Power & Market

Fed June Meeting: Misunderstanding Economics

06/18/2021Robert Aro

The June Federal Open Market Committee Meeting (FOMC) presented more of the same problem, the continual purchase of $120 billion in bonds a month and near zero interest rates. Only this time, the Fed increased the interest it pays on bank reserves from 0.10 to 0.15 percent. The stated purpose, per Chair Jerome Powell, was

in order to keep the federal funds rate well within the target range and to support smooth functioning in money markets.

This “smooth functioning” market explanation endorses the same proverbial green-light to all central bank interventions. If it wasn’t for the Fed, markets wouldn’t function properly, or at least that is the basis for all inflationist policies put forward by the Fed.

He goes beyond routine talking points, this time illustrating the complete disconnect between the central bank and reality. When discussing long-term (price) inflation expectations, he says:

They moved down during the beginning of the pandemic, you know, sort of further exacerbating concerns that we might find ourselves where, for example, the ECB and the Bank of Japan [have] been where you have expectations and inflation itself sliding down, and you have a really hard time stopping that process once it begins. So that was a concern.

Stated simply, there exists a belief that if prices of goods and services decrease, bad things happen. Indirectly, he is saying that in Europe and Japan, there was some sort of failure which led to prices decreasing. How bad it is there versus how bad it could be here is never articulated. The Fed aims to do things differently, intervening to make sure prices don’t “slide” down.

He continues:

So, it's good actually to see longer-term inflation expectations move back up to a range—it's a range that's consistent with what our objectives are.

Literally saying it’s good prices are expected to go higher in the foreseeable future.

His elation over inflation expectations ensues:

It's gratifying to see them having moved up off of their pandemic lows. And, you know, as you know, it's fundamental in our framework …

In a world ravaged by a government shutdown, where millions are rendered without jobs, claiming the cost of everything should increase in prices will make one’s life better remains without merit.

Often people say things like “it’s good for business,” or something only half thought out. They will only see the seller who has sold at a higher price and think this is beneficial, failing to consider the inputs the seller must pay to bring his product to production. Also there is the failure to realize the same seller must then go out and live in this world, consuming products, also now higher in price.

There is an unhealthy affixation to the perpetual increase in prices, as measured by a price index. That has been the cause for generational loss of purchasing power of our dollars, increase in debt levels and overall hardship for the masses.

The misunderstanding of economics doesn’t stop at prices. Listen to Powell as he shares a concern over the “full employment” mandate:

And I think during the last cycle, there were waves of concern that we were reaching full employment as early, you know, as 2012 when I arrived at the Fed …

There were “waves of concern” that full employment was coming earlier than anticipated, the supposed dreaded scenario of living in a nation where too many people are all working at once, creating businesses, manufacturing goods or providing services for the needs and wants of others. The America of 2012 must have been so bad with all these people working, according to the chair.

Ultimately, it doesn't matter whether the Fed is a clandestine force operating nefariously against public interest, or whether they are so high in their ivory tower really believing they are a force for positive change; we may never know what is said behind closed doors. What we can say for certainty is that not only are they not taking us in a direction towards prosperity, liberty and freedom, but they are steering us, with all of their might in the exact opposite direction.

Until this becomes both proverbial and literal front page news, “they” will continue to win, and everyone not closely tied to them will continue to lose.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Frank Buckley on Secession

06/16/2021David Gordon

Because of the deep division in America between red states and blue states, there has been much talk of secession. Is the United States too big? Would people be happier in smaller communities? Frank Buckley, a distinguished professor at the Scalia Law School, breaks with most of his fellow legal academics by taking these questions seriously. In a recent article in the American Mind, he suggests that secession today would be difficult but not impossible. “As I argued in  American Secession (2020), a civil war would be unlikely, and we’d be more likely to see a pacific James Buchanan in the White House than an indominable Abraham Lincoln.”

Against those who argue that secession is unconstitutional, Buckley offers some strong arguments: “Finally, the legal barriers to secession are weaker than most think. Originalists on the Court would recognize that the framers had thought secession permissible, while its more liberal members would find it difficult to ignore the expressed wishes of voters in a state. Is an indissoluble union a more fundamental constitutional norm than democracy? Canada and Great Britain posed that question, and answered no. While the Supreme Court held that secession was unconstitutional in Texas v. White, that was a decision of a unionist Court right after the Civil War. Moreover, the decision assumed that the 1781 Articles of Confederation, which spoke of a “perpetual” union, had survived when the Constitution was adopted. Had that been the case, however, the Constitution would not have been ratified until the last state signed on in 1790, and George Washington’s election two years earlier would have been a nullity.”

Buckley is someone who “thinks outside the box,” and we badly need this quality today.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Fauci and the Fed: America's Technocratic Frauds

05/18/2021Tho Bishop

This past March, Dr. Anthony Fauci sparred with Dr. Rand Paul over any public health benefit that came from wearing a mask if one had developed immunity to the virus. In dealing with both a democratically elected senator and a medical doctor, Dr. Fauci was dismissive and condescending. He demonstrated the degree to which he held himself higher than the Senate.

Dr. Fauci was also wrong.

A medical expert in Dr. Fauci’s position losing a debate on the science to an ophthalmologist—even one of Dr. Paul’s great reputation—would itself be enough to declare them a fraud.

But Dr. Fauci is much worse than a fraud; he is a technocrat. He doesn’t see himself as simply someone to explain “the science” of the virus but appointed himself a covid czar. He leveraged the corporate press’s personality cult and used it to manipulate the public to behave the way he wanted them to behave.

He prioritized control over presenting the science.

He also has no shame in doing this. He has repeatedly boasted about it to his devoted followers in the media.

For example, this morning, Fauci explained on ABC that his wearing masks indoors was about optics—not science.

I didn’t want to look like I was giving mixed signals but being a fully vaccinated person, the chances of my getting infected in an indoor setting is extremely low.

This is not the first time Fauci has given himself the authority to act beyond "the science." Last December, Fauci started changing his claims about the necessary rates of vaccination to achieve a state of postcovid normality. The original aim of 70 percent was moved as high as 90 percent. As Fauci explained to the New York Times:

When polls said only about half of all Americans would take a vaccine, I was saying herd immunity would take 70 to 75 percent…. Then, when newer surveys said 60 percent or more would take it, I thought, "I can nudge this up a bit," so I went to 80, 85. We need to have some humility here…. We really don’t know what the real number is. I think the real range is somewhere between 70 to 90 percent. But, I'm not going to say 90 percent.

America has subjected itself to a lost year of economically devastating, mentally abusive policies—all based on the authoritarian impulses of a learned ignoramus.

This has also become the norm for Washington’s imperial federal government.

While Fauci’s thirst for the camera has made him an easy target for ridicule, most of the true power of the federal government rests in the hands of similar unelected “experts.” For all the arguments that can be made against democracy, it is in these unelected institutions of power that we have seen the most aggressive expansions of state power in pursuit of the most radical policies.

Take the institution most challenged now by the success of Fauci-ism: the Federal Reserve.

Though he doesn’t make enough television appearances to earn his own progressive prayer candle, Jay Powell has received his own fawning praise from the slice of the corporate press that follows the Fed. Senate Democrats have even begun to push for Biden to keep Powell on board when his term comes up next year.

Outside the Beltway, however, Americans are feeling the impact of inflation. Google searches for “inflation” hit record highs in March, long before the 4.2 percent reported increase in the Consumer Price Index (CPI). Perhaps an American consumer seeing their paycheck buy less and less would be comforted by the fact that inflation is precisely what the Fed has been explicitly calling for.

Of course, the consequences of the Federal Reserve’s unprecedented monetary policy go beyond simply the devaluation of money. The Fed’s low interest rate policy has massively increased risk in the financial system by depriving investors—both large and small—of safe, conservative investment options. Doing so has been great for large corporations, which have seen stock prices soar since 2008, both richly rewarding CEOs and subsidizing attempts to purchase smaller potential competitors. Those Americans who just wanted to simply save money, avoid debt, and avoid the volatility of the stock market have been less lucky.

At least they can look forward to funding the bailouts when the collapse of a stock market bubble ends up designating Facebook a systemically important company.

Even better, the Federal Reserve continues to give itself greater and greater authority to expand its mission far beyond monetary policy, with policy aims such as “greening the financial system.”

These bold and aggressive power grabs come in spite of the fact that the Fed’s own actions have repeatedly demonstrated that it has no idea what it is doing. Examples include not only the inability to identify the financial crisis in 2008 but its failure to reverse quantitative easing (QE)—as it repeatedly claimed it could do—and its repeated inability to forecast economic growth. The Fed has gone from one crisis to another, expanding its power, creating new tools for itself, and without any clear or coherent vision or economic theory.

Just like Fauci and the other parts of America’s technocratic class.

As the Trump era showed, the problem of these unelected policy czars is not solved simply by a presidential election. They are embedded deep within the structure of the federal government. To reign them in, we either need systemic change or pressure from the states.

Ultimately, what forced the Centers for Disease Control and Prevention (CDC) to break itself from the propaganda of Dr. Fauci were the counterexamples offered by Florida and other open states, which were grounded in science rather than a personality cult. While it is easier for a state to nullify public health guidelines than it is to separate a state from America’s central bank, we have seen states like Wyoming and Texas take legislative action to promote alternatives to the Fed.

Hopefully, the example of Dr. Fauci will help kill some of the faith in “policy experts” that government schools spend so much time instilling in the public.

Image source:
Wikimedia
When commenting, please post a concise, civil, and informative comment. Full comment policy here

From Christianity to Black Power, Rothbard Offers a Unique View

04/08/2021Lipton Matthews

Judged by the sheer quality and volume of his intellectual output, Murray Rothbard was a genius. Though we reflect on the ingenuity of his peculiar intellect—we must never forget that Rothbard was the master of defying stereotypes. Unfortunately, many assume that libertarians are hostile to Christianity, but it was Rothbard who admitted that “[t]he greatest and most creative minds in the history of mankind have been deeply and profoundly religious, most of them Christian.” Rothbard also informed readers that the Spanish Scholastics made a pivotal contribution to economics.

Christianity

Rothbard in several articles and books refuted the uncharitable characterization of late Scholasticism as intellectually barren. In his article “New Light on the Prehistory of the Austrian School,” Rothbard asserts that we owe religious thinkers a debt of gratitude for laying the foundations of modern economics. Despite popular belief, late medieval thinkers and not Adam Smith offered the first systematic justification for modern economic theories. Rothbard writes of the Scholastics: “It was the sixteenth-century Spanish Scholastics who developed the purely subjective and profree-market theory of value. Thus, Luis Saravia de la Calle denied any role to cost in the determination of price; instead, the market price, which is the just price, is determined by the forces of supply and demand, which in turn are the result of the common estimation of consumers on the market. Saravia wrote that 'excluding all deceit and malice, the just price of a thing is the price which it commonly fetches at the time and place of the deal.'”

Notably, the Spanish Scholastics were remarkably sophisticated in applying supply and demand analysis to money. Rothbard writes of the Dominican Martín de Azpilcueta Navarro: “Citing previous Scholastics, Azpilcueta declared that “money is worth more where it is scarce than where it is abundant…. Because “all merchandise becomes dearer when it is in great demand and short supply, and that money, in so far as it may be sold, bartered, or exchanged by some other form of contract, is merchandise and therefore also becomes dearer when it is in great demand and short supply.”

This analysis is illuminating because Azpilcueta provided relevant examples: “We see by experience in France, where money is scarcer than in Spain, bread, wine, cloth, and labour are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labour were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce than where and when it is abundant.”

The Black Power Movement

Rothbard was such an objective analyst that he could even appreciate the political aspirations of the Black Power movement. Unlike many on the right, he noted that “the goals and means of civil rights were statist and Liberal to the core.” Rothbard argued that the failure of civil rights to change the hearts of men resulted in an awakening among black activists, who recognized that they could not force racists to tolerate their demands. As a result, instead of lobbying for integration, these leaders thought that it would be prudent for blacks to create communities free of white control, and Rothbard supported them in this regard in a popular essay: “The Negroes began to turn, and turn swiftly, from the old Liberal ideal of compulsory integration to another tradition that had previously lingered, underground and un-respectable, at the core of the Negro community. This was the idea of black nationalism, an idea that had always appealed, not to the educated and articulate Negroes, but to the poorest inhabitants of the ghetto. The black nationalist idea came to the fore in the 1920s with the phenomenally popular Marcus Garvey.”

Rothbard felt that the circumstances of the 1960s justified black separatism: “For a time many conservatives were enthusiastic about black nationalism…. The conservatives were overjoyed with the nationalist and Muslim emphasis on Negro self-help, thrift, dignity, and pride, in contrast to the old ideals of coerced integration from above. But there is one thing that the conservative proponents of black nationalism overlooked: self-help, pride, thrift, Negro businesses, etc. are all well and fine. But they cannot hope to flourish within the context of the black reality in America: permanent oppression by the white 'power structure.' None of these good and libertarian things can be achieved without first and foremost, getting the white-run U.S. and local and state governments off the backs of the Negro people.”

Nationalism and National Liberation

Although libertarians frequently condemn nationalism, Rothbard held that in some cases nationalism can result in the liberation of oppressed groups. As he contends in a 1966 essay: “There are two contrasting types of nationalism: a desire to liberate an oppressed nation from the chains imposed by another nation (a movement for 'national liberation'); as against a desire to aggress against other nations and impose one's own national domination upon them…. One is a libertarian form of nationalism, the other an invasive, profoundly anti-libertarian form. A Negro nationalist movement in present-day America is a movement for national liberation; any white insistence on thwarting such a movement is an example of white imperialism. Such are the qualitative differences within the concept of nationalism.”

In his radicalism, Rothbard posited that black Americans were a colonialized people and needed to be free from the clutches of the state. Specifically, urban renewal activists and school administrators are singled out for criticism in his controversial piece on black power. Rothbard details the negative effects of urban renewal on black communities: “All good Liberals, not so long ago, used to admire urban renewal as a means of helping the poor and bringing esthetics to the city. Now, radicals and some conservatives are beginning to agree (in another burgeoning form of 'Left-Right' coalition) that urban renewal is really a vast subsidy to the real estate interests at the expense, not only of the taxpayer which was always evident, but also of the poor themselves, who are summarily kicked out of their homes by the urban renewal bulldozer, and forced elsewhere, redoubling the slums there. If they try to move into the new urban renewal housing, they find that there is far less space available, and at much higher rents than they were paying before. And so, more and more people are coming to recognize 'urban renewal' is really 'Negro removal'—for urban renewal has been concentrated in the Negro ghetto areas.”

He is equally critical of administrators: “The compulsory attendance laws force all of the youth of the country, regardless of their talents or inclinations into this vast prison-system, and the teachers and administrators are their guards and wardens. The oppression lies much the heaviest in the urban Negro areas, where so many children are not inclined toward schooling and where racism as well as hatred for working-class mores are given full rein by the school staff, armed with the power of compulsory education to force their charges to stay in school. No wonder that Negro youth are embittered by their enforced stay in the system.”

So, Rothbard continues to confound even in death. For example, the average person who has not read his publications would assume that he had no interest in Christian philosophers. And as expected people under the spell of liberal delusions believe that he was a racist without assessing his ideas. However, Rothbard was a giant among men and an exceptionally articulate defender of black sovereignty.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Fedcoin to the Rescue?

04/05/2021Robert Aro

Listen to the Audio Mises Wire version of this article.

It could take several years. But “Fedcoin'' is on its way and soon will be our reality. The question is: Will Fedcoin make our lives easier or just the Fed’s?

The Federal Reserve Bank of Boston is currently working with Massachusetts Institute of Technology (MIT) on the project, with the first step expected to be revealed for the fall, as explained in the Wall Street Journal on Wednesday. We’ve been offered some details as to the direction it seems to be aiming, drawing similarities to private cryptocurrencies without the mining costs:

The Fed staffers say their efforts are mindful of private offerings but don’t seek to replicate them. For instance, the creation of Fed digital dollars wouldn’t mimic the energy intensive mining system seen in some private offerings …

Should Fedcoin require no mining, create faster transmission, have less expensive transaction fees and provide more security over existing USD, it will quickly gain widespread acceptance.

If mandated by Congress, the Fed could substantially replace most US dollars with the new digital dollar. After accounting for US government debt levels, a large percentage held by government entities and the Fed itself, the Fed could hold the supply of all Fedcoins constant, indefinitely. A new “gold standard” would be achieved, one requiring no gold.

As Rothbard said, there is no “gold fetish.” The purpose of the gold standard was not to get rich from an appreciation in price; rather, the idea was to ensure money could not be created without substantive backing.

Of course, the idea of a return to a gold standard sounds nothing short of science fiction anyway. Instead, this is what we are to expect, as another Wall Street Journal article explains:

These Fed “digital dollar” accounts would be set up as a way to speed payments to households that need support.

This was supported by an economics professor from Dartmouth, Andrew Levin, who said:

Fed accounts “would be a very significant improvement” in getting money speedily to those who need it most …

Unfortunately, from the early looks of it, Fedcoins will be used for fast expansionary capabilities, to give to those who are deemed worthy of government support.

If the USD was held at a constant supply, there would be no risk of hyperinflation, no boom and busts. There would be far less malinvestments, such as trillions spent on companies buying back their own shares. As for “the people,” rather than watch their purchasing power erode year after year, the cost of living would go down. They could actually accumulate savings.

Contrast this to the worldwide hyperinflation we’ve seen, yet ignored, for generations. Consider the status quo America, where government proposes trillion-dollar stimulus bills every other month, phrases like “debt doesn’t matter” have been normalized, all endorsed by the Federal Reserve System, which spends billions of dollars in salaries for economic planning with ideas ranging from antiquated to flat out “half-truths,” for perpetual balance sheet expansion.

The launch of a new currency gives us an opportunity to start over, to a certain degree, where we can learn from the past to build a better future.

True, the notion of holding the money supply constant is a foreign concept to most. That’s only because we’ve lost a fair bit of knowledge and economic history over the years. But just because the gold standard is not widely understood does not mean it’s not a viable solution.

If Fedcoin offers a choice between inevitable destruction (from exponential increases to the money supply) versus an unknown future under honest money, the choice shouldn't be difficult. Sadly, it seems nearly impossible to convince central planners that sound money is a better path forward. Unless there is a dramatic shift in society and the Fed’s expansionary monetary policies are reigned in, the digital dollar will be destined to expand simultaneously, if not at a quicker pace than the existing US dollar; and the opportunity for real societal change will be lost.

Image source:
Getty
When commenting, please post a concise, civil, and informative comment. Full comment policy here

Fed Profit = Society’s Loss

01/15/2021Robert Aro

Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:

$88.5 billion of their estimated 2020 net income to the U.S. Treasury.

Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.

Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…

The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.

Interest income on US Treasurys and MBS is hardly new. But this line item is:

The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.

This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.

As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.

The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.

If this wasn’t confusing enough, it gets better:

We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”

In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:

$517 million to fund the operations of the Consumer Financial Protection Bureau.

And the payout to banks:

Statutory dividends totaled $386 million in 2020.

Numerous questions should come from this: 

These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.

Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.

It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Food Prices Soaring

01/13/2021Robert Wenzel

The latest data from the Bureau of Labor Statistics shows twelve-month food prices climbing at a 3.9 percent annualized rate for 2020.

Overall price inflation for the same period, as measured by the government's Consumer Price Index, rose 1.4 percent.

Bottom line: the goods people are buying during this lockdown period such as food are soaring.

The advance in food prices was pretty much across the board.

All subcategories from cereals to fruit showed gains far in excess of the Federal Reserve's "target" inflation of 2 percent. But, hey, if you don't eat, price inflation is not as high.

In the EPJ Daily Alert, I am warning that as the lockdowns ease, price inflation across the board will rise to meet the advance in prices we are seeing in food prices.

Hug your gold coins.

Reprinted from EconomicPolicyJournal.com.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Fixating on Consumer Prices While Ignoring Asset Prices

06/25/2020Robert Aro

For most fields of study, the goal is to progress ideas and seek truth. This doesn’t seem to be the case in economics.

It’s not just the Fed; it’s the entire global community. The Central Bank of Sweden recently shared a press release showing they have similar concerns to the Fed and want to facilitate the “supply of credit” while striving to hold market rates down. The bank further stated the difficulties faced with interpreting its inflation statistics during times of pandemic, noting:

For one thing, prices have been lacking for certain goods and services, as these have not been consumed, and for another thing the actual consumption by Swedes during the pandemic does not correspond to the weights in the consumer price index. Quite simply, the Swedish people have bought more toilet paper and fewer trips abroad than the weights in the consumer price index imply.

The problem with measuring “inflation” has also been expressed by the Bank of Canada. It’s not just the relative weights which are problematic, but also the volatility of the data that impacts the “inflationary experience” of the Consumer Price Index sample size, making interpretation difficult:

in any given month, the CPI can be quite volatile and not reflect its long-term trend. That’s because prices of items such as fresh fruit and vegetables or gasoline can jump around a lot, affecting the CPI.

Especially since “these aren’t normal times,”

Canadians are spending much less on gasoline and air travel, and more on food purchased from stores. And until very recently, they weren’t spending anything on haircuts. The implication is that the CPI isn’t fully reflecting people’s current inflationary experience.

In formulating an arbitrary basket of goods to include items such as gasoline, fruits, vegetables, and toilet paper and then assigning an arbitrary weight of relative importance to these items, central bankers obsess over consumer prices while ignoring asset prices such as those of stocks, bonds, and real estate.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Fed Accountability Is a Farce

06/19/2020Robert Aro

The Fed claims they are “accountable to the public and the U.S. Congress.” But what good is accountability if the public and Congress have little understanding of what the Fed does? Even worse, if no one has the power to stop the inflationary actions of the Fed, what good are the accountability measures in place?

This week, Chair Jerome Powell addressed Congress and provided the June Monetary Policy Report. The process of testifying before Congress is very much farcical, because what the Fed says has no bearing on what the Fed does. We can assume that few members of Congress actually understand monetary economics. But what if many of them did, as well as the general public? Could the Fed really get away with all of this?

Reviewing the chair’s testimony to Congress reveals how little the Fed and Congress know about economics and illustrates how ineffective testimony before Congress really is.

In his speech, Powell lists many of the lending programs (Paycheck Protection Program, Main Street Lending Program, and Term Asset-Backed Securities Loan Program), but when it came to corporate bond–buying programs, all he offered was:

To support the employment and spending of investment-grade businesses, we established two corporate credit facilities.

Like a teenager trying to hide purchases made on a parent’s credit card, he did not explicitly list the Primary and Secondary Corporate Credit Facilities by name. He only said “two corporate credit facilities,” the only two the Fed has. How issuing debt to corporations or trading their bonds on the stock exchange supports employment or spending is anyone’s guess. What does it matter, anyway? Even if he said that $750 billion may go to buy corporate bonds, who would stop them?

He moved from vagueness to deception quickly with the statement:

The tools that the Federal Reserve is using under its 13(3) authority are appropriately reserved for times of emergency. When this crisis is behind us, we will put them away.

What will the Fed say ten years from now, when “the crisis” is long behind us but the Fed is still using these emergency lending facilities? Or is the crisis not meant to end?

Powell then cited the economic report:

As described in the June Monetary Policy Report, these purchases have helped restore orderly market conditions and have fostered more accommodative financial conditions. As market functioning has improved since the strains experienced in March, we have gradually reduced the pace of these purchases.

We have yet to get details on an “orderly market” or “accommodative financial conditions,” but it’s safe to say that neither the Fed nor Congress really knows what this means.

Chair Powell is not the only central banker who seems to have never read Mises. Vice Chair Richard Clarida also discussed monetary policy this week in a speech,  noting:

To me, price stability requires that inflation expectations remain well anchored at our 2 percent objective, and I will place a high priority on advocating policies that will be directed at achieving not only maximum employment, but also well-anchored inflation expectations consistent with our 2 percent objective.

Of course, unpacking the issue with a “2% inflation” and “maximum employment” objective would require effort to understand and refute. We can only imagine how few members of society have actually done this.

Just like his boss, the vice chair also stressed how temporary the new programs will be:

these are, after all, emergency facilities, and someday—hopefully soon—the emergency will pass.

Unfortunately, whether “emergency” or not, we can be sure of one thing: the Fed’s balance sheet can never decrease again, as it will lead to “liquidity” and other unbecoming issues of a nonfunctioning market—stock market decline, a decrease in the price of bonds, rising interesting rates, etc. We’ve crossed the rubicon.

Accountability means nothing if those you are accountable to have little understanding of what you say or the ability to affect the outcome. Few elected officials, or anyone in a position of power, have either of the two.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Five Ways Policymakers Get Cause and Effect Backward

There are many reasons why socialism fails everywhere and every time it is tried. One primary reason is the propensity of socialists to confuse the cause and effect relationship. Due to this confusion, the remedies put forth by socialists and Keynesians try to solve the effect instead of tackling the cause. It is analogous to treating symptoms instead of the disease.

In this article, I will highlight this tendency with a few examples and show how government does damage to society through misguided actions arising out of this confusion between cause and effect.

One: Economic Growth Is Stimulated By Increasing the Circulation of Money

In a healthy economy, more money circulates in the economy because consumers buy more products and businesses invest more to produce new products and services.

Cause = healthy economy

Effect = higher circulation of money

Keynesians, however, assume the relationship holds in reverse. That is, they think that higher rates of economic growth can be generated by promoting faster circulation of money. Thus follows the misguided Keynesian prescriptions of ultralow interest rates, quantitative easing, capital injections, bailouts, and deficit spending to combat recessions.

Two: Eliminating Cash Transactions Leads to Higher Economic Growth

Recently, the government of India imposed on its people a misguided policy called “demonetization” in an effort to promote a “cashless economy.” The logic is as follows: in developed nations, people mostly use electronic monetary transactions with relatively few cash transactions. Therefore, eliminating cash transactions and forcing people to use electronic transactions will lead to healthier economic conditions similar to those of developed nations.

In truth, in poor nations people predominantly use cash because monetary transactions are too low in value to justify investment in infrastructure to support electronic transactions. As an economy grows and people get wealthier, the average cash transaction will be high enough to justify electronic transactions. So, the relationship is the other way around. Higher economic growth leads to elimination of cash transactions.

The misguided policy of the Indian government is leading to disastrous economic consequences for poor people in India, who rely on small cash transactions in their daily lives.

Three: Deadly Diseases Lead to Poor Economic Growth and Higher Poverty Rates

In what regions of the world are people least affected by diseases like malaria, dengue and cholera? Developed nations. Even in nations with high poverty rates, people who are well off are less susceptible to these diseases, because they can afford medicines, hospital care, and prevention measures such as mosquito repellents and environments free of stagnant water, where mosquitos can breed.

Eliminating diseases does not lead to economic growth. Many deadly diseases such as smallpox and polio have been eliminated. Many charitable organizations invest in disease prevention and health improvement initiatives. The Gates Foundation invests heavily in reducing infant mortality in India. Jimmy Carter has been successful in raising billions of dollars for health education and disease prevention in Africa. Yet these initiatives and billions of dollars make little difference in improving the macroeconomic conditions in poor nations.

What Africa and India need are conditions that stimulate rapid economic growth. As people become richer they can afford better medical care and better living conditions that help them fight diseases and stay healthier.

Diseases do not cause poverty. Poverty is the reason for the higher prevalence of deadly diseases.

Four: Proliferation of Small Firearms is Impeding Economic Development in Africa

Peter Thum, an American entrepreneur and “humanitarian,” was so appalled by the proliferation of guns and other small firearms in Africa that he started a company called Founderie 47 to tackle the problem. His company buys small firearms from Africans, destroys them, and uses the recycled parts to make high-end designer watches and jewelry that sell at prices ranging from $25,000 to $200,000. The funds thus obtained help in the procurement and destruction of thousands more weapons.

Behind Thum’s venture is the assumption that the proliferation of firearms is causing the youth of Africa to participate in destructive civil wars instead of engaging in economic activity that will improve the well-being of Africans.

Brilliant idea? Not so fast! Peter Thum’s got it backwards. The reason the youth of Africa are picking up firearms is because they don’t have jobs. In other words, lack of economic development is the reason for the proliferation of firearms, not the other way around.

Believe it or not, given a choice between a decent job and joining a group of militants, almost all people will choose jobs.

Five: Illiteracy leads to Poverty

What is the most important thing that India needs to eliminate poverty? “Education,” replied a friend of mine. By “education” he meant formal school and college education.

Most people in India believe that lack of education is why poor people are unable to escape poverty. So, the Indian government, which is always dominated by socialists regardless of which party is in the majority, allocates billions of rupees towards providing schooling and college education at a highly subsidized cost. As people get better education, they can get jobs and thus escape poverty. Right?

Wrong! Take Cuba and Nicaragua, for example. The communist governments of these countries launched massive campaigns to eliminate illiteracy. They were successful in almost eliminating illiteracy decades ago. Yet, Cuba and Nicaragua today are among the poorest nations in the world, with per capita GDP rankings of 128 and 165.

This is another example of socialists confusing the cause and effect relationship. Illiteracy in Cuba and Nicaragua was high because of poverty. As people's economic conditions improve, they prefer to obtain better education for their children. This is what happened in the four Asian tigers—Korea, Taiwan, Hong Kong and Singapore—over the latter half of the twentieth century.

Treat the Disease, Not the Symptoms

Illiteracy, the prevalence of deadly diseases, violent civil wars, and uncontrolled population growth are all effects of poverty, which stems from low economic growth. They are not the causes of low economic growth. All of them can be eliminated by creating conditions for rapid economic growth.

The easiest and fastest way to achieve high economic growth rates is through free enterprise systems and free markets. Let’s create free market conditions, such as less centralized government control (democratic and dictatorial), and more free trade. Good things will follow.

Image source:
Piqsels
When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2