Mises Wire

Two Arguments Against the Fed We Should Make Over and Over

Populism is the order of the day. And one particularly ripe populist issue is the Federal Reserve, which Americans quite reasonably think is complicit with Wall Street banks and the Treasury Department in creating an elite class that makes far more money than it should. While the details of how this occurs mechanically are complicated, it’s no crime for working people not to follow the Fed’s every move or understand the intricacies of its relationship with commercial banks.

The question is how anti-Fed libertarians might take this vague sentiment, seen among both Trump voters and Occupy Wall Street/Bernie Sanders supporters, and make hay of it. How do we make our fundamental criticisms of central-banks more meaningful to average Americans, while steering the debate away from deeply misguided anti-capitalist sentiment? Simply saying “End the Fed” sounds extreme and scary to many, but simply arguing about the details of this or that pronouncement by Janet Yellen allows our opponents to frame the debate from their status quo perspective.

Two ideas suggest themselves:

  • First, we should never tire of repeating the simple truth that, yes indeed, the dollar has lost 90% of its purchasing power to monetary inflation since the Fed was created. This is not a complicated argument, and it especially rings true with older people who remember how much they paid for homes, cars, appliances, and the like many decades ago. It is also easy to depict visually, as the St. Louis Fed chart above shows. And it requires no conspiratorial bent to accept: one prominent hedge fund manager from a firm you would recognize told us he has a printout of this chart taped next to his monitor as a constant reminder that the only returns that matter to his investors are returns net of inflation.
  • Second, we should consistently remind people that inflation is a tax-- and a regressive tax at that. Defenders of the Fed frequently respond to the point above by reminding us that people don’t just stuff money in mattresses, but rather earn interest via simple bank deposits or returns via investments. Never mind that these same Fed defenders routinely support near-zero, zero, or even negative interest rates when it comes to FOMC policy decisions. But the salient point is this: the difference between the interest rate one earns on a simple money market or savings account and the real inflation rate is effectively a tax. Whether you believe government inflation statistics or alternate statistics as compiled by Shadowstats.com, you are losing money by holding it in an account that pays interest at a rate below inflation. The loss is the “Fed tax.”
    Suppose today you put $100,000 in a bank account that pays zero interest. Even if the Fed magically targets and holds inflation exactly at 2% for the next decade, in ten years you will need nearly $122,000 to buy what $100,000 buys today. This Fed tax is also highly regressive, because people with less wealth and financial acumen tend to hold savings in cash, simple checking accounts, or 401(k)s. Wealthier individuals, meanwhile, have diversified portfolios and can chase yields through more sophisticated equity and bond investments. Retirees suffer as well, because it’s harder for them to go out and find new sources of earned income. The Fed tax is real, and it is easy to explain to average people.

With these two points in mind, libertarians and Austrians should embrace anti-Fed populism. It is not inherently anti-capitalist or anti-intellectual, but rather grounded in truth: the Fed is a ripoff that leaves most Americans worse off. But how we explain the details of that ripoff matters.

Jeff Deist is president of the Mises Institute. He previously worked as a longtime advisor and chief of staff to Congressman Ron Paul. Contact: email; twitter.

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