Here's The Real Reason The Fed Is Making Absurd Monetary Decisions

Tyler Durden's picture

John Mauldin has often written about the Fed's abysmal track record in managing the economy. Here Lacy Hunt and Van Hoisington of Hoisington Investment Management explain the reasons for the Fed's consistently poor track record.

They start by considering the Fed’s “dual mandate,” which sets “the goals of maximum employment, stable prices and moderate long-term interest rates.” (And yes, that is actually three goals, not two.)

 

But a problem arises, the authors note, “because considerable time elapses between the implementation of the monetary actions designed to follow the mandate and when the impact of those actions take effect on broader business conditions.”

 

The time lag can easily be three years or longer, with the result that policy changes often end up being pro-rather than countercyclical.

 

To make matters even worse, “the economic risks from adherence to this dual mandate are now much greater than historically due to the economy’s extreme over-indebtedness, poor demographics and a fragile global economy.”

Hoisington Quarterly Review and Outlook, Second Quarter 2017

By Dr. Lacy Hunt and Van Hoisington

The Fed’s Dual Mandate

“Dual mandate” is one of the most commonly used phrases in U.S. central banking. The current Chair of the Federal Reserve often mentions it in both speeches and testimony to Congress. Not surprisingly, this is an extremely hot topic in monetary economics, and execution of this mandate has profound significance.

The mandate originated in The Federal Reserve Reform Act of 1977. This legislation identified “the goals of maximum employment, stable prices and moderate long-term interest rates.” Ironically, these goals have come to be known as the Fed’s “dual mandate”, even though there are actually three goals. The manner in which the Fed operates in following these goals has had and will have dramatic effects on economic activity. In this report we consider:

  1. What is the causal link between the mandate and the Fed’s capacity to act in a counter-cyclical fashion?
  2. How has the dual mandate morphed into the Phillips Curve?
  3. What are the arguments for and against a Phillips Curve based approach for conducting monetary policy?
  4. What does empirical research reveal?

In view of the extreme over-indebtedness and other adverse initial conditions, what are the immediate consequences of using a Phillips Curve based dual mandate for the economy, the Fed and fixed income investors?

Causality

To achieve the goals of this mandate (maximum employment, stable prices and moderate long-term rates), the Fed will inevitably tighten for too long and by too much. This occurs because considerable time elapses between the implementation of the monetary actions designed to follow the mandate and when the impact of those actions take effect on broader business conditions. By waiting to recognize a definitive change in inflation and unemployment, monetary policy changes will be pro-, not counter-cyclical. The time difference between leading or causative measures like the money and reserve aggregates, on the one hand, and the economically lagging series of the unemployment rate and inflation, on the other hand, can easily be three years or longer.

This difference between the actions of the Fed and the reactions within the economy explains why the Fed historically has not begun easing cycles until the economy was either in, or on the cusp of, a recession. When the Fed takes action, relief is painfully slow in arriving. Importantly, the economic risks from adherence to this dual mandate are now much greater than historically due to the economy’s extreme over-indebtedness, poor demographics and a fragile global economy.

To demonstrate, suppose that in the fourth quarter of this year, unemployment turns significantly higher while the inflation rate decelerates from its already subdued pace. The downturn that the Fed would be witnessing in the fourth quarter could be reflecting policy actions all the way back to the fourth quarter of 2015 when they initiated the current tightening cycle. This cumulative evidence is reflected in the monetary and credit aggregates (Charts 1 and 2). This change in economic fortunes might cause the Fed to accelerate the rate of growth in the monetary base and lower the policy rate in order to stimulate money and credit growth. However, the monetary and credit aggregates might not respond to these first steps until 2019 or even 2020, thus putting the Fed three years or more out of sync with the needs of the economy, suggesting a prolonged period of severe underperformance.

Being out of step with the goals of a counter-cyclical monetary policy will arise as long as the Fed keys its decision-making on unemployment and inflation, rather than on maintaining financial stability, which focuses on the reserve, monetary and credit aggregates. Achieving such stability, however, is now much more difficult for the Fed than in the past. Until the economy became so heavily indebted, M2 was a consistent leading economic variable. Now M2 only leads recessions. Until the debt overhang is corrected (which does not appear to be in the immediate future), the velocity of money is likely to continue declining. Thus, when the Fed eases in the future, the strong leading relationship between M2 and the economy will no longer prevail.

There have always been lags between the time of a policy shift and evidence of that shift in the broader economy. However, in a heavily indebted economy, with the velocity of money likely falling further, and policy rates close to the zero bound, the Fed’s current capabilities are decidedly asymmetric. Any easing actions taken now would be far less powerful than the steps taken in the prior tightening cycle. Thus, by keying off the dual mandate in an economy with a severe debt overhang, the Fed would be more disadvantaged than normal in trying to come to the quick aid of a faltering economy.

From the Dual Mandate to the Phillips Curve

The Federal Reserve Reform Act of 1977 does not spell out the nature of the trade-off between the unemployment rate and the inflation rate, nor does it say how the Fed should act if the mandates are at odds in terms of the policy approach.

The potential problems that arise from this lack of clarity are clearly illustrated by the current situation. The Fed has extended the current tightening cycle twice this year, with the latest move on June 14. At the time of the latest decision, headline and core CPI had year-to-date price increases of 1% and 1.3%, respectively, substantially below their 2% target. Additionally, the latest twelve-month increases in both of these inflation gauges were below the 2% target. Only the unemployment rate warranted more restraint. This means that inflation and unemployment are at odds, thus the dual mandate is dead. It now boils down to the Fed’s interpretation of the Phillips Curve.

The most definitive study of the Fed’s operations is widely considered to be the multi-volume series, A History of the Federal Reserve written by the late Carnegie Mellon economist Alan Meltzer (1928-2017). Volume I examines the span from the creation of the Fed in 1913 until the accord with the Treasury in 1951. Volume II, Book 1 covers the years from the accord in 1951 until 1969, while Volume II, Book 2 discusses the period from 1970 until the end of the great inflation period in the mid-1980s. In this scholarly historical examination, Meltzer, on the basis of price and financial stability, gave the Fed high marks in only one-fourth of its years of operation. Meltzer made many seminal contributions to economics, including identifying the algebraic determinants of the money multiplier and outlining the transmission of monetary policy actions to the real economy.

In his 2014 paper, “Recent Major Fed Errors and Better Alternatives,” Meltzer summarized the root cause of the Fed’s policy errors and long record of failed forecasts as follows: “The Fed’s error was to rely on less reliable models like the Phillips Curve ... that ignore or severely limit the role of money, credit, and relative prices.” By focusing on the Phillips Curve, Meltzer contends that the Federal Open Market Committee (FOMC) overemphasizes information in monthly and quarterly data periods while giving insufficient attention to persistent trends in money and credit, which are the very aggregates that the Fed supplies. To paraphrase Meltzer, by relying on the Phillips Curve, the FOMC avoids developing a strategic view of their role and the complex world in which they operate. As the massive credit buildup leading up to 2007 illustrates, the Phillips Curve mandate also diverts the Fed’s attention from important regulatory matters that can have extremely consequential and long lasting macro implications.

The key passage that Meltzer writes to describe the inadequacies of the Phillips Curve/ dual mandate within the Fed is as follows:

No less an authority than Paul Volcker explained publicly and to the staff that the Phillips Curve was unreliable and not useful. As Chair, he gave many talks about what I have called the anti-Phillips Curve. Volcker claimed repeatedly that the best way to reduce unemployment was to reduce expected inflation. He did not use Phillips Curve forecasts. He ran a very successful policy. Alan Greenspan was less outspoken, but he also rejected Phillips Curve forecasts as unreliable. Instead of finding a better model, the staff resumed use of Phillips Curve forecasts. They were again unreliable as should be evident from the repeated prediction errors ... Year after year, growth and employment are below forecast. One might hope that repeated forecast errors all in the same direction would raise doubts about the usefulness of the model or models and initiate search for a better model. This does not appear to have happened.

In the three years since this prophetic passage, the string of unbroken economic forecasts continued unabated.

The Phillips Curve

The Phillips Curve represents the relationship between the rate of wage inflation and the unemployment rate. In a 1958 study, New Zealand economist A. W. H. (Bill) Phillips (1914-1975) found an inverse relationship between wage inflation and the unemployment rate in the United Kingdom from 1861 to 1957. A high unemployment rate correlated with slowly increasing wages, while a lower unemployment rate correlated with rapidly rising wages.

According to Phillips, the reasoning for this finding was that the lower the unemployment rate, the tighter the labor market, thus firms would raise wages to attract scarce workers. Conversely, at higher rates of unemployment the pressure on wages abated. Thus, this curve attempts to capture a cyclical process that can be used for evaluating the business cycle. This curve presumes the average relationship between wage demands and the unemployment rate is stable, thus there is a rate of wage inflation that results if a particular level of unemployment persists over time. As time has passed, Phillips Curve proponents have also asserted that a stable relationship exists between the unemployment rate and the overall rate of inflation, not just that for wages. The original Phillips Curve shows a downward sloping line on a graph, with wage inflation on the vertical axis and the unemployment rate on the horizontal axis.

In a 1967 peer-reviewed paper, Edmund Phelps challenged the theoretical structure of the Philips Curve. Independently of Phelps, Milton Friedman (1912-2006) in his Presidential address to the American Economic Association in 1967 (published in 1968) came to similar conclusions. They reasoned that well-informed rational employers and workers would pay attention only to real wages (i.e. the inflation adjusted level of wages). In the view of Friedman and Phelps, real wages would adjust to make the supply of labor equal to the demand for labor, and the unemployment rate would then stand at a level uniquely associated with the real wage rate. In time this uniquely associated real wage rate has come to be called the “natural rate of unemployment.”

Friedman and Phelps argued that the government could not permanently trade higher inflation for lower unemployment. When the natural rate of unemployment prevails, the real wage is constant. Workers who expect a given rate of inflation insist that wages increase at the same rate to prevent the erosion of their purchasing power.

Consistent with Friedman and Phelps, consider the effects of a monetary policy designed to expand economic activity in an attempt to lower the unemployment rate below its natural rate. The resulting increase in demand (pricing power) encourages firms to raise prices faster than workers anticipate. With higher revenues, firms are willing to employ more workers at the old wage rates and in some cases are willing to somewhat boost them. With rising wages, workers willingly supply more labor, which leads to a drop in the unemployment rate. Initially, they do not realize that their purchasing power has eroded since prices have advanced more rapidly than expected. In this initial period workers suffer from what is known as a “money illusion” – the rise in nominal wages is not equal to the rise in real wages. As workers come to anticipate higher rates of price inflation over time, they see through the money illusion, and less labor is supplied and demanded. The real wage is restored to its old level, and the unemployment rate returns to its natural rate. Today, the opposite case is present. Monetary restraint is limiting demand and eroding pricing power, causing employers to restrain wages. Once workers realize this restraint is not a cut in real wages, they will continue to supply the same amount of labor. The Phillips Curve trade-off does not exist in either of the two alternative situations.

Phelps and Friedman also distinguish between these effects over the “short run” and the “long run”. Phillips Curves only prevail so long as the average rate of wage inflation remains fairly constant. Only in such a limited time frame will wage inflation and unemployment be significantly inversely related. Once the higher inflation is fully incorporated into expectations, unemployment returns to the natural rate, with the result that the natural rate of unemployment is compatible with any rate of inflation. These long and short run relationships can be combined in an “expectations augmented” Phillips Curve. The quicker workers adjust price expectations to changes in the actual rate of inflation, the quicker the unemployment rate will return to the natural rate and the less successful the government will be in reducing unemployment through monetary and fiscal policies. The expectations augmented Phillips Curve approach is used in and appears to play a major role in the Federal Reserve’s large-scale econometric model.

Empirical Evidence

We examined the relationship between percent changes in real average hourly earnings and the unemployment rate from 1965 through 2016 – the entire historical record for wages. This sample is comprised of over 600 monthly observations (Chart 3). The trendline fitted through the observations does have a slightly negative tilt, but the line is not statistically different from a straight horizontal line, which signifies a total lack of responsiveness of real wage changes to the unemployment rate. The adjusted R2 is 0.04, which is not statistically significant. Thus, our empirical findings are consistent with the causality outlined – that the Phillips Curve assumption is not valid. Cherry picking through the data points can identify limited time periods when a greater inverse relationship exists between wage increases and the unemployment rate. As many researchers have pointed out this was true of the 1960s. From the first half to the second half of the 1960s, nonfarm business sector compensation per hour (a widely followed measure of labor compensation) increased from 3.6% per annum to 5.9% as the unemployment rate fell from 5.7% to 3.8%. The critical point is that these individual episodes of an apparent Phillips Curve trade-off are too weak and too infrequent to establish an enduring relationship over time.

The adherents to the Phillips Curve do not accept these various empirical criticisms. For many decades, they insist that the poor results are due to the fact that the basic relationship has not been properly quantified. They point to the problems capturing leads and lags between the unemployment rate and wage changes as well as difficulties that arise from measuring expectations and working with aggregate data. For followers of the Phillips Curve, it is just a matter of time before these issues of statistical quantification are resolved.

These arguments are not compelling, yet they have been used repeatedly for at least a half a century. As the years have passed, the constantly restated Phillips Curve formulations have regularly missed major business cycle developments, a pattern which has been evident in the Fed’s record. The Fed presided over the worst U.S. peacetime inflation from 1977 to 1981, and tightened before all of the recessions after 1977. The Fed did contain the Panic of 2008 with excellent lender of last resort tools, but a far better result might have been achieved if the Fed had learned the lesson of the 1920s and prevented the massive buildup of debt prior to 2008 that the regulatory powers of the Fed were designed to prevent.

For most of the past eight years, the frequently restated Phillips Curve models have pointed to a sustained acceleration in wage and price inflation that has failed to materialize. These failures not only impair monetary policy but also portfolio decisions based on the presumed efficacy of the Phillips Curve and the reliability of the dual mandate. Based on the slowdown in the monetary and credit aggregates, and the continuing fall in the velocity of money, the rate of inflation is more likely to moderate rather than accelerate, even as the unemployment rate in May 2017 stood at a sixteen year low. Thus, inflation, on average, moved lower during this current expansion, contradicting the forecasts for higher inflation based on the Phillips Curve concept. the velocity of money, the rate of inflation is more likely to moderate rather than accelerate, even as the unemployment rate in May 2017 stood at a sixteen year low. Thus, inflation, on average, moved lower during this current expansion, contradicting the forecasts for higher inflation based on the Phillips Curve concept.

Implications

For the Fed, the more advisable approach would be to pull the Phillips Curve relationships from their model and their policy decisions. Instead, they should rely on capturing the strategic role of the monetary transmission mechanism and its potentiality for moving through the reserve, monetary and credit aggregates in a highly leveraged economy. If the Phillips Curve proponents are right, and the quantification efforts are eventually proved to be valid, then at that point they can be inserted into the Fed’s model as well as into their subjective decision-making process.

This is relevant to investors as well. If adherence to the dual mandate induces financial insatiability, then investor performance, like overall economic activity, will be directly influenced. If the Fed’s mandate consistently leads them in the wrong direction, then long-term investors may often be forced to construct portfolios that are contradictory to the error-prone words, forecasts and policy actions of the FOMC. Moreover, investors should expect that the Fed’s actions will create substantially more volatility in the financial markets and particularly so over the short-term. Operating with strategic views and multi-year trends, rather than trying to focus on the Fed-generated noise in many monthly and quarterly indicators, may be a preferred method of generating investor returns.

Our economic view for 2017 is unchanged and continues to suggest that long-term Treasury bond yields will work irregularly lower. The latest trends in the reserve, monetary and credit aggregates along with the velocity of money point to 2% nominal GDP growth for the full year, down from 3% in 2016. This would be the third consecutive year of decelerating nominal GDP growth and the lowest since the Great Recession. This suggests that the secular low in bond yields remains well in the future.

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armada's picture

Here's The Real Reason The Fed Is Making Absurd Monetary Decisions: THEY'RE STEALING OUR MONEY.

http://biblicisminstitute.wordpress.com/2014/08/24/the-corrupt-federal-r...

max2205's picture

Just print motherfuckers 

GUS100CORRINA's picture

Pretty charts!!

Here's The Real Reason The Fed Is Making Absurd Monetary Decisions

My response: THE FED IS UP A CREEK WITHOUT A PADDLE!!!! I could use expletives, but this is a FAMILY PROGRAM.

The KEYNESIAN EXPERIMENT has failed SPECTACULARLY!!!

May America R.I.P.

Lordflin's picture

So this is one big unintended outcome resulting from a misunderstanding of implementation lag... but I have some questions:

1) How is it that after a hundred years of Fed activitiy they are only now discovering this... or is this somehow an artifact of the modern age?

2) Bigger question... how is it that as a result of this massive 'Oh my god, never saw that coming' moment, they have gotten so filthy rich while the majority of us have seen our assests gutted?

NidStyles's picture

Yeah, let's pretend Orthodox Jews don't have a clue what they are doing....

bionicknees's picture

Fire the FED make them take on the debt they took on on behalf the US Taxpayer. They didn't ask me about the Bank bailouts. So I don't think I (we) should have to pay it back.

joshnyce's picture

or maybe the mandate is deliberately convoluted so they have cover for whatever they really want to do for their masters

bionicknees's picture

Fire the FED make them take on the debt they took on on behalf the US Taxpayer. They didn't ask me about the Bank bailouts. So I don't think I (we) should have to pay it back.

Blue Balls's picture

End the Fed.  We don't need it.  Ever.

JRobby's picture

They really don't know what they are doing

They know exactly what they are doing

 

The time lag / over tightening has been the case for decades until (gold bug) Allen held rates down for way too long. WHY?

Blue Balls's picture

The Fed allowes the banks to leverage up and then bails them out.  The rest is PR BS.

bionicknees's picture

Yea, they know who gets screwed in the end and it ain't them.

bionicknees's picture

Yea, they know who gets screwed in the end and it ain't them.

HRClinton's picture

I've seen tighter groupings from Cheney's shotgun, than Chart 3.

Scatter diagram, or scatter-brain diagram?

True Contrarian's picture

Reductio ad absurdum.

brushhog's picture

The fed painted itself into a corner with low interest rates and now it doesnt know what to do because there isnt much it CAN do. What are their options? Cut rates a point? Raise rates a point? It cant go too much lower or higher. The economy and debt will not withstand a 4% interest rate ( it wont even withstand a 3% rate for too long ). And they are already a point away from zero.

They've been "checkmated" by the invisible hand of the market.

ejmoosa's picture

They did not know what they were doing in the first place.  You are right: CHECKMATE.

But they are going to pretend that they still have a few moves left.

brushhog's picture

All they have left is talk and impotent feints in one direction or another.

peopledontwanttruth's picture

We're not in Kansas anymore Toto

JRobby's picture

It's like they were in a coma as DEBT LEVELS EXPLODED

Irresponsible, no negligent to the point of criminal.

gregga777's picture

"John Mauldin has often written about the Fed's abysmal track record in managing the economy. Here Lacy Hunt and Van Hoisington of Hoisington Investment Management explain the reasons for the Fed's consistently poor track record."

No, the Goldman Sachs Feral Reserve System's timing is perfect when considering their TRUE aims are making the rich richer, eliminating the middle class and making the poor poorer.

JRobby's picture

Long pitchforks, torches, shotguns, AR's, etc.

Clock Crasher's picture

Print of die.

Raising rates bankrupts the treasury.

Not raising rates bankrupts the People.

The People have done their part and elected a man who is not owned by the Tribe.. at least not through capaign contributions. The ball is in your court President SomaSalesman.

Only military Generals aligned with the Constiution are going to be able to maintain order if this blows up in our faces.

peopledontwanttruth's picture

Some good points but I don't believe anyone will be able to keep order this next time around. It may have worked when our money had some value but who is going to work for nothing?

They'll all be looking out for their own.

Clock Crasher's picture

The military and police who do not have wifes and children will have to stand and fight. In addition voulnteers and perhaps a new draft. Likely veterans of recent wars who also are solo could enlist in peace keeping forces, so hopefully the UN wont have an excuse to come in. They will need to agree to defer payment until order has been restored and a new currency has been minted and the value there of set.

The beauty of fiat fractional reserve system is that is purely a construct of the mind. It does not exist in the newtonian world. So when the "money" is destroyed all our primary wealth will remain. The farms and sources of water will be there. And for all the doom and gloom I myself enjoy I believe there are enough awake people who have not been turned to the forces of evil to hold it together long enough post crisis until we transistion back to sound money.

If I were an unemployed veteran that had my life savings wiped out and was offered to serve in defense of the country to protect life and property in the failing city centers under contract to be repaid in full at an unspecified time in the future and fed and housed in the there and now I'd sign up. And all these MAGA types already love Trump as it is. He is a deal maker. IDK.. perhaps I should start writing science fiction.

That is why the police have been militarized.

Trump will need to use the Armed Forces in the Top 10 or so largest cities.

Trump will need to activate FEMA to provide displaced city dwellers and provide them with temporary food/shelter/water. Any family living in a neighborhood within walking distance to an EBT dependent community will likely have to displace and walk away from their homes.

The states will need to activate their National Guard units and the police are going to have to enter a state of active duty themselves.

Curfews, riot control, food and water distribution.

After people have raged and vented perhaps we can have war tribunals for crimes against humanity against those responsible who have not fled the country.

Trump would then need to help gold miners dig as much money out of the ground as possible and convert the Fed Reserve Branches spread among the land into mints where individuals can take their jewelry to be stamped into coined money.

Then hopefully Russia can lend us money, a starter loan, so we can re industrialize the nation.

Russia's debt to GDP is 17%

Just speculating.

Thats a best case, the best I can come up with. Other scenarios are much much worse.

Debt collapse, hyperinflation, whichever or whatever you want to call it will be the birth pang that sets us free.  It will be the opportunity to reclaim our sovereignty and bring us into the 21st century proper. For the survivors. I know this may sound unreal. But I look at Russia and see a Country where at a time Tyranny was a way of life. Fast forward to today and they are nearly debt free and The Gulag Archipelago is mandatory reading for all high school students in that country. All the dirty laundry is aired out and the hard lessons learned are there to stay and likely never to be repeated and serve as armor against future failures. Could be a trend we see here.

peopledontwanttruth's picture

CC. Thanks for that thesis I can tell you put some thought and time into it. You had me laughing at the science fiction point but what we're seeing is almost science fiction. The only thing I can see not working out is I don't believe this beast will go quietly into the night. I see them all in on losing their power and money. But I do agree Russia has really turned itself around. Iran is another with virtually no debt and a ton of resources above and below the ground.

I just spent time with a Russian school teacher and he said the high school kids are all respectful and disciplined. Very educated. We're so far behind it's not funny but actually scary.

css1971's picture

The Fed makes a "mess" of it deliberately or accidentally?

<---- Deliberate

<---- Accidental

Conscious Reviver's picture

Yes it does matter.

Does Janet/ Lucy pull the football away on purpose. The whole point of the joke is it is pretty clear she is doing it on purpose and only Charlie Brown can't figure it out.  That he's being taken for a ride. Much like the American public.

Zarbo's picture

What's the chart look like with the *real* unemployment rate?  ( 23% on shadowstats.com )

chubbar's picture

Hard to believe that these authors continue to cite the unemployment numbers as a reason for tightening when any fucking retard knows that when a working age population of 240 million ISH has 100 million out of work, that metric doesn't figure out to be 4.5% UE but closer to 40%!!!!!! Christ, does anyone really give a shit about what the fuck is going on in this country???

peopledontwanttruth's picture

You're too logical. You'll never make it as a fake news author. LOL

J J Pettigrew's picture

How can employment improve and wages improve when there is a constant flow of illegals...and a constant flow of HB1 visas...and a constant OVERSTAY of those visa holders.

The supply of labor grows faster than the demand in this country.......allowed by the aforementioned.

Mena Arkansas's picture

Fed Mandate

Maximum part-time employment at the lowest wages possible

Stable prices except for shit you actually spend money on like housing, health insurance, autos and college

Zero percent long-term interest rates for savers and zero percent infinity loans for their bankster friends

Iskiab's picture

I agree with this, but I'm actually a believer in the Phillips curve. It's logical, as the employment market tightens wages go up, and eventually this leads to inflation. Note I said eventually.

What the fed's been doing is hiking rates as soon as employment picks up. So really their mandate isn't against inflation, it's against rising wages. It's no wonder that wages have been depressed for 20 years, the fed is getting better and better at suppressing wages.

What they should be doing is waiting until inflation is above 2 percent, then hiking rates. Instead they've constantly been over aggressive at the first sign wages might increase.

Rebelrebel7's picture

Well, you certainly give the Fed more credit for their intentions than I believe is  warranted! It's not exactly rocket science, it's a con job! Due  to the inherent conflict of interest, they are incapable of regulating monetary policy that would benefit our country!

Repeal the unconstitutional Federal Reserve Act of 1913 and restore the right to congress to coin money and regulate its value, debt free!

No need for taxes or spending reductions!

 

itstippy's picture

Attention working-class Americans and old-school economists: This Time Really Is Different.

We now live in a global economy with digital communications, instant financial transactions, containerized shipping, and highly automated production methods.  American working-class labor simply isn't as needed to produce and sell stuff in the U.S.  Your labor ain't worth much anymore; there's plenty of cheap labor available worldwide.  

We also now live in a world where Central Banks provide all the capital necessary to the financial system at rock-bottom interest rates.  Your saving aren't needed anymore.  No more fat interest rates on savings accounts or bonds.  No more free toasters.  

The only things the Amerrican working class still has that the financial system needs is the ability to borrow more money and the willingness to consume more goods and services.  There is nothing that the President or Congress or the Federal Reserve or Spongebob Squarepants can do to fix this situation.  

Plan accordingly.

Hume's picture

For all the Fed haters out there, how do you explain that, as time has passed from the formation of the Fed, recessions have become more and more rare?

J J Pettigrew's picture

The Fed, sir was promoted to perform the funtion of adding liquidity when banks were illiquid.  Banks lend long and borrow short. They make the spread.  When temporary (TEMPORARY) liquidity issues arose, the Fed was to solve them. Period.

The Fed has morphed, even since 1978 when their last mandate and mission statements were codified and approved by Congress.

There are THREE, not two but THREE mandates.

Now you tell me where they are abiding by their mandates.

1. Promote Maximum employment.  (I give them a B on this)

2. Promote STABLE PRICES.  ( I give them an F on this. Promoting inflation is not promoting stable prices)

3. Promote Moderate Long Term Rates. (F again. Record low rates for 8 years is hardly moderate.)

SO you see, they are in constant violation on two of the three points of their mission statement.

FURTHERMORE, they have self expanded their "powers" to include forcing interest rates BELOW the inflation rate now for 8 years.!!!!!

This is counter to the interest rate history of this country.!!!

They have connected that which they are obliged to monitor with foreign central bankers.....this is not in their sphere of authority.

What happens in China or Europe need not have one thing to do with Fed policy in the US.

J J Pettigrew's picture

The Fed has become a Central Planner. This was never the intent.  It was never mandated.

The Fed now irons out the cycles, and they think they are briliant in doing so.  They spent $4 Trillion exercising their theory.

But now they cant get out of their balance sheet excesses....for as Newton said, "for every action, there is an equal and opposite reaction."

So we will now hear of the new theories that the $4 Trillion excesses on the balance sheet need not be reduced...in fact it is a good thing!!

Hayek and others have said, Central bankers, when they decide a course, willfully hurt one group and help another.   The Free Market does not do this!!! But Central Planners do.  So can we see who has been HURT TERRIBLY by having interest rates below the inflation rate....and who has profited from this manufactured condition??

So as they "iron out" the cycles, they create MEGA CYCLES...SYSTEMIC COLLAPSE condiitons.....that is what '08 was.....Greenspan had the punch bowl too full for too long.  And now it is even more so....

Cycles flush excesses, keep money and capital responsible and well allocated. Can we say that is what is going on now?

 

jmeyer's picture

"The Fed has become a Central Planner. This was never the intent.  It was never mandated."

 

It WAS THE INTENT. And we will have a mega meltdown; it's in the DEBT, public and private. The mega melt will result in a world wide single currency, digital in nature and controlled by the BANKERS who have been planning this for 250 years ( think Rothschild ). In the LONG run this may be a good thing but either way it's a done deal. It's not like they planned every detail and twist and turn in the world but that they had a strategy that is multigenerational and supported by politicians and businessmen ( and women ). You can take some comfort in the fact that the bankers want the people to succeed, flourish and make money; everybodys' happy. Live life, enjoy, mazeltov. The politicians don't give a rat's ass about the people. They are after POWER uber alles. The bankers are the only " group " that can control the politicians. Go back and look at English history where one dude was battling another dude to be king and see that the bankers funded both sides a lot. Heads rolled but the bankers made the shekels. It's the same today. The more things change, the more things stay the same.

PUNE's picture

Oh okay?  really that is crap

Clock Crasher's picture

Interest payments with 1% rates = 500 Billion

GDP growth = 2.5%

Deficit as a percentage of GDP = -2.5%

So.. we have a problem here. The good news is that the inflation has been amassed in the stock and bond market and to a smaller extent college/autos/housing.

The bad news is that eventually this inflation will leak out of these markets as value investors front run positions in commodities.. the value play.  If this triggers a bull market in commodities then the cost of living will also rise, likely out of control.

At that point there will be two choices. 

Choice 1. Do nothing. Result - social unrest inducing levels of inflation.

Choice 2. Raise rates until the inflation is put out. Result - stock market obliteration and the bankruptcy of every financial institution without a manufacturing base to fall back on and tens of millions of pro-socialists among our ranks with no marketable skills and hungry EBT communities.