Some folks at The Heartland Institute’s home office thought my little email exchange about Keynesian vs. Austrian economics, the Federal Reserve, etc., with Dick Ewing of Winthrop, Wash., worth publishing for all to see. Here it is.
Mr. Ewing wrote:
I can not find any publications on financial reform that discuss what the pathway from Keynesian economics to the Austrian school of economics as represented by Hyak (sic), Mises etc. It seems that now is the time to discuss disbanding the Federal Reserve central banking system and returning the coining and printing of money to Congress and tying the value of money to the actual capital created by the economy rather than creating artificial wealth out of debt.
Please advise and direct me if my observation is in error and you (sic) position on this matter.
I agree with you. Just yesterday I gave a presentation about entitlement spending, and of course the issue of government debts and deficits came up.
I said: “Does anyone remember when people in this country used to mock Soviet central planning? Well, central economic planning is what we have with the Federal Reserve.”
I pointed out how the Fed tries to manipulate interest rates, money supply, employment, inflation, etc.
I pointed out how money backed by nothing eventually becomes worth nothing. The Fed has an official inflation target of 2 percent. That means if we earned a dollar on January 1 of this year, on January 1 of 2012 that dollar has become worth 98 cents. And that’s assuming the Fed hits its target, which is a huge if.
Because of the Fed’s official policy to erode the value of our money, combined with its policy of holding interest rates to near zero, we receive almost no return on whatever money we manage to save. With real inflation being much higher than official inflation (because the official inflation measure does not count items including food and energy), the value of our money is eroding faster than 2 percent a year.
Government loves inflation because inflation rewards borrowers, and the US government is the world’s largest borrower. Our state and local governments combined are the world’s second-largest borrowers. Inflation rewards them because they are able to repay their borrowed money with cheaper money.
Inflation punishes savers, people who live on fixed incomes, and investors because it reduces the value of their savings, retirement accounts, and investments. Many of these stock investors are deluding themselves. They see highs in the Dow and S&P and get excited, but those are nominal highs. Even with “gains” in the stock market, there are many years when the gains fail to keep up with inflation — real inflation — not the manipulated inflation measures the government uses. And there are many years when stock market gains fail to keep up with the government’s official inflation rate![I was going to add a sentence or two here on easy money causing booms which lead to busts, but I got distracted and forgot to add it when I returned to the email.]
The Fed pours money into the bank accounts of whichever institutions it likes, and then those institutions use that money to acquire whatever assets they like. Eventually that money works its way into the rest of the economy, to people like you and me. But by the time it reaches us, we must pay higher prices because the people and institutions who received the money first bid up prices. They were able to buy low, forcing us to buy high.
The Fed’s manipulations and money printing are harming the nation and the world. This is what I think, anyway.
As for publications that might help you . . . I would suggest
1) The Independent Review, edited by Austrian school economist Robert Higgs of the Independent Institute.
2) The Quarterly Journal of Austrian Economics, published by the Mises Institute. Mises.org has a huge amount of material on Austrian economics. Mark Thornton edits the Quarterly Journal of Austrian Economics and often contributes to my Finance, Insurance & Real Estate News publication.
3) The Mercatus Center of George Mason University
Also, you might find this article from FIRE News amusing: “Blind Monkey Could Have Managed Money Better than the Federal Reserve” article amusing. I recently ran it in my publication:
Last month several newspapers picked up this attack on the Federal Reserve that I wrote in The Washington Examiner.
Last week I wrote this attack on the Fed.
Hope this helps.