Two Arguments Against the Fed We Should Make Over and Over

[Suzanimal]

Jeff Deist

Populism is the order of the day. And one particularly ripe populist issue is the Federal Reserve, which Americans quite reasonably think is complicit with Wall Street banks and the Treasury Department in creating an elite class that makes far more money than it should. While the details of how this occurs mechanically are complicated, it's no crime for working people not to follow the Fed's every move or understand the intricacies of its relationship with commercial banks.

The question is how anti-Fed libertarians might take this vague sentiment, seen among both Trump voters and Occupy Wall Street/Bernie Sanders supporters, and make hay of it. How do we make our fundamental criticisms of central-banks more meaningful to average Americans, while steering the debate away from deeply misguided anti-capitalist sentiment? Simply saying "End the Fed" sounds extreme and scary to many, but simply arguing about the details of this or that pronouncement by Janet Yellen allows our opponents to frame the debate from their status quo perspective.

*CHART YOU CAN VIEW AT LINK*

Two ideas suggest themselves:

First, we should never tire of repeating the simple truth that, yes indeed, the dollar has lost 90% of its purchasing power to monetary inflation since the Fed was created. This is not a complicated argument, and it especially rings true with older people who remember how much they paid for homes, cars, appliances, and the like many decades ago. It is also easy to depict visually, as the St. Louis Fed chart above shows. And it requires no conspiratorial bent to accept: one prominent hedge fund manager from a firm you would recognize told us he has a printout of this chart taped next to his monitor as a constant reminder that the only returns that matter to his investors are returns net of inflation.

Second, we should consistently remind people that inflation is a tax-- and a regressive tax at that. Defenders of the Fed frequently respond to the point above by reminding us that people don't just stuff money in mattresses, but rather earn interest via simple bank deposits or returns via investments. Never mind that these same Fed defenders routinely support near-zero, zero, or even negative interest rates when it comes to FOMC policy decisions. But the salient point is this: the difference between the interest rate one earns on a simple money market or savings account and the real inflation rate is effectively a tax. Whether you believe government inflation statistics or alternate statistics as compiled by Shadowstats.com, you are losing money by holding it in an account that pays interest at a rate below inflation. The loss is the "Fed tax."

Suppose today you put $100,000 in a bank account that pays zero interest. Even if the Fed magically targets and holds inflation exactly at 2% for the next decade, in ten years you will need nearly $122,000 to buy what $100,000 buys today. This Fed tax is also highly regressive, because people with less wealth and financial acumen tend to hold savings in cash, simple checking accounts, or 401(k)s. Wealthier individuals, meanwhile, have diversified portfolios and can chase yields through more sophisticated equity and bond investments. Retirees suffer as well, because it's harder for them to go out and find new sources of earned income. The Fed tax is real, and it is easy to explain to average people.

With these two points in mind, libertarians and Austrians should embrace anti-Fed populism. It is not inherently anti-capitalist or anti-intellectual, but rather grounded in truth: the Fed is a ripoff that leaves most Americans worse off. But how we explain the details of that ripoff matters.

https://mises.org/blog/two-arguments-against-fed-we-should-make-over-and-over

See also..

http://www.ronpaulforums.com/showth...skyrocket-for-middle-class-goods-and-services

 

[The Gold Standard]

That's a nice thought, but the average American can barely wipe his or her own ass. We would have to dumb this down quite a bit.

 

[Zippyjuan]

Second, we should consistently remind people that inflation is a tax-- and a regressive tax at that.

If there was no central bank what would the inflation rate likely be? Zero percent? Is there a money or banking system which has not experienced inflation we could replace the Fed with?

 

[Origanalist]

Donald Trump would end the fed.

 

[osan]

If there was no central bank what would the inflation rate likely be? Zero percent? Is there a money or banking system which has not experienced inflation we could replace the Fed with?

The issue is not one of central banks per sé, but of the actual currency system in question. An honestly and competently administered central bank could in theory do the job correctly. Unfortunately, theory and practice are at wide mutual variance where central banking is concerned. That aside, a currency system that employed actual money would be far more likely to remain stable in terms of purchasing power. Real money is a store of value. Currencies such as FRNs are not money at all, but rather DEBT INSTRUMENTS. This means that inflation is built into them such that it cannot be avoided.

If all the money in the world was represented by a single dollar bill and the Fed loans it to you at an annualized 3% on a one-year term, where prithee tell does the $0.03 come from when the note comes due? This is a question few people even know to ask, much less ask it. This example illustrates with stark and simple clarity the nature of the American (and other) currency system. It is a SCAM up one side and down the other.

Another problem even well-experienced investors do not see, much less understand, is that the apparently lower returns produced in an environment of real money is no handicap at all, but rather an advantage in that the real economic power of those returns are actually equal to or greater than the numerically superior counterparts of the non-money currency systems. There are several dimensions to this, but this is not the place to discuss those.

Suffice to say that with real money, if the host economy is experiencing low growth or even deflation, the correspondingly diminished returns will not in fact result in net losses in the purchasing power of investor asset bases precisely because the deflationary phenomenon will render the unit purchasing power of the money higher than it had been before. Who cares if your investment returns shrink if the specific purchasing power grows? But most people simply cannot get away from absolute numbers, believing that if those of today have smaller values than those of yesterday, they are taking it in the neck. They seem unwilling or incapable of separating purchasing power from numbers. Who cares if today I make 50% of what I made yesterday if the price of that Ferrari I have been coveting is 50% today of what it was yesterday? Indeed, I stand to gain net wealth if I have any savings.

Your answer, Juan, is that there are money systems that would solve virtually all of our problems regardless of whether there exists a central bank, all else equal.

 

[AZJoe]

If there was no central bank what would the inflation rate likely be? Zero percent? Is there a money or banking system which has not experienced inflation we could replace the Fed with?

You ask as if inflation is a natural phenomenon. Inflation is unnatural. Inflation is artificially created by watering down the currency. There have been lots of monetary systems in history without inflation. Gold is not inflationary.

Sure under gold and other hard currency systems there are still price fluctuations up and down, but that is not inflation. Inflation is a policy of devaluing a currency through dilution. It is an active process of transferring wealth from the wage earners and savers to the speculators, banks and elite that have first access to the newly created currency.

A gold or other hard currency system would end the policy of inflation and impose monetary discipline. A more libertarian approach to breaking the exclusive monopoly on currency would be a completely open and free competition in currency.

And some words from the good Dr. Ron Paul:

Dr. Ron Paul – First reason is, it's not authorized in the Constitution, it's an illegal institution. The second reason, it's an immoral institution, because we have delivered to a secretive body the privilege of creating money out of thin air; if you or I did it, we'd be called counterfeiters, so why have we legalized counterfeiting? But the economic reasons are overwhelming: the Federal Reserve is the creature that destroys value. This station talks about free market capitalism, and you can't have free market capitalism if you have a secret bank creating money and credit out of thin air. They become the central planners, they decide what interest rates should be, what the supply of money should be... Question: How does the gold standard solve that? Ron Paul: It maintains a stable currency and a stable value. If the Fed concentrated more on stable money rather than stable prices... They push up new money in stocks and in commodities and in houses, and then they have to come in to rescue the situation. They create the bubbles, then they come in and rescue it, and they do nothing more than try to do price fixing. Capitalism depends, and capital comes from savings, but there's no savings in this country, so this is all artificial. It creates the misdirection and the malinvestment and all the excessive debt, and it always has to have a correction. Since the Fed has been in existence, the dollar has lost about 97% of its value. You're supposed to encourage savings, but if something loses its value, why save dollars? There's no encouragement whatsoever. [...] Gold is 6000 years old, and it still maintains its purchasing power. Oil prices really are very stable in terms of Gold. [...] Both conservatives and liberals want to enhance big government, and this is a seductive way to tax the middle class. - CNBC debate with Faiz Shakir, March 20, 2008

Dr. Ron Paul – The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch-- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference—that threatens to impoverish us by further destroying the value of our dollars.

Dr. Ron Paul – What's happening is, there's transfer of wealth from the poor and the middle class to the wealthy. This comes about because of the monetary system that we have. When you inflate a currency or destroy a currency, the middle class gets wiped out. So the people who get to use the money first which is created by the Federal Reserve system benefit. So the money gravitates to the banks and to Wall Street. That's why you have more billionaires than ever before. Today, this country is in the middle of a recession for a lot of people... As long as we live beyond our means we are destined to live beneath our means. And we have lived beyond our means because we are financing a foreign policy that is so extravagant and beyond what we can control, as well as the spending here at home. And we're depending on the creation of money out of thin air, which is nothing more than debasement of the currency. It's counterfeit... So, if you want a healthy economy, you have to study monetary theory and figure out why it is that we're suffering. And everybody doesn't suffer equally, or this wouldn't be so bad. It's always the poor people -- those who are on retired incomes -- that suffer the most. But the politicians and those who get to use the money first, like the military industrial complex, they make a lot of money and they benefit from it. - GOP debate, Dearborn, Michigan, October 9, 2007

And from some other wise sources:

Raymond J. Keating, - Monetary policy today is guided by little more than government fiat—by the calculations, often mistaken economic theories, and whims of central bankers or, even worse, politicians. Under such a regime, inflation of three or four percent annually has come to be viewed as a stellar monetary performance. However, under a more sound monetary system—i.e., a gold standard—such increases in the general price level would be seen as wildly inflationary. - BOOK REVIEW: The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880-1914, The Freeman, p. 645, September, 1996.

Professor Ludwig von Mises – The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. - The Theory of Money and Credit p 461.

Professor Ludwig von Mises – The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.

Ayn Rand - Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments. - Who Will Protect Us From Our Protectors?, The Objectivist Newsletter, May 1952.

Paul Volcker (former Federal Reserve chairman) - It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with “free banking.” The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.

Dr. Mary J. Ruwart - In 1914, the Federal Reserve (Fed) received an exclusive monopoly to issue U.S. currency. Like AT&T, the Fed is a private corporation, owned by its member banks. The Fed is a powerful institution; some believe it is the most powerful in the world. … Before the creation of the Fed, banks found they needed reserves of approximately 21% so that they would have enough money on hand when their customers wanted to make a withdrawal. When the Fed took over the reserves of the national banks, it lowered the reserve requirement to half that. The Fed itself used a reserve system: it kept only 35% of the reserves entrusted to it by the member banks! The balance was loaned out, mostly to the government, with the wealth of the American people as collateral. Lowering reserves resulted in the creation of more money. As a result, the money supply doubled between 1914 and 1920 and once again from 1921 to 1929. In contrast, gold in the reserve vault increased only 3% in the 1920s. The bankers would obviously be unable to keep their promise to deliver gold to depositors if a large number of people withdrew their money at the same time. Businesses could not use all the newly created money the banks wished to loan, so stock speculators were encouraged to borrow. Many people got heavily into debt, thinking that the boom would continue. In 1929, the Fed started deflation by slowing the creation of new money. People who had counted on renewing their loans to cover stock speculations or other investments found they could no longer borrow. They were forced to sell their securities, and a stock market plunge ensued. The mini-crash in October 1987 also may have been triggered by the Fed’s slowing the creation of new money. People who lost money spent less on goods and services; business began to slow. With banks unwilling to renew loans, businesses began to reduce their work force. People nervously began withdrawing their gold deposits as banks in other countries quit honoring their promise to return the gold. Rumors circulated that the Federal Reserve would soon be bankrupt as well. Naturally, there was no way for the banks to exchange the inflated dollars for gold. As people withdraw their bank funds, the money supply decreases—just the reverse of what happens when they deposit it. The banks’ failure to loan coupled with massive withdrawals, caused even greater deflation. People lost their savings and their purchasing power; in turn, businesses lost their customers and laid off workers. Each loss contributed to the next, resulting in the most severe depression Americans had ever known. Had this happened in Scotland between 1793 and 1845, bank owners (stockholders) would have to make their promises good by digging into their own pockets. In our country, however, the government enforcement agents were instructed to come after the American citizenry instead! Franklin Roosevelt convinced Congress to pass a bill making it illegal for Americans to own gold. Everyone had to exchange their valuable gold for Federal Reserve notes, which had no intrinsic value. Gold was still given to foreigners who brought their dollars to be exchanged for gold, but not to Americans! … Why was the Fed introduced in the United States and relieved of its promise to return gold that was deposited by our great-grandparents and their contemporaries? Why did the Fed slow money creation in 1929, precipitating the stock market crash? Why does the Fed alternate inflation and deflation at the expense of the American public today? Several authors have proposed that the evolution of central banks represents a collusion between politicians and a small elite with ownership/control of major banking institutions. Bank owners want to create as much money as possible, without having to dig into their own pockets when depositors want their money. Politicians long to fulfill their grandiose campaign promises without visibly taxing their constituency. Central banking can give both groups what they want. First, through the aggression of exclusive licensing, politicians give the central bank a monopoly on issuing currency. As long as banks must make good on their promises to depositors, however, they are still subject to the regulation of the marketplace ecosystem. The politicians encourage the aggressive practice of fraud by refusing to make banks and similar institutions (i.e., Savings & Loans, known as “S&Ls”) keep promises to depositors. Instead, owners and managers who make risky loans can simply walk away from their mistakes, as President Bush’s son Neil did. Depositors either lose their life savings or are reimbursed from taxes taken at gunpoint, if necessary from their neighbors. The bankers, of course, must give the politicians something in return. When the ranchers, loggers, or other special interest groups want more subsides, our representatives need not incur the wrath of the populace by suggesting more taxes. Instead, they borrow some of the Fed’s newly created money! When it comes time to pay the loan back with interest, the politicians pay it back with a bigger loan using our wealth as collateral. The special interest groups thank the politicians by funding their reelections. As a result, our national debt has grown so big that the interest alone consumed 25% of 1989 federal outlays! The single largest holder of the national debt is the Federal Reserve itself. … our pension and investment plans often buy the government I.O.U.s. For our pension funds to pay us, we may first have to pay higher taxes to cover the I.O.U.s. How much higher will our taxes be? The 1989 national debt was more than $11,000 for every man, woman, and child! Like any special interest group, the Fed is inclined to help the politicians who protect it. By manipulating the money supply to cause boom or bust at the appropriate times, the Fed controls the illusion of prosperity an illusion that determines which politicians people will vote for or against. Like any other special interest group, the Fed can control our government to a significant extent. For example, the exclusive monopoly of the Second Bank of the United States was scheduled to end in 1836. Andrew Jackson swore not to renew it if he were reelected president in 1832. Soon after his victory, he removed the government’s deposits from the central bank. The bank’s president, Nicholas Biddle, attempted to bring about a depression by cutting back on the creation of money, just as the Federal Reserve would do almost 100 years later. Biddle hoped to blackmail Congress into renewing the bank’s monopoly by making the voters miserable. Fortunately, these tactics were not successful. The American people were not fooled and the bank charter was not renewed. Unfortunately, this lesson was forgotten, and central banking was reestablished with the Federal Reserve. - Healing Our World, Ch 9.

 

[Chester Copperpot]

deflation is the natural order.. inflation is contrived... as daniel webster used to say when forced to choose between a politician's word and gold, I choose gold every time

 

[Chester Copperpot]

zippy this is the kind of thread where you have to earn your paycheck lol

 

[bunklocoempire]

Donald Trump would end the fed.

lol

I'm hoping he wins solely for the satirical quips and the rifle prices -and we'll see about the rifle prices.
He had his own tv show ya know.
Yes! End the Fed!

The best reaction talking to people about the Fed I get, is when ask people:

"Do you think that the more of something that there is, the less valuable it becomes?" (the example depends on who I'm talking to)

"Like an Xbox game. Is an Xbox game worth the same now, as when it is new and not yet wide spread?"
"New games are worth more, and then the market gets flooded. Would you agree that I may be able to trade my new Xbox game for several old Xbox games -like on Craigslist, and enjoy an advantage?"

If they seem like they want to know more, I hit 'em with:

"Why does Game Stop charge so much for OLD used games? It's almost like they're keeping the "value" artificially high, would you agree?"


THIS turns on a light bulb. It may be over simplified, but they get the concept... and then turn around and vote for the flavor of the weak.

 

[Zippyjuan]

deflation is the natural order.. inflation is contrived... as daniel webster used to say when forced to choose between a politician's word and gold, I choose gold every time

Changes in prices is the natural order. As supplies and demands move up or down relatively to each other, prices should go higher or lower. If I have four apples and only three people want one at the price I am asking, I will have to lower my price if I expect to get rid of them all. If this year my tree only had two apples, I can charge a much higher price than I did a year ago.

 

[Chester Copperpot]

Changes in prices is the natural order. As supplies and demands move up or down relatively to each other, prices should go higher or lower. If I have four apples and only three people want one at the price I am asking, I will have to lower my price if I expect to get rid of them all. If this year my tree only had two apples, I can charge a much higher price than I did a year ago.

yes youre right changes are the norm... however planned inflation like we have now isnt part of that natural change.. or shouldnt be

 

[DamianTV]

If there was no central bank what would the inflation rate likely be? Zero percent? Is there a money or banking system which has not experienced inflation we could replace the Fed with?

*shows his true colors and his support for Privately Owned Central Banks and Money Manipulation*

 

[Occam's Banana]

If there was no central bank what would the inflation rate likely be? Zero percent? Is there a money or banking system which has not experienced inflation we could replace the Fed with?

The answers to your questions depend upon what you mean by "inflation." Do you mean actual inflation (i.e., monetary inflation) - or do you mean so-called "price inflation" (which is really just a more or less general increase in the price levels of some goods but not of others)? When it suits them to do so, Fed apologists ignore the critical distinction between these two entirely different things. They have to, of course - otherwise, they'd lose one of their chief tools when it comes to confusing the issue and covering the Fed's exposed hindparts.

Consider Zippy's questions, for example. His implication is that the monetary inflation of fiat currency by a central bank is unobjectionable - or, at least, no more objectionable than any non-centralized, non-fiat alternative - because "price inflation" will, for any of a wide variety of reasons, sometimes occur in any economy (even ones with specie-backed money and no central banking). This completely ignores the fact that the Fed's fiat-based monetary inflation is, by a HUGE margin, the major contributor to and driver of so-called "price inflation" in the economy.

Zippy et al. can ask all the "ooh! look! a squirrel ..." questions they like, but the simple and inescapable fact is this: when you add a centralized regime of fiat-based monetary inflation into the mix of any economy, then ceteris paribus, both monetary inflation and "price inflation" will necessarily always end up being greater than they otherwise would have been. After all, that's the whole point of setting up centralized regimes of fiat-based monetary inflation in the first place! I mean, goddam - the Fed's explicitly stated purpose and policy is to ensure continual year-to-year inflation at some given percentage rate ...

 

[Ender]

Changes in prices is the natural order. As supplies and demands move up or down relatively to each other, prices should go higher or lower. If I have four apples and only three people want one at the price I am asking, I will have to lower my price if I expect to get rid of them all. If this year my tree only had two apples, I can charge a much higher price than I did a year ago.

True, but the problem is you are dealing with fractionalized money.

In a true capitalistic society, a dollar is always a dollar; your goods or services are based on availability & popularity- not where a federal system is manipulating the money and handing out 1000x more loan 'money' than there are actual dollars.

 

[Occam's Banana]

Changes in prices is the natural order. As supplies and demands move up or down relatively to each other, prices should go higher or lower. If I have four apples and only three people want one at the price I am asking, I will have to lower my price if I expect to get rid of them all. If this year my tree only had two apples, I can charge a much higher price than I did a year ago.

And that "natural order" gets completely borked when the economy is "goosed" with money from "out of nowhere" in accordance with the arbitrary decrees of central bankers.

The "inflation" (or "deflation") of prices in your apple example depends upon real factors - such as the actual demand for apples, weather (late freezes, droughts, etc.), and so forth. And the status of apples as an economic good is contingent upon the investment of real wealth - such as land, labor and capital goods (seed stock, equipment, etc.).

But the status of fiat money and the "inflation" of prices due to centralized fiat-based monetary inflation are due solely to the arrogant (and ultimately ignorant) whims of central bankers and other species of "central planners," who foolishly imagine that they are clever enough to outsmart the "natural order." And that's being charitable, by at least assuming some sort of noble intent or good purpose on their part. It seems more than likely, though, that their efforts are just cynically jaded attempts to funnel wealth into the pockets of bankers, financiers and assorted other well-connected hangers-on - which ultimately has to be paid for by the chumps at the far end of the chain of Cantillon effects ...

 

[mrsat_98]

That's a nice thought, but the average American can barely wipe his or her own ass. We would have to dumb this down quite a bit.

 

[Zippyjuan]

*shows his true colors and his support for Privately Owned Central Banks and Money Manipulation*

Our central bank is not privately owned.

 

[Zippyjuan]

True, but the problem is you are dealing with fractionalized money.

In a true capitalistic society, a dollar is always a dollar; your goods or services are based on availability & popularity- not where a federal system is manipulating the money and handing out 1000x more loan 'money' than there are actual dollars.

Who can loan out 1000x more money than they have? If a bank does that, they are guilty of fraud.

 

[Ender]

Who can loan out 1000x more money than they have? If a bank does that, they are guilty of fraud.

Banks always do it, Zip- it's called fractionalized banking.

When the FED send B of A $1 mil, the bank can now loan out $10 mil or $100 mil.

That's why the dollar is worthless; money is nothing but keystrokes.

 

[Zippyjuan]

Banks always do it, Zip- it's called fractionalized banking.

When the FED send B of A $1 mil, the bank can now loan out $10 mil or $100 mil.

That's why the dollar is worthless; money is nothing but keystrokes.

Fractional banking means the banks have to keep a "fraction" of deposits in reserve. Typically ten percent. So if a bank has $1000 in deposits, they are allowed to loan out $900 of that. Not $100,000.