Power & Market
The Fed’s Exit Strategy (in 2009)
Over a decade ago, on July 21, 2009, then Federal Reserve Chair Ben Bernanke wrote an article in the Wall Street Journal titled The Fed’s Exit Strategy. His words are all too familiar, starting with his opening sentences:
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero.
He follows with:
We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
On July 28, 2021, as if continuing where Bernanke left off, current Fed Chair Jerome Powell explains many years later:
These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In instances of a national housing crisis or global pandemic, money is supposedly injected into the system to prevent catastrophe. The flow of credit must have been so bad it required the Fed’s balance sheet to reach $2 trillion in July of 2009. It continued to expand ever so steadily, where it now sits at $8.3 trillion.
So, what happened to the Fed’s exit strategy?
In his letter, Bernanke wrote:
At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.
Given the tremendous expansion in asset purchases since 2009, it’s difficult to know when exactly the exit strategy commenced.
See the Fed’s balance sheet below:
According to Bernanke, the Fed devotes:
…considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
Sadly, like pulling troops out of a foreign nation, withdrawal is something which never comes easily.
He offers several ideas on how the Fed can be less accommodative, such as paying interest to banks on reserves held at the Fed or offering reverse repos, whereby the Fed sells a security to a bank with the promise to buy back the same security at a higher price. Per Bernanke, providing risk-free profits to wealthy intuitions will raise short-term interest rates and:
...limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Unfortunately, the average person cannot access the Fed’s easy money programs, yet the average person is forced to accept these programs may create an “inflation problem." Beyond perusing an old speech, wondering how society got here, Bernanke’s speech serves as a reminder that there really is no such thing as a Fed Exit Strategy.
In the realm of possibility, the Fed could one day dramatically reduce its balance sheet, no longer looking to control rates no matter the cost. However, nothing indicates this would be done voluntarily. Whether Bernanke, Powell, or the Chair who follows, no matter what the Fed says about tapering, tightening or tinkering with interest rates, they will never lift their foot from the gas pedal.
The Fed sets the rules to a game we all must partake in (as long as we use their dollars), therefore they have no incentive to ever stop playing. They have no desire to slow down the money creation scheme beyond a mild transient period. Raising rates is off the table, maybe even indefinitely. It follows, they will continue using Fedspeak to make excuses, justifying their interventions and trying their best to keep the general population unaware that this monetary experiment will not end well.
Some of us may want a truly free market, but those with the most power and influence appear to be in no rush of finding this anytime soon. Price discovery will have to wait for another day…
The Government's "Sovereign" Power to Tax and Print Money
Our Federal Government’s Balance Sheet: Putting the Cart Before the Horse
The Financial Report of the U.S. Government for 2020 included a balance sheet with $6 trillion in assets and $33 trillion in liabilities, leaving a negative net position of about $27 trillion. Those reported liabilities exclude tens of trillions of dollars of unfunded obligations in Social Security and Medicare under current law and policy, indicating the $27 trillion in negative net position is far too optimistic.
In other words, the balance sheet paints an alarming picture. Introducing the balance sheet, however, the government’s report offers the following comforting words:
There are, however, other significant resources available to the government that extend beyond the assets presented in these Balance Sheets. Those resources include stewardship PP&E in addition to the government’s sovereign powers to tax and set monetary policy.
So we should rest easier about our government’s financial position because our government can take our money and inflate the value of our dollars away?
That may not be so comforting, but there is a more fundamental issue here.
We are told that the “powers to tax and set monetary policy” are “the government’s sovereign powers,” with a possessive “s” on “government.” Ironically, this assertion arises in a document serving as a vehicle for securing the accountability of government to We the People.
Sovereignty, Accountability, and Federal Government Accounting
The federal government of the United States issues an annual financial report every year. The results in the report are now framed by accounting standards issued by the Federal Accounting Standards Advisory Board (FASAB), an entity created in 1990. FASAB issues two main types of pronouncements – concept statements and accounting standards. Concept statements do not include specific authorities, but lay out guiding principles for the standards and their interpretation.
FASAB issued its first concept statement in 1993, titled “Objectives of Federal Financial Reporting.” The statement identified three main goals, and the first was to “demonstrate accountability to internal and external users of federal financial reports.” A “Background and Rationale” discussion included, first and foremost:
The federal government derives its just powers from the consent of the governed. It therefore has a special responsibility to report on its actions and the results of those actions. … Providing this information to the public, the news media, and elected officials is an essential part of accountability in government.
Chapter two of the first concept statement lists 11 “unique characteristics” of the federal government relating to accounting principles, and the first one discussed is titled simply “Sovereignty.” It begins:
The federal government is unique, when compared with any other entity in the country, because it is the vehicle through which the citizens of the United States exercise their sovereign power.
That statement is footnoted with the following illuminating ideas:
The word “sovereign,” much discussed by legal and political philosophers, is used here in its broad, popular sense to imply (1) internally that the people are the ultimate (if indirect) overseer or authority in the decision-making process of a democratic state and (2) externally that the state is autonomous or independent.
So, according to this fundamental concept statement, the people are the ultimate authority. This suggests that the government should reconsider staking a claim to possessing “sovereign” powers to tax and set monetary policy, especially in a document securing government’s accountability to the real sovereign, the people.
Legal and Accounting Plunder
In articulating his concept of “legal plunder,” Frederic Bastiat wrote in The Law that:
But, unfortunately, law by no means confines itself to its proper functions. … The law has been used to destroy its own objective … The law has placed the collective force at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty, and property of others. It has converted plunder into a right, in order to protect plunder.
Similarly, our government’s financial reporting has been used in practice to “destroy its own objective.”
Over time, both Ludwig von Mises and Friedrich Hayek grew leery of placing too much faith in popular sovereignty, given how the exercise of power through the government could undermine higher values. However, as regarding the fundamental relationship of the people to their government, I think both Mises and Hayek would defend popular sovereignty in principle.
In a novel and valuable recent interpretation of the 10th Amendment, Elizabeth Anne Ross concluded:
The Tenth Amendment ought to protect popular sovereignty—as it protects state sovereignty—by serving as a source for robust judicial review of federal and state laws that infringe on popular sovereignty. … By ignoring the people in the Tenth Amendment, American jurisprudence has ignored a vital structural protection against federal and state tyranny and risked government-driven erosion of democracy in America.
When our federal government’s financial report similarly ignores the people in its identification of government’s possession of “sovereign powers to tax and set monetary policy,” American accounting joins jurisprudence in risking government-driven erosion of democracy, greasing the wheels of tyranny.
That’s One Small Step for a Man, One Giant Leap for Mankind
Our government’s assertion that it possesses the sovereign powers to tax and to set monetary policy first appeared in the annual report for 2000, in the following words:
There are, however, other significant resources available to the Government that extend beyond the assets presented in this Financial Statement. Those resources include Stewardship Assets, including natural resources (see Stewardship Information on pages 45-53) and the Government’s sovereign powers to tax, regulate commerce, and set monetary policy.
In other words, back in 2000 the report included the power to regulate commerce among the resources possessed by the government. Beginning in 2007, under the signature of Treasury Secretary Henry Paulson, the Government added the “power to print additional currency” among the sovereign powers it possessed beyond the assets presented in the balance sheets.
In 2012, however, the powers to regulate commerce and to print currency were not to be found:
There are, however, other significant resources available to the Government that extend beyond the assets presented in these balance sheets. Those resources include the Government’s sovereign powers to tax, and set monetary policy.
So it went until the financial report for 2018, when a small but significant change arrived.
Those resources include Stewardship Land and Heritage Assets in addition to the government’s sovereign powers to tax and set monetary policy.
They stopped capitalizing the “G” in “Government!” It’s been a small “g” since 2018.
That’s one small step for a man. But the objectionable sentences remain. The next giant leap could be to eliminate those two sentences completely.
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The Swiss National Bank’s US Stocks: $162 Billion and Counting
Every quarter this past year I’ve provided updates on the stock holdings of the Swiss National Bank (SNB). Comment sections, internet chat boards, social media, and various articles about the bank reveal many people don’t understand the significance of its anticapitalist actions nor the problems this creates.
Understand, the SNB is not a “bank” in the traditional sense of a deposit-taking institution open to the general public. Rather, it’s Switzerland’s central bank, where profits are derived, much like at the Fed, with a variety of inflation (i.e., money creation) schemes. Regarding their US equity holdings, they ultimately create francs which are converted to USD to buy US stocks in the open market.
Those who champion a free market maintain that a central bank shouldn’t be in the profit-making business, if it should exist at all. Its activities lead to price distortion, interest rate manipulation, currency expansion, and the boom/bust cycle, to name just a few ill effects.
According to the SNB’s June 2021 Q2 statement:
The profit on foreign currency positions totalled CHF 44.5 billion.
The notes say just over half of their profit is due to price gain/loss on equity securities and instruments. But there is an additional benefit. Many of these holdings pay dividends, as explained:
Interest and dividend income amounted to CHF 3.8 billion and CHF 2.0 billion respectively.
Not only can the bank buy equities with newly created money but they stand to earn dividend income from the stocks, practically in perpetuity.
Their recently filed 13F statement shows the bank amassed $162 billion in US stocks, up from $150 billion from last quarter.
This is no cause for celebration. This legal counterfeiting can and has only been defended using the equivalent of Fedspeak, but by Swiss central planners. In his latest official public address in June, Chairman Thomas Jordan unapologetically said the SNB will
remain willing to intervene in the foreign exchange market as necessary.
Meaning he’s willing to debase the franc for as long as he sees fit. His rationale is that
[t]he Swiss franc remains highly valued. Our expansionary monetary policy provides favourable financing conditions, contributes to an appropriate supply of credit and liquidity to the economy, and counters upward pressure on the Swiss franc.
The failure is this continued belief that the franc is valued too highly in relation to other world currencies. The SNB either thinks the market is valuing the currency incorrectly, so they must fix this error, or that the market price is correct but they’re looking for a way to game the market to win what they consider an advantage. Both require the bank to “intervene in the foreign exchange market as necessary.”
Their expansionary monetary policies, which currently includes a negative 0.75 percent deposit rate, provides ideal financing conditions, apparently. Of course, there is no calculation to prove this.
Similarly, that the SNB knows the “appropriate supply” of credit/liquidity required to value the franc below what the market dictates follows the same problem of using impossible calculations.
They may claim these are their reasons. But they’re actually excuses used to give an air of legitimacy to their inflationist policies, as if a handful of planners knew what’s best for an entire nation and the course of action they must take on its behalf. Unfortunately, the SNB's interventionism not only impacts those living in Switzerland but also those holding US stocks, who must compete with the relentless buying pressure only a central bank can afford to create.
Luckily, when you’re a central bank with a stock portfolio of $162 billion, you’ll find very few people bothered by your actions. And so, another quarter concludes; the value of their holdings increases, the open market purchases continue, and there is no end in sight, not now, not any time soon, and maybe not ever.
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The Roots of Concord and Discord
In Abraham Lincoln’s June 16, 1858, speech upon being chosen as Illinois’ Republican nominee for U.S. Senate against Stephen Douglas, he cited Jesus’ words in the Bible that “a house divided against itself cannot stand.”
Today, that principle is once again an ominous portent for America. We have piles of politicians who claim they will unify us, protecting us from division (e.g., President Biden’s promise to be a leader who “seeks not to divide, but to unify”), but the only unity they really offer is the creation of slight and unstable majorities who wish to benefit themselves at others’ expense. Such unity is really tyranny.
That is why we also could benefit from remembering Lincoln’s reason for his house divided language: “I want to use some universally known figure, expressed in simple language as universally known, that it may strike home to the minds of men in order to rouse them to the peril of the times.”
Leonard Read, creator of the Foundation for Economic Education, also echoed that house divided language and the seriousness of the problem it highlighted for America, in his “The Roots of Concord and Discord,” Chapter 8 in his 1975 The Love of Liberty. The reason? It was abundantly clear to him that our house was seriously divided.
The house we call America is divided against itself, as is evident to anyone who has eyes to see and ears to hear. Discord is rampant…If our house is to stand, concord must replace discord and, if this is to be accomplished, we must practice the way of life that leads to harmony.
What is the essence of the contrasting roads to discord and concord that Read recognized? Dictocratic determination versus free markets.
What road are we now treading? It’s the road to serfdom. Day by day and in nearly every way, we move nearer to omnipotent government, the totalitarian state--dictocrats by the millions telling us how to live our lives.
When discord is rampant, we’re on the wrong road; when concord prevails, we’re on the right one.
What is the road in the opposite direction? It is the free market, private ownership, limited government way of life. Not a single dictocrat [with] those in government confined to invoking a common justice and keeping the peace…no man-concocted restraints standing against the release of creative human energy.
Read then evaluates dictocratic determination and the discord--disunity in more modern terms--that results. That discord is created by attempts to coerce people into conformity with dictocrat wishes against their will.
Why does the road featured by dictocrats lead to discord? And why does the road in the opposite direction, featured by a free and self-responsible people, lead to concord?
The road to serfdom--socialism, the planned economy, the welfare state, call it what you will--is featured by millions of dictocrats…each trying to make over society in his image.
In view of their dissimilarities, it is instructive to reflect on what dictocrats have in common…no doubt that were he to direct the whole economy it would be improved…politically applied know-it-all-ness.
Note the mess we’re in--the failures more apparent each day. And the discord! With millions of dictocrats advancing as many or more panaceas--all at odds--how could it be otherwise!
All that the dictocrats can possibly do to modify their mistakes…is to attempt something less bad. But not so bad is error still!
The seed is socialism; the fruit has to be discord!
Each individual of the…dictocrats…assesses himself as the focal point of wisdom….[But] every assumed focal point of wisdom [is] at odds one with the other. Discord!
The ability of individuals to freely choose for themselves with their own resources is what converts the discord created by dictocrats into concord. All parties whose rights are involved must agree to the arrangements made, rather than some uniting with one another to violate others’ rights.
What then is the way of life that leads to harmony? It is every man pursuing his legitimate--intelligent--self-interest, that is, acting any way he pleases so long as his way does not impair the rights of others to be their creative selves.
This reflects the importance of understanding that in a world where agreement on who should get how much of what is beyond our potential--because in a world of scarcity, more for me at your expense, which is the vast majority of political determination, will seldom achieve your voluntary agreement. There is no real unity in that direction.
However, despite our disagreement on myriad aspects of who should get what, we share far greater unity about what we do not want to happen to us. None of us wants what John Locke called our “lives, liberties and estates” violated. Each of us wants our rights and property defended against invasion. That protection expands our joint freedom to peacefully pursue our goals.
As Lord Acton put it, “liberty is the only object which benefits all alike, and provokes no sincere opposition,” because freedom to choose for ourselves is always the primary means to our ultimate ends. That is why the traditional functions of government are to protect us from abuse, which Acton recognized as requiring “the limitation of the public authority,” because creating added rights and privileges for some at the expense of others’ rights--the mainstay of dictocrats--makes government itself the most dangerous predator.
Well-established property rights and the voluntary market arrangements they enable let individuals decide for themselves, limiting each of us to persuasion rather than coercion. And since we all want persuasion rather than coercion used when it comes to ourselves, the kind of unity that is impossible in allocating “who gets what” becomes possible when it comes to “rules of the game” we all prefer for ourselves.
Reflect on…how we may switch from the kind of actions that produce discord to the way of life that leads to concord…[where] liberty is a blessing to everyone.
Coercion in every instance [is] the root of discord…Is it any wonder that discord rather than concord is dominant!
These people who exercise coercion see only the “advantages” of their special privilege, of their coercion.
The remedy is nothing less than an eye-opening performance…the seeing at once of a delusion and of a truth.
The delusion?...that the dictocrats’ coercive tactics are responsible for life being as good as it still is. That which is seen! The truth? That the free flowing of creative energy--liberty--is the source of human welfare. That which is not seen!
Leonard Read thus saw that the transition from the discord we know to the concord we could have involved expanding people’s ability to choose for themselves, under private property rights, rather than dictocrat coercion into different choices. That requires better protection for our rights than we receive today. And while that would not eliminate our disagreements on many things, it would stop them from threatening our society.
Concord can replace discord. It is only a matter of seeing. When seen, our house will no longer be divided against itself.
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The Fed’s Failure to Launch
The July Federal Open Market Committee (FOMC) meeting this week had many interesting sound bites and a lot of Fedspeak, as is typical from one of the nation’s most powerful central planners, talk of the Fed’s “liftoff” being among them. Don’t bother looking in any textbook in search of an economic model or the theory behind liftoff; there is none.
It began when a reporter pressed Fed Chair Jerome Powell on his inflation target, asking:
In your opening statements in March and April, you noted that a transitory rise in inflation above 2 percent this year would not meet the threshold of moderately exceeding 2 percent for some time, and I noticed you didn't repeat that qualification last month or today. And so, in your view, has the rise in inflation this year met the threshold of moderately exceeding 2 percent for some time?
Exceeding the inflation target, or average inflation targeting, where the Fed purposely overshoots inflation to make up for previous years of low inflation, is an idea whose origins started with central bankers. It is not an economic theory.
It’s curious the Fed spent over a decade aiming for its (arbitrary) 2% target, yet earlier in the year warned us that if the target were met, they still wouldn’t consider the goal achieved...
Powell responds to the reporter:
That would, again, be a question for the Committee. But I would really say the guidance that you're talking about is really the guidance to do with liftoff, right? That's -- what the guidance is for liftoff…
Liftoff occurs when we have:
… labor market conditions consistent with full employment, inflation at 2 percent and on track to run moderately above 2 percent for some time.
However (per the Chair of the Federal Reserve):
It really isn't relevant now.
Concluding with:
It -- because we're really -- we're looking at tapering asset purchases. We're clearly a ways away from considering raising interest rates. It's not something that is on our radar screen right now. You know, so when we get to that question, when we start to get to the question of liftoff, which we are not at all at now or near now, that's when we'll ask that question. That is when that will become a real question for us.
Said plainly, the Fed is in no rush to taper asset purchases. When Powell speaks of tapering, he’s referring to the decrease of $120 billion a month in bond purchases. This is very different from actually shrinking the balance sheet which seems entirely off the table. As for raising rates, that will also be at an indeterminate time in the future. When these goals are to be met remains both immeasurable and unknown to everyone outside the Fed’s committee.
Consider humoring all the Fed plans. It may take months or years, but the Fed’s accommodative stance is expected to continue until its goals are achieved. Once sufficiently met, liftoff (tightening) will commence. It’s a big if but assuming this happens exactly as the Fed hopes, how long until the Fed capitulates its liftoff, citing a new crisis, a recession, or other external factor attributed to anything else except the Fed?
The cycle comes full circle. Once the tightening starts, it’s only a matter of time until the Fed will have to reverse course, engage in expansionary monetary policies yet again, citing another new economic crisis. Due to the accumulation of past interventions and its compounding effects, regardless of whether the Fed is on an expansionary or tightening stage, the current trajectory is a path ensuring everything increases, as the idea of any sort of a deflation clearly is not on the agenda. If there is a liftoff, it will come in the form of higher prices for all we hold dear, as over time, the money supply, national debt, asset prices, and the prices of goods and services will continue to “liftoff” in unimaginable ways.
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The Federal Reserve Cannot Help America
Over the weekend, Yahoo Finance Editor-in-Chief Andy Serwer wrote an article titled: How the Federal Reserve can really help America. His error is as old as the word “Socialism” itself. The author seems genuine in wanting a better society, but his misguided belief is that the way there is through better planning from the government and the Fed. Unfortunately, this is asking for something unachievable, as history has shown.
He opens with a nod to central banking, saying the:
Federal Reserve has greatly aided our economic well-being (by cushioning us from and even helping us avoid economic catastrophe)…
It’s understood the Fed tells us that without their interference in the free market, society would be a worse place; but multiple generations of Austrian authors have written to the contrary. Specifically, about the boom/bust cycle central banks cause through the interference of the money supply and interest rates, which most impacts vulnerable members of society. Yet the warnings go unheeded.
He says things like:
The Fed’s boosting of the economy by keeping interest rates low disproportionately helps rich people and thereby actually disadvantages those in need.
The revelation can be applauded. But Mises, Rothbard, Hayek, Hazlitt, to name a few of a long list of authors, have been saying this and much more for a very long time. Why aren’t their ideas further explored?
A difficult passage comes from an associate professor at University of Chicago, Michael Weber, who, according to the author, says:
It’s important to note here that low rates and goosing the economy does help people of color, lower educated women and other less wealthy groups… It’s just that it benefits the already advantaged more.
In an era where statues are being torn down and maple syrup has become offensive, it’s shameful to think comments from an academic like Mr. Weber go unnoticed. That a handful of experts are paid to support a system which plans the economic landscape for “people of color” and “lower educated women” is highly disrespectful.
Despite mentioning “inequality” nearly 20 times, the author never defines specifics that can be resolved. The article continues with various opinions on how intervention can be used to address inequality, with no clear message other than the Fed should do something, which always boils down to money creation or interest rate manipulation.
The hope of using money creation to create a more just society is actually a very old tactic known as “inflationism.” Mises discussed this over 100 years ago, the various problems with tinkering with the money supply and how it ultimately hurts society. That the Fed’s metaphorical money printer be halted is not even considered by the author.
By the end, one question illustrates the problem the author missed completely, asking:
What if the Fed, Treasury Secretary (and former Fed chair) Janet Yellen and congressional leaders from both parties, convened a summit on how the federal government should address inequality?
The appeal to a higher power is tempting. But it neglects over a century of Fed intervention, the boom/bust cycle, perpetual loss of the dollar’s purchasing power, asset bubbles, and abysmal track record governments have with creating solutions to our problems.
A desire to ameliorate economic disparity is commendable. But because it’s the government and the Fed who creates the disparity, the request is little more than appeal to popular hope and emotion. The author even cites some of the Fed’s missteps, but instead of asking to stop central planning, he asks for a better central plan.
He is asking that a mix of elected and unelected officials, by way of taxation or money creation, confiscate or create money to disburse to certain members of society, as well as manipulate interest rates to help those deemed most in need. The hope is that this new allocation of funds and changes to rates will make for a better society.
Congress mandated the Fed the tasks of full employment and price stability; but we must delve deeper to understand this. The goals can only be reached when the Fed says they are reached, as judged by measurements known only by the Fed. Although there is no such thing as an optimal money supply or an ideal interest rate, the Fed insists on controlling these on behalf of the nation; both being tasks that hundreds of millions of market participants can do better than any central bank.
If free market solutions to America’s economic problem are not considered, the alternative will always be a call for more socialism, except this time, it’s definitely going to be done right.
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The Fed’s “Special Topics”
This week, Federal Reserve Chair Jerome Powell gave two days worth of testimony before Congress. As part of his testimony, he presented the Monetary Policy Report July 2021. With this week’s major economic news flow undoubtedly being that (price) inflation, as measured by the Labor Department, is on the dramatic rise, it’s easy to lose sight of the Fed’s “special topics” outlined in Powell’s report.
The report mentions:
The labor force participation rate (LFPR) has improved very little since early in the recovery and remains well below pre-pandemic levels.
But this seems strange. Just last month various news outlets, including CNBC, had headlines to the effect of:
Job openings set record of 9.3 million as labor market booms.
The Chair doesn’t mention job openings but provides various reasons why the LFPR is down, including the explanation that the:
level of unemployment insurance benefits may also have supported individuals who withdrew from the labor force.
Imagine an America where individuals must choose between working to receive a salary or not working and still receiving a salary….
Powell moves on to price increases, noting:
Consumer price inflation has increased notably this spring as a surge in demand has run up against production bottlenecks and hiring difficulties.
The concept of “bottlenecks” continues to take a large part of the blame for the increase in prices lately. However, what level of bottlenecks should be across all industries, whether they should exist at all, and what the Fed can do to manage said bottlenecks hasn’t been specified by Powell.
“Inflation expectations” are another area the Fed tries best to manage, as the notes to the report specifies:
Inflation expectations are often seen as a driver of actual inflation, which is why a fundamental aspect of the FOMC's monetary policy framework…
Inflation expectations have been on the rise. Yet various surveys, expert opinions, forecasters and market-based measures allow the Fed to understand inflation expectations, which in turn drive “actual inflation” doesn’t add up. If it were that easy, there shouldn’t be any inflation problems in the USA, or anywhere else in the world. If inflation expectation only influences a portion of the actual inflation numbers without knowing whether that influence is 1% or 99%, the Fed will have no concept as to how effective its efforts to influence opinions really are.
Lastly, there remains “the balance sheet.” Per Powell’s report:
The Federal Reserve's balance sheet has grown to $8.1 trillion from $7.4 trillion at the end of January, reflecting continued asset purchases to help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Of all the Fed’s special topics, this remains the most stunning: that we live in a society where $8 trillion has been lent out by a central bank on the basis of fostering a smooth and accommodative market. What can hardly be explained in great detail has become the Fed’s guiding principle, responsible for the increase in the money supply and suppression of interest rates for a very long time. The response from mainstream economists, members of government and the public remains deafening. Either they don’t understand or don’t care enough to demand that the Fed’s hand be halted. And if they do understand the problem, at the present time they remain in a position to do little about it.
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The Ideology of Victimism
Luke Burgis’s Wanting: The Power of Mimetic Desire in Everyday Life (St. Martin’s Press, 2021) is a popular exposition of the theories of the great French thinker René Girard. The book includes a passage that is of great value in understanding contemporary politics. “Obviously, the defense of victims is a good thing. At the same time, it brings new dangers. In the same way that scapegoating rituals in archaic religions were entirely practical—that is, they were used to achieve practical ends—so too can the defense of victims be used for practical purposes, James G. Williams, in his foreword to one of Girard’s most well-known works, I See Satan Fall Like Lightning, attempted to sum up Girard’s thinking on this point. ‘Victimism uses the ideology of concern for victims to gain political or economic or spiritual power.’ he wrote. ‘One claims victim status as a way of gaining advantage or justifying one’s behavior.’ Victims now have the power to make new scapegoats of their own choosing. An open and honest memory is needed to prevent that power from becoming tyrannical” (pp. 128–29).
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The Fed Is Trying to Gaslight the World—It Won’t Work
Good news, everyone, the inflation that Americans are witnessing daily is temporary. That is, at least, what our enlightened technocrats at the Federal Reserve are desperately trying to convince the rest of the world of. The latest reassurance that there is nothing to be concerned about comes from Atlanta Federal Reserve Bank president Raphael Bostic, who claimed Wednesday that “much of the data recently has come in stronger than I expected.”
As Reuters reports, Mr. Bostic told reporters:
“GDP is on a strong trajectory. Inflation is higher and has been well above our target,” with the economy growing at 7% and inflation at 3.4% compared to the Fed’s 2% target.
Oh, he also noted that inflation is likely to last longer than he had originally thought. As he explained in an interview with NPR:
Now the one thing you said, which is something that we are looking at, is that when I talk to businesses, they are saying that it's going to be temporary. Still, temporary is going to be a little longer than we had expected initially. So rather than it being a two- to three-month, it may be a six- to nine-month factor. And this is something that we're going to have to pay attention to see if that changes how people approach the economy.
Going even further than Mr. Bostic is his colleague from Dallas, Robert Kaplan, who thinks that the economy is performing so well that the Fed may even need to consider soon “doing some things to take our foot gently off the accelerator sooner rather than later.”
The meaninglessness of these words should be obvious to anyone who has followed the Fed the last decade. Of course, the Fed does not have a monopoly on meaningless words emerging from the mouths of our technocratic class—what may concern Americans is the degree to which the Fed is counting on this PR campaign as a vital tool to prevent the financial crisis 2020 has created.
After all, along with the explicit tools with which it conducts monetary policy—such as open market operations, the discount rate, and reserve requirements—one the Fed takes just as seriously is its communication strategy. Since the 2000s, the Fed has actively viewed “forward guidance” as a tool that can allow it to alter economic behavior. As the Federal Reserve’s website explains:
When central banks provide forward guidance about the future course of monetary policy, individuals and businesses will use this information in making decisions about spending and investments. Thus, forward guidance about future policy can influence financial and economic conditions today.
To those ends, the Fed has created various communication tools—such as its dot plot—to illustrate the various forecasts for future economic performance from a variety of Federal Reserve governors and regional bank presidents. While the central bank sold this as an act of “transparency,” it is better understood as deliberate propaganda. In an age where an army of bots move markets based on financial Twitter, every future projection shared by a Fed official instantly has an immediate impact on economic behavior in the real world.
As such, the goal of public comments from Federal Reserve officials is always to convince the public that there is nothing to fear—the experts have things covered. Inflation is temporary. Growth is coming. All is well—no matter the economic struggles you yourself may be feeling. To do otherwise would may itself spark the very sort of crisis that the Fed fears.
This does not necessarily mean that either Mr. Bostic or Mr. Kaplan are cynical in their public statements. It is quite possible that both men sincerely believe their rose-colored forecasts and believe that America’s central bank is well positioned to steer the economy out of choppy waters. After all, government propaganda is most effective when it comes out of the mouths of those who truly believe it.
Unfortunately, the Fed’s biggest problem has been getting results to match their optimism.
Since 2010, the Fed has habitually overestimated future economic growth. Even more concerning, the Federal Reserve has repeatedly failed to follow policy timeframes it has set for itself in the past to reverse previous emergency policies.
As Jeff Deist noted in 2016:
Fed critics, again mostly Austrians, have argued since 2008 that "normal" monetary policy would never return, that QE would never be unwound and that artificially low (or even negative) interest rates were here to stay. In other words, that the Fed and its 300 Ivy League economists don't know what to do other than kick the can down the road another few months while hoping for a miraculous economic recovery.
Fast forward to today, and the recovery hasn't materialized. And Fed officials, current and former, are singing a different tune about ever restoring the balance sheet to pre-2008 levels.
The closest the Fed has come since was a slight bump in interest rates—still historically low—at the peak of the economic performance of the Trump administration, which provided policy relief in the form of regulatory and tax cuts. Even then, however, Jerome Powell’s modest attempts to leverage this meaningful economic growth to unwind the Fed’s intervention had to be reversed in early 2019 due to the adverse reaction in financial markets.
So, again, even prior to global economic shutdowns that massively disrupted supply chains, eviscerated small businesses, and put millions out of work, the Fed was lying through their teeth about the tools at their disposal to appropriately handle economic distress.
The question then is, what happens if we face an economic crisis at a time when the Fed is out of ammo for its current arsenal of policy tools?
Well, we can count on them giving themselves even more power—which has always been the primary justification for trying to replace cash with central bank digital currency (and why we should expect escalation from central banks against private cryptocurrencies.)
We can also be assured that they will promise they know exactly what they are doing.
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The Road to Authoritarianism is Paved with Fiat Currency
Last week, the Federal Reserve announced it will maintain an interest rate target of zero to 0.25 percent for the rest of 2021. The Fed said it will also continue its monthly purchase of 120 billion dollars of Treasury and mortgage-backed securities.
Some Fed board members are forecasting a rate increase by late 2022 or 2023, though with the rate still not reaching one percent. The Fed will neither allow interest rates to rise to market levels nor reduce its purchase of Treasury securities. A significant increase in interest rates would make the government’s borrowing costs unsustainable.
The Fed also raised its projected rate of inflation to three percent, although it still insists the rise in prices is a transitory effect of the end of the lockdowns. There is some truth to this, as it will take some time for businesses to get back to full capacity. However, the Fed began taking extraordinary measures to prop up the economy in September of 2019, when it started pumping billions of dollars a day into the repo market that banks use to make short-term loans to each other. The lockdowns only postponed and deepened the forthcoming Fed-caused meltdown.
Germany’s Deutsche Bank recently released a paper warning about the Federal Reserve continuing to disregard the inflation risk caused by easy money policies designed to “stimulate” the economy and facilitate massive government spending. Germans have reason to be sensitive to the consequences of inflation, including hyperinflation. Out-of-control inflation played a major role in the collapse of the German economy in the 1920s, which led to the rise of the National Socialists.
This pattern could repeat itself in America where we have already witnessed the rise of authoritarian movements. Last summer, groups exploited legitimate concerns about police misconduct to foment violence across the country. Can anyone doubt that an economic crisis that leads to mass unemployment, foreclosures, and maybe even shortages will result in large-scale violence? Or that the violence will be exploited by power-hungry politicians? Or that many people will once again fall for the big lie that preserving safety requires giving up their liberty?
The apparatus of repression already exists in the form of a surveillance state, police militarization, and big tech’s cooperation with big government to stamp out dissent. Now, President Biden and his congressional allies want to use the January 6 US Capitol turmoil to justify expanding government powers in the name of stopping “domestic terrorists.” Part of this new campaign is expanding censorship of “extremism,” defined as any views that threaten the status quo. The Biden administration has taken a page from the Communist playbook in suggesting people report their friends and family who are becoming “radicalized.”
We may still have time to prevent collapse in America, or at least to make sure the collapse leads to a transition to a free society. The key to success is spreading the ideas of liberty until we have the ability to force the politicians to dismantle the welfare-warfare state and the fiat money system that is the lifeblood of authoritarian government.
When commenting, please post a concise, civil, and informative comment. Full comment policy here
When commenting, please post a concise, civil, and informative comment. Full comment policy here