Monetary Policy

In spite of the declared “independence” of the Federal Reserve from the political control of either Congress or the White House, America’s central bank is a branch of the U.S. government that is responsible for setting monetary policy.

Several major central banks around the world, including the Federal Reserve in the United States, have set a goal of two percent price inflation. The problem is, what central bankers are targeting is a phantom that does not exist.

There is little that happens in society in general and the market economy in particular that most on the political “left” do not think needs more government intervention, regulation, and redistribution to make “better.”

Financial markets in the United States and around the world are all waiting with “bated breath” for when the Federal Reserve modifies its “easy money” policy and starts to raise interest rates. No one, however, asks a simple question: Why is the American central bank in the interest rate setting business?

For more than a decade, now, Federal Reserve policy has been guided by the fear of one economic bogyman: the presumed danger of “price deflation.” The fear is unfounded and the inflationary “solution” only leads to disaster.

Since the economic crisis of 2008-2009, the Federal Reserve – America’s central bank – has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road.

Forty years ago, during the week of June 15-22, 1974, the Austrian School of Economics was reborn during a conference in the small New England town of South Royalton, Vermont. Why was this important? Because the economists of the Austrian School have developed the most persuasive understanding of why only economic freedom can give mankind both liberty and prosperity.

For more than two hundred years, practically all of the leading advocates of individual liberty and free markets have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation. They have been wrong on this important issue.

Ninety years ago, on November 15, 1923, the Great German Inflation came to an end when the monetary printing presses were finally shut down, and the economic havoc came to an end. Its lessons are worth remembering.

Transparency, therefore, has little to do with being accountable to the political branches of government. It’s about allaying the concerns of the financial market in the face of accommodative monetary policy.

Did Janet Yellen,
(1) see any problem in the housing bubble,
(2) anticipate the bursting of the housing bubble; and,
(3) anticipate its implications for the U.S. economy?

The answers are (1) no, (2) no, and (3) no.

“Money doesn’t grow on trees, you say? That outdated notion is where you went wrong. Today’s paper money IS trees.”

The other day I came across a good review of Edmund Contoski’s  latest book, The Impending Monetary Revolution, The Dollar and Gold, at Feathered Quill Book Reviews. An excerpt from that…