Deception at the Fed

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Deception at the Fed 
       
For the past three decades, the Federal Reserve has been given a dual 
mandate: keeping prices stable and maximizing employment.  This policy relies 
not only on the fatal conceit of believing in the wisdom of supposed experts, 
but also on numerical chicanery.  
 
Rather than understanding inflation in the classical sense as a monetary 
phenomenon-- an increase in the money supply- it has been redefined as an 
increase in the Consumer Price Index (CPI).  The CPI is calculated based on a 
weighted basket of goods which is constantly fluctuating, allowing for 
manipulation of the index to keep inflation expectations low.  Employment 
figures are much the same, relying on survey data, seasonal adjustments, and 
birth/death models, while the major focus remains on the unemployment rate.  
Of course, the unemployment rate can fall as discouraged workers drop out of 
the labor market altogether, leading to the phenomenon of a falling 
unemployment rate with no job growth.
 
In terms of keeping stable prices, the Fed has failed miserably.  According 
to the government's own CPI calculators, it takes $2.65 today to purchase 
what cost one dollar in 1980.  And since its creation in 1913, the Federal 
Reserve has presided over a 98% decline in the dollar's purchasing power.  
The average American family sees the price of milk, eggs, and meat 
increasing, while packaged household goods decrease in size rather than 
price.  
  
Loose fiscal policy has failed to create jobs also.  Consider that we had a 
$700 billion TARP program, nearly $1 trillion in stimulus spending, a 
government takeover of General Motors, and hundreds of billions of dollars of 
guarantees to Fannie Mae, Freddie Mac, HUD, FDIC, etc.  On top of those 
programs the Federal Reserve has provided over $4 trillion worth of 
assistance over the past few years through its credit facilities, purchases 
of mortgage-backed securities, and now its second round of quantitative 
easing.  Yet even after all these trillions of dollars of spending and 
bailouts, total nonfarm payroll employment is still seven million jobs lower 
than it was before this crisis began.  
 
In this same period of time, the total U.S. population has increased by nine 
million people.  We would expect that roughly four million of these people 
should have been employed, so we are really dealing with eleven million fewer 
employed people than would otherwise be expected.  
 
It should not be surprising that monetary policy is ineffective at creating 
actual jobs.  It is the effects of monetary policy itself that cause the boom 
and bust of the business cycle that leads to swings in the unemployment 
rate.  By lowering interest rates through its loose monetary policy, the Fed 
spurs investment in long-term projects that would not be profitable at market-
determined interest rates.  Everything seems to go well for awhile until 
businesses realize that they cannot sell their newly-built houses, their 
inventories of iron ore, or their new cars.  Until these resources are 
redirected, often with great economic pain for all involved, true economic 
recovery cannot begin.
  
Over $4 trillion in bailout facilities and outright debt monetization, 
combined with interest rates near zero for over two years, have not and will 
not contribute to increased employment.  What is needed is liquidation of 
debt and malinvested resources.  Pumping money into the same sectors that 
have just crashed merely prolongs the crisis.  Until we learn the lesson that 
jobs are produced through real savings and investment and not through the 
creation of new money, we are doomed to repeat this boom and bust cycle. 

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