Part III: Applications
The Federal Reserve’s Dual Mandate is the Phillips Curve.
It’s not that the Fed is charged with the impossible task of reaching a state of 2% inflation and full employment; rather, the Fed is trying to obtain these two goals, believing (according to the Phillips Curve), these goals come as a trade-off needing to be managed.
Chapter 7: The Fed’s Policies Since the 2020 Coronavirus Panic
In chapter 6 we summarized some of the major changes in how central banks have operated since the 2008 financial crisis. In the present chapter, we detail some of the even more recent changes in Federal Reserve operations since the onset of the coronavirus panic in March 2020.
The most obvious change in Fed policy has been the dramatic expansion of its balance sheet since March 2020.
Figure 1: Total Assets Held by the Federal Reserve
Senator Elizabeth Warren recently stated that rising prices were due to corporations increasing their profits. “This isn’t about inflation, this is about price gouging for these guys.” It is simply incorrect.
No, corporations have not doubled their profits, and rising prices are not due to the evildoings of businesses. If evil corporations are to blame for rising prices in 2021, as Elizabeth Warren says, I imagine that they were magnanimous and generous corporations when there was low or no inflation, right?
Paul Krugman is at it again, this time with a series of a series of tweets that repeatedly miss the reality of price inflation and its causes. Let’s take a closer look:
“Instead of protecting us, the State has delivered us and our property to the mob and mob instincts…. How can the State and the statist disease be stopped?” – Hans-Hermann Hoppe
The American regime has allowed its mask to drop. The state has shut down businesses and unleashed leftist mobs. It inflates away our currency and has weaponized our banks. It wants to politicize every aspect of our lives while eliminating any semblance of self-governance.
If the Senate follows the House of Representatives’s lead and passes the Immunization Infrastructure Modernization Act (HR 550), Americans who do not get the recommended number of covid vaccines can look forward to receiving a text like this: “This is Dr. Anthony Fauci. According to government records you have not yet received your monthly covid booster shot. Until you prove you are following vaccine protocols, your vaccine passport will be revoked, resulting in loss of your privilege to work, worship, and visit your family.”
It is a commonly accepted view these days that the central bank is a key factor in the determination of interest rates. By this way of thinking, the Fed determines the entire interest rate structure by influencing the short-term interest rates.
The central bank influences the short-term interest rates by means of the monetary liquidity. Thus, by buying assets the Fed adds to the monetary liquidity, thereby lowering rates. When it sells assets, the exact opposite takes place.
As someone who teaches public finance (better termed the economics of government), I can’t count how many times I have heard politicians promise “comprehensive” reforms to some major problem. But what such efforts actually produce is always different from what is promised, because such achievements are beyond government’s competence. The more comprehensive the “reforms” (say, measured by the number of pages in a bill), the more adverse incentives undermining social cooperation are created and the less freedom survives.
Chapter 6: Central Banking since the 2008 Financial Crisis
In chapter 4 we reviewed the textbook analysis of how a central bank buys government debt in “open market operations” to add reserves to the banking system, with which commercial banks can then advance loans to their own customers. However, in the wake of the financial crisis of 2008, the Federal Reserve and other central banks around the world adopted new “tools” (the term often used) to influence economic activity.
