of the above is that monetary policy is a poor tool to address these issues.  Monetary policy did not cause any of these conditions, so why the insistence that it is the cure?

Embracing out dated theories

The blind allegiance to the Phillips Curve, a theory that essentially connects loose money with jobarrow-10x10.png creation, must be revisited if not halted. Today’s instant world of international economic connectivity and agile manufacturing were not in play back in the Philip’s Curve’s creation.  It may be entirely impotent in today’s economic world.  Results to date suggest the theory was for another time and another place.

The velocity of money has plummeted.  It is not a secret that today’s forced and faked interest rates create a false environment.  People and businesses are reluctant to lend at record low ratesarrow-10x10.png.  A fair return on money for the lender is what is necessary to get the velocity of money back up into historical ranges.

The Benefits of the businessarrow-10x10.png cycle

When did the Fed pumping cross the line from systemic rescue to smoothing out s and guaranteeing bull markets?

The Fed has decided that they must smooth out the business cycles.  But for those locked in the ivory tower of academia, a life’s lesson.  Business cycles are natural, necessary and perform an important function.  They flush out the inefficient and create balances in the market place. The market dispenses disciplines which in turn breeds efficiencies. The markets ebb and flow within  moderate cycles and in so doing purge excesses and help prevent the unwelcome big swings. 

Remarkably the self anointed intellects in the Federal Reserve know better. They believe cycles to be unwelcomed complications. The old saying that” the market knows all” is now superceded by the notion that if one has enough degrees and publishings, it is he who knows all.  Install such a person behind the wheel of an ever self empowering entity accountable to no one and you have the Federal Reserve.  It’s pledge to smooth out these cycles is but a promise to ensure ever rising markets fueled by ever increasing liquidity.  Everyday’s a holiday. So what’s the problem?

Stable Prices

The Federal Reserve has picked a 2% inflation target.  They are also charged with maintaining stable prices.  This is a dichotomy.  The Fed has no mandate to create inflation, but is charged with exactly the opposite, stable prices.  2% per year inflation sounds harmless.  Five years into such a programarrow-10x10.png, the holder of dollars will notice a more than 10% decline (compounding) in buying power.  Prices double every 36 years. Not so harmless.

During the Cypriot financial crisis, the idea of taxing deposits 10% was proposed.  People were shocked and outraged by the concept.  But such theft meets little reaction when it is spaced over a five year (or more) period.

The ruination of the currency, the enabling of federal deficit creation without cost, all set the financial time bomb firmly ensconced in that “can” that keeps being kicked down the road.  And one must ask, who empowered the Federal Reserve to conduct such a program of encouraged inflation?  It has no connection with any mandate or mission statement.

Moderate interest rates

Moderate definition:  ”Medium, modest, reasonable, avoiding extremes, average in size or amount”

Zero interest rates are none of the above.  They are extreme to one end of the spectrum.  The Federal Reserve has ignored this mandate.

ZIRP (zero interest ratearrow-10x10.png policy) policies never end.  There is no way out.  The only exit is that executed by the lord overseer of the Fed as he hands over the problem to the next chairperson, then heads for book signings and consultant fees.

What we have here is theory without wisdom, unilaterally expanded powers, and a deliberate non compliancearrow-10x10.png with the mandate of moderate interest rates.  All of this under the presumption that loose money will solve a litany of problems not created by monetary policy.  Pushing on the string results in pulling the dollar to new lows.  Perhaps the Fed should wonder if the current course is the best course.  Revisiting one’s belief system is a most difficult task.

In conjunction with these misdirected efforts are the countervailing socio economic policies coming from the Obama administration.  Politically contrived and ever expanding programs that make idleness more comfortable and thus entrench a certain segment of the unemployed, dampen any effect the Fed’s loose money policy might have on unemploymentarrow-10x10.png.  


Bruce Johnson

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