But Now You Know

The search for truth in human action

Forget the Fed


End the DEBT

The Federal Reserve, though bad, is a scapegoat, and ending it would neither reduce the deficit, nor rein in the printing of money

Among my political companions, “End the Fed” has been the hot, trendy thing for a while. This is mainly because Ron Paul correctly distrusts it, and has sponsored a bill to have it audited.

Now, I almost named this article Eff the Fed, because I, too, dislike it, and know it can never manage money properly…no government agency ever could. Instead of the a fiat dollar, we should have a free market in currency, like the Austrian economist Friedrich Hayek advocated . But when it comes to the fight to end it, there’s a problem.

The End the Fed crowd seems to think that getting rid of it is some magic bullet, that will accomplish all kinds of different things.

They believe it will:

  • Bring back “sound money”, by imposing a gold standard.
  • End the printing of new, extra money
  • Restrain runaway government spending
  • Prevent budget deficits

The problem is that ending it will accomplish none of those things.

In fact, it would probably make them worse.

Why?

Because the Fed isn’t what started those things happening, and none of them depend on the Fed’s existence.

Axe the IRS

In effect, fighting those things by attacking the Fed is like wanting  to fight the income tax, and high taxes, by demanding “Ax the IRS”.

Obviously, we had taxes before the IRS, and we’d have taxes after it. In fact, the IRS was not created by the 16th amendment establishing the income tax, but five decades earlier, by Abraham Lincoln.

If we got rid of the IRS, we’d still have the income tax, and high taxes. Putting our time, energy, and money into attacking the IRS would be a waste of time, when we could have fought for actual tax reduction, reforming or ending the income tax, et cetera, directly.

What’s worse, the government would still want to oversee the taxes we failed to actually fix, and would probably end up using something worse than the IRS.

Well, all of this is true of the Fed, as well:

The Feds Don’t Need the Fed

The Fed and a Gold Standard are Compatible

Trade Dollars, coins minted in the US during the gold standard, in an attempt to offset a shortage of money

Ending the Fed won’t bring back a forced gold standard, because they are two unrelated issues.

We had both at the same time for decades, anyhow.

The US had a fiat gold standard from 1873, through 1934.

The Fed, of course, was established in 1913. It existed alongside the gold standard for over two decades. It helped cause the Great Depression while the US was on a gold standard. It created floods of new money in the 1920s, and drew down the money supply by 30% (which would cause any economy, at any time, to collapse) in 1929…both of these things while we were on the gold standard.

Congress Would Just Print More Money

Not only did we have a gold standard while we had the Fed, but we also printed fiat paper money when we did not have the Fed. The reason the dollar is sometimes called the Greenback, is that this was the nickname commonly used for the paper money common in the United States in the 1860s and 1870s, printed to finance the Civil War, known for its green ink .

Right now, the Federal Reserve is a bureaucratic middleman, standing between Congress and simply printing money willy-nilly. The Fed uses what are ironically called “mechanical” means, to create its electronic, funny money for banks. In other words, it has a set of rules that cause the money to be created according to some specific set of conditions, not simply all the money the government wants.

An actual Greenback, fiat paper money printed in the US before the Federal Reserve

Without it, Congress will simply mandate the printing of more money, on its own, surely in accordance to its bloated, and ever-snowballing spending. They printed floods of extra money before the Fed, and would print it after.

As with the IRS, however it replaces the Fed (and, in a sense, it will have to) will probably be with a mechanism that is even worse.

The US government issued treasury notes, and created deficits in other ways, for the majority of US history where there was no Federal Reserve Bank, and would do it again without it.

Restrain the Deficits…How?

This is the silliest one, and speaks to an ignorance of how the Fed works.

The Federal Reserve certainly responds to some deficit spending by selling more treasury notes…but as with printing money and collecting taxes, this would happen whether the Fed existed or not. It simply is the middleman, again.

You might as well blame the mailman for delivering your bills.

A Big, Fat Windmill

The problem with Don Quixote attacking windmills wasn’t just that the windmills wasn’t only that the windmills weren’t actually dragons, harming people.

It was also that he was wasting the energy and time that could have gone into fighting actual bad causes.

And that’s what the End the Fed noise is doing. This energy could be spent fighting deficit spending directly, which has run rampant under Democrat and RiNO alike…or any of dozens of other issues of government abuse.

It’s Going Nowhere

Of course the last problem with tilting at windmills was that it was never going to get rid of them, anyhow.

The Federal Reserve is in no danger of being “ended”. Ron Paul is actually only sponsoring a bill to audit the Fed, which (unfortunately) will not even permanently open its records to the public, the way they need to be. It will do even less to “end” it, since government self-investigations only ever are used to create a pretense that a few new regulations have “put the problem behind us”, and things usually just get worse, thereafter.

A majority of Americans oppose the drug war. Nearly all Americans not directly on the government teat oppose its massive spending and deficits. But the mechanisms for keeping the Fed in place, on both the private and public side, are massive. Not only would getting rid of it have no more effect than axing the IRS, but it’s no more likely to happen.

How To Actually Fix Things

What we need to do, rather than waste our time tilting at the Fed, is to directly address the problems we’re using it as a whipping boy to attack, or at least focus on their actual sources.

For example:

Balance the Budget; A balanced budget amendment would stop massive deficits, rein in government spending, and eliminate much of the incentive to print money and treasury notes, under the current system.

Line-Item Veto; Giving the President the power to veto any specific detail in any spending bill would be a step in that direction, as well. This may need to be an amendment, too, in order to override corrupt Federal courts claiming that it’s somehow unconstitutional.

Pull the Pork; Rules against pork, against Congress specifying projects in detail intended just to send money to their own cronies in their district, would be devastating not only to spending (which, unfortunately, is more centered on entitlements), but also to motives to give officials legalized bribes like campaign contributions.

Or maybe something else, entirely…but, whatever is done, it needs to be done. We need to choose surmountable obstacles that will actually matter, not waste our effort and attention on some scapegoat, however undesirable it is. The Fed is a poster child for government’s destruction of finance and economy, but what we need now is real solutions, not symbolic gestures, however satisfying this one would be.

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July 5, 2010 Posted by | Economy, liberty, Philosophy, Politics | , , , , , , , , , , , , , , , , , , , , | 5 Comments

Where’s the Hyperinflation?


When the unaccountable, secretive arm of the banking industry known as the Federal Reserve started lending itself (the banking industry) billions of newly invented dollars, late last year, responsible people all over America were horrified.

Some of the soundest economic minds even started predicting “hyperinflation”.

Well, it’s been three quarters, now…soon it’ll be a year.

“Where,” other people are saying, “oh where is that oh-so-scary hyperinflation?”

The answer comes in several parts:

What is Hyperinflation? Hyperinflation is a specific thing. It’s not the three percent inflation we normally “enjoy”, any more than it’s a flavor of cream pie. We must define what it is, in order to know if it happens.

What Causes Hyperinflation? Having defined it, we need to know if the things that cause it are happening. The Fed has printed new money for nearly 100 years, never with hyperinflation. Is what happened recently sufficient to change that?

How Long Would it Take? Is it too late? It’s been nine months; are we safe?

Well, Let’s See

What is hyperinflation?

An actually hyperinflated currency, the Zimbabwe dollar was so weak that this is a single note for one hundred TRILLION. The Fed would have to print fifty times as much as it did last fall, in order to match this ONE bill.

(caption: An actually hyperinflated currency; the Zimbabwe dollar was so weak that this is a single note for one hundred TRILLION. At the rate it printed money for two months last fall, the Fed would still need over eight years just to print enough to equal this one scrap of paper)

Well, “inflation” is when you increase the amount of money, or the supply of it compared to the demand for goods in society…but when non-economists say “inflation”, they usually mean “prices go up”.

And so “hyperinflation” is just “prices going up really, really fast”. The amount necessary to count is generally said to be “100% per year for three years”, for long-term hyperinflation, or else “50% per month” for short-term hyperinflation.

The most inflation we’ve ever suffered, in the 1970s, was less than 14% per year. Normally, it’s between 2% and 3%.

Right now, prices are going DOWN most months, not up. There isn’t even price stability now, much less price inflation.

But why would prices be going up OR down, in an unhealthy way?

Super-quick history:

Almost exactly 100 years ago, in 1907, the US suffered yet another in a long series of destructive depressions and panics, generally caused by money shortages creating runs on banks, price failures, stock market crashes, et cetera.

But this one was stopped dead in its tracks by a group of wealthy entrepreneurs who made very short-term loans to various financial groups, allowing banks to pay off depositors, et cetera. The result was the downturn cut short, never becoming a full-blown depression.

A brilliant lesson was about to be learned, but unfortunately government prevented that. Instead of a newish industry of short-term finance lenders/insurers springing up, the Federal Government announced it was going to act in that role, from now on. It created the Federal Reserve, which would use its coercive power to print imaginary new money to lend to financial institutions in times of crisis.

(Sadly, it did the opposite; it lent out newly minted money in good times, but tended to cut it off whenever there was a financial panic, which was the only time it was supposed to lend in the first place…this is part of what triggered the start of the Great Depression in 1929)

Well, the Fed is a whole other discussion, of course, so we’re going to skip ahead, now

Today:

So instead of lending out money during a crisis, the Federal Reserve increases the amount of money a few percent per year, lending it out in good times. This is part of why we have (usually moderate) inflation…the amount of money increases faster than the demand for goods, so there’s more money to spend than stuff to buy, and prices increase.

But from 2004 through 2008, the Fed did something it hadn’t done since 1938 when we went off the Gold Standard: It started DECREASING money supply:

(caption: Notice that M1, paper money and money in US banks, shrinks (goes below 0 growth) from 2004-2008)

(caption: Notice that M1, paper money and electronic money in US banks, shrinks (goes below 0 growth) from 2004-2008)

Notice that the most important line, the red M1, goes below zero (to shrinking money), and stays negative longer than it had been at any but one time in fifty years. And currency (actual paper money) falls lower than ANY time in that span.

This is because M3, which includes money in foreign banks, was going up so quickly: Money was fleeing the US because of our wars, and the 700% inflated oil prices, and our billions in new foreign aid. We would buy oil that should have cost a few hundred billion, but instead cost us trillions, and send the money for that oil to Saudi Arabia, and other foreign countries.

Over the course of four years, this added up to a shortfall of between two and three trillion dollars in the domestic US economy. That money was all overseas.

Here comes deflation

The Federal Reserve cannot possibly keep money supply balanced, as illustrated by the recent deflation

(caption: The Fed's monopoly could never work better than any other monopoly, and now it's produced deflation)

This didn’t even leave enough money to pay for our normal goods, much less allow the economy to grow…plus, of course, the cost of making things was shooting up from the high oil prices, as all things require energy, while there was LESS money to cover that universal new expense.

The result? Deflation, and therefore a money shortage, that led to the economic depression starting in 2008. There was not enough money to run the economy, so prices began FALLING, the US suffering what appeared to be a “loss” of about three trillion dollars. This was simply the change in prices to represent the trillions missing because of M1 shrinking for four years.

The Federal Reserve’s response? It actually CUT its offered money supply in 2008, by refusing to lend to banks suffering financial trauma…once again failing to act in its sole official role of “lender of last resort” as in 1907.

But it couldn’t keep that up, because deflation destroys a market economy.

So, once this cutting off of emergency money caused the banks to start failing, the Fed belatedly loosened its purse strings: It lend out over two trillion dollars to financial institutions, in just a few months.

Is It Enough to be Hyper?

Now if the Fed did this all the time, lending out a trillion dollars each month when the economy was just fine, we might really have hyperinflation.

But, instead, the Fed did this ONE TIME, starting from a money deficit of three trillion dollars.

So, in fact, what it did was produce enough new money to, hopefully, make up for the money shortage.

Being down trillions of dollars, then adding two trillion, could not make prices double every year. Or even once.

Even if there had been no shortage, two trillion is not enough to increase prices by 50% every month, nor 100% every year, because it is a fraction of the many trillions of dollars in our economy, and only happened one time. Hyperinflation requires more money to be printed even as prices are going through the roof, so that people come to expect it and overprice things ahead of time.

But, even if it had been enough to cause hyperinflation, there’s one last big factor:

Time delay.

How Long?

We can’t guarantee that there will be NO backlash from this infusion of money, until about 18 months have passed. Historically, changes in money supply take between 6 and 18 months to hit prices in an economy. It has to gradually spread throughout the system, being spent, invested, and saved over and again, until its full impact is felt and absorbed.

So we have until mid 2010 to see whether there are SOME effects from the unhealthy throwing of two trillion unearned dollars at our socialized banking institutions.

What About Government Spending?

For better or worse, it is actually impossible for government spending to “stimulate” an economy, at all. And since the current “stimulus packages” are financed by bonds and deficit, not the printing of money, they are actually DE-Flationary. Read the above link, to understand exactly why these things are so.

Sorry, Not Even Close

But, ultimately, whatever backlash there is, it cannot be hyperinflation. With an economy of, depending on how you count, eight to twelve trillion dollars, you can’t make prices jump even 50%, even for ONE month (and it must keep happening, to be hyper), by printing two trillion new dollars. Not even if there were not already deflation to counter.

The great danger, to this day, is deflation, not inflation, which can produce a long-term spiral of economic depression

The great danger, to this day, is deflation, not inflation, which can produce a long-term spiral of economic depression. What's worse, is that the Consumer Price Index, adjusted to compensate for annual cycles like Christmas spending and winter energy prices, showed deflation six months earlier than this chart.

July 25, 2009 Posted by | Economy, Politics | , , , , , , , , , , , , , , , | 26 Comments

   

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