by Eric Fry of The Daily Reckoning
In 2013, we Americans will commemorate a century of wealth destruction in the United States – the Federal Reserve will be 100 years old.
The purchasing power of a one dollar bill has plummeted more than 95% since the Federal Reserve first began printing its legal tender in 1914. Although the dollar’s epic decline began glacially, it has gathered luge-like momentum.
Deception at the Fed
by Ron Paul
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.
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.
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.
How the Fed Fuels Unemployment
by Thomas J. DiLorenzo
Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy.
When the Fed expands the money supply excessively it not only is prone to creating price inflation, but it also sows the seeds of recession or depression by artificially lowering interest rates, which can ignite a false or unsustainable "boom" period. Lower interest rates induce people to consume more and save less. But increased savings and the subsequent business investment that it finances is what fuels economic growth and job creation.
Lowered interest rates and wider availability of credit caused by the Fed’s expansionary monetary policy causes businesses to invest more in (mostly long-term) capital projects (primarily real estate in the latest boom-and-bust cycle), and there is an accompanying expansion of employment in those industries. But since the lower interest rates are caused by the Fed’s expansion of the money supply and not an increase in savings by the public (i.e., by the free market), businesses that have invested in long-term capital projects eventually discover that there is not enough consumer demand to justify their investments. (The reduced savings in the past means consumer demand is weaker in the future). This is when the "bust" occurs.
The economic damage done by the boom-and-bust policies of the Fed occur in the boom period when resources are misallocated in the ways described here. The "bust" period is actually a necessary cure for the economic miscalculations that have occurred, as businesses liquidate their unsound investments and begin to make decisions on realistic, market-based interest rates. Prices and wages must return to reality as well.
Government policies that bail out businesses that have made these bad investment decisions will only delay or prohibit economic recovery while encouraging more of such behavior in the future (the "moral hazard problem"). This is how short recessions can be turned into seemingly endless ones. Worse yet is for the Fed to create even more monetary inflation, rather than allowing the necessary economic adjustments to take place, which will eventually set off another boom-and-bust cycle.
As applied to today’s economic situation, it is obvious that the artificially low interest rates caused by the policies of the Greenspan Fed created an unsustainable boom in the housing market. Thousands of new jobs were in fact created – and then destroyed – giving an updated meaning to Joseph Schumpeter’s phrase "creative destruction." Many Americans who obtained jobs and pursued careers in housing construction and related industries realized that those jobs and careers were not sustainable after all; they were fooled by the Fed’s low interest rate policies. Thus, the Fed was not only responsible for causing the massive unemployment that we endure today, but also a great amount of what economists call "mismatch" unemployment. The skills that people in these industries developed were no longer in demand; they lost their jobs; and now they must retool and re-educate themselves.
Cheating Investors As Official Government Policy
by Daniel R. Amerman, CFA
When interest rates in general are manipulated, what does that mean for savers and investors?
When you put your savings into a money market fund, and the policy of the US government is to force interest rates to unnaturally low levels - you are being cheated out of the yield you should be receiving.
When you buy a corporate bond or corporate bond fund - you are being cheated by overt government market interventions that have the explicitly stated purpose of lowering corporate borrowing costs. This is where that "spin" comes back in. How does a government lower borrowing costs for multinational corporations, enabling them to take the proceeds and invest them overseas? (Taking the money and investing it out of country seems to be the most common behavior so far.)
The government does so by manipulating the market so that investors receive much lower interest payments than they would receive in a free market. In other words, it directly creates benefits for corporations and banks by cheating ordinary investors out of the income they would receive if free market forces governed. Boil it down to another level, and this is a fairly straight up redistribution of wealth from average citizens to corporate interests.
Wherever the investor goes, whatever interest-bearing investment they look to - there is no escaping the cheating, because there is no escaping the unprecedented direct government control over interest rates. Even as inflation rises (in the real world rather than the also manipulated world of government statistics), there is nowhere for the fixed-income investor to find compensation for current inflation or inflationary pressures. Which, in a free market, would likely be the dominant market forces at this point.
Adding to the irony - and the tragic dilemma for us all - is that the market manipulation is being paid for by the Federal Reserve creating brand new money out of the nothingness, so to speak, at the rate of about $1,000 per US household per month. This is creating perhaps the greatest inflationary pressures of our lifetime. In other words, government policy is to risk the value of all of our savings in the future, in order to fund a program of cheating us out of market interest rates today. And this thereby ensures that none of us are compensated for the inflationary risks, or are able to prepare for the destruction of the value of our money by way of conventional methods.
"Unmasking the Federal Reserve"
by Joseph Salerno