THE FED’S DILEMMA
The Federal Reserve doesn’t know what to do. That’s too bad. For all of us.
The bigger problem is that it probably doesn’t make much difference what they do – or don’t do.
Fed
The Fed And Drug Addiction – A Prediction
THE FED AND DRUG ADDICTION
The Federal Reserve Bank was established in 1913. Its stated purpose was to control the economic cycles; more specifically to avoid panics and crashes by smoothing out the variances in the stages (prosperity, inflation, recession, depression) of the economic cycle.
The plan centered around control (expansion and contraction) of the money supply and exertion of any influence it could muster regarding direction (up, down, or stable) of interest rates.
Before going further, lets talk for just a bit about drug addiction. Without being overly technical, lets briefly and generally look at the course of addiction; other than for purely experimental reasons, or peer pressure, or social association. Most addictive habits are the result of attempts to escape, or hide, or avoid problems and concerns.
What is most important, however, is the process itself and the effects of usage; both concurrent and cumulative.
An initial ‘fix’ will likely provide temporary relief and/or even induce a state of calm or euphoria. All good so far.
After a reasonably short period of time, the effects (for the most part) seem to dissipate and the individual returns to previous reality. And, of course, after a brief interlude, is just as aware of the issues that were of concern previously.
Soon thereafter, the next attempt at escape is pursued. But something is different. This time the effects experienced are not as ‘positive’ as before and don’t last quite as long. In addition, the aftereffects resulting from the ‘come down’ are more pronounced.
The seemingly logical next step for most users is to up the dosage; which is done. And the effects are more positive and might even last as long as the first time. But the aftereffects are worse.
The Federal Reserve has proclaimed their intention to manage the economic cycles. And, yes, they do believe they can. At least they say they can. And they have said that for decades. But, unfortunately, for them and for us, they have not been able to do so and cannot do so. Not that they will admit that.
The Fed’s efforts at controlling the money supply are attempted in expectation of minimizing the effects of recession, maintaining financial and economic stability, promoting prosperity, and avoiding calamities like the Depression of the thirties. Certainly those are commendable objectives. But are they even possible?
Likely not. And their track record thus far indicates more harm than good has come from their efforts.
The Fed has the tools to expand and contract the money supply. But on a continuous basis, and ongoing for over one hundred years, the focus is on expansion. And the net result of their cumulative expansionary efforts is a ninety-eight percent decline in the value of the U.S. dollar.
That is the price we have paid for hoping and believing that a small group of individuals can “manage the economic cycles” and avoid temporary and short-term pain associated with the changes in the cycle.
As addiction to drugs becomes more intense, and the dosage and frequency increase, so do the cumulative negative effects. An individual who is habitually addicted starts to notice a breakdown in organs and systems within the body. And each succeeding fix or dosage supplies less and less of the intended effects; and doesn’t last as long.
As the reality of the addiction sets in, and all along the way, half-hearted attempts are made at kicking the habit. Get off the drugs and get better. But in most cases, the shorter, temporary illusion of something better or something not as bad prevails. And so the destructive behavior continues. But the withdrawal symptoms are worsening. Hence, any abstention is brief.
By now, death may very well be apparent. Continued usage will kill the patient. But the effects of withdrawal, by necessity, might pose just as great a risk. In other words, it just might be too late to do anything of lasting, positive, consequence. Damned if you do, and damned if you don’t.
What we refer to as ‘inflation’ are really the effects of inflation that has already been created by the Fed. The continued, ever-increasing expansion of money and credit destroys the value of existing money. Over time, as the existing money loses its value/purchasing power, the effects show up generally in the form of rising prices.
This is why it costs more today to buy life’s necessities (and luxuries) than it did ten years ago; or twenty years ago, etc. On a year-to-year basis it is usually not too noticeable. But sometimes the symptoms are exacerbated such as in the seventies.
The long-term results of reliance on the Fed’s infusions of money and credit have brought us to a similar juncture as that mentioned above in the drug addiction scenario.
As we become more dependent on the inflation to keep things going, the effects of each successive expansionary effort have less impact. And we become more vulnerable in two ways.
The first is an overdose. Too much money, too quickly, leads to complete destruction and repudiation – death – of the currency. The runaway or hyper-inflation in Germany in the 1920s is a defining example.
The second is a credit collapse. Not enough money at the right time and the patient slips into withdrawal. And the effects of withdrawal – monetarily speaking – could be so bad as to usher in true deflation and a full-scale depression.
Just as a drug addict must endure pain and discomfort in order to cleanse himself, so must it be with our monetary system. It is not the individual, per se, or the system that are at fault. The dilemma results from the cumulative effects of repeated bad choices over long periods of time.
In 2008-09 our economy bordered on the verge of collapse. Think of the drug addict who has slipped into withdrawal and the accompanying symptoms have become almost unbearable.
Doing the right thing would have required enduring the pain while setting things straight. In order to effectively cure the patient, this means implementing sound monetary policy; admitting the failure of policies and actions that had been pursued for the past century; and resisting the temptation to avoid the necessary pain by relapsing into previous bad habits.
Unfortunately, the Federal Reserve chose to ramp up the dosage and increase the frequency.
The patient (U.S. dollar) has stabilized and is currently in recovery – temporarily. But full recovery is only possible if a purging and cleansing occurs. That won’t happen voluntarily; by the Fed, the U.S. Government, or by U.S. citizens.
The path chosen is one of managing the illness. The addict who wishes to avoid withdrawal and its often excruciating symptoms does something similar. Temporary comfort and illusion provided by regular doses of the drug – in this case, money – masks the pain and avoids the reality of the existing condition. And it leads eventually to death and destruction.
You cannot get better by killing yourself slowly, a little bit at a time.
What’s worse, however, is the increased likelihood that the entire system will collapse under its own weight, no matter how hard someone tries to avoid the inevitable consequences.
That is where the Federal Reserve (and U.S. Government) are today. It is exactly as we said earlier in referring to the addict who has passed the point of behavior modification and common sense having the desired effect. Too much damage has been done. Damned if you do, damned if you don’t.
Something similar to 2008-09 is going to occur again. Only it will be much worse. And regardless of the traditional, reactionary talk and efforts to save us, the system will likely not withstand the “symptoms of withdrawal”.
Learn to enjoy things now; as they are currently. It probably won’t get much better than this.
(more about The Federal Reserve: A Game Of Chess And The Source Of The Federal Reserve’s Power)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Source Of The Fed’s Power
SOURCE OF THE FED’S POWER
We have become pawns in the game of Chess being played by the Federal Reserve Bank. Who is their opponent? Anybody else who makes a move.
We have become pawns in the game of Chess being played by the Federal Reserve Bank. Who is their opponent? Anybody else who makes a move.
Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do. Mostly, it is about what they say. That’s because they can’t really do much of anything.
Except inflate the supply of money and credit. Which they have been doing for over one hundred years. And they are good at it, too. The historic erosion in value of the US dollar should merit more acclaim – or outrage. Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).
In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”. And, admittedly, they are sincere in that attempt. The trouble is, it is an impossible task.
The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).
Federal Reserve Bank policies are a repudiation of fundamental economic principles. The consequences of those policies and actions are evident in the historical results and the final resolution will be ugly.
On the face of it, that should be enough to discourage anyone from taking upon themselves such a hopeless task. But the problem is much worse than that. The inflation created by the Federal Reserve is intentional. And their efforts have brought about a ninety-eight percent decline in the value of our money.
The cumulative effects of their ‘success’ have made their job even more difficult. Now their efforts are almost solely focused on containing the effects of their own inflation. The stages of the economic cycle mentioned above are skewed in ways which alter their duration and hugely increase their volatility.
So why does the Fed do the things they do? For that matter, why does the Federal Reserve Bank even exist?
From my article, The Federal Reserve And Interest Rates – Definitely Not What You Think:
In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government. Or, in other words, maintaining their (the US Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make. It is not about the economic effects of their policies on US citizens (individually or collectively). It is ALL ABOUT KEEPING THE US GOVERNMENT SOLVENT. The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential. And nothing else takes precedence.
Alan Greenspan was noted for his verbiage. Other Federal Reserve Board chairs and members make frequent comments about various things related to the economy and financial matters. And the official reports and statements given for public consumption are usually crammed with facts and figures deemed to be part of a credible basis for the decisions and actions taken.
But, whereas there is a great deal of information related, you won’t hear anything referring to the above reason for the existence of the US Federal Reserve Bank.
The responsibility of “keeping the US Government solvent” may sound ‘laudable’ to some. I certainly would prefer that the US Government be able to return to solvency and maintain it. But something seems amiss.
It isn’t so much about keeping the government solvent as it is facilitating the government’s ability to borrow more and more money. This is done by issuing more and more Treasury bills, notes, and bonds. When the US Government needs money, the Federal Reserve creates deposits of Treasury securities in the accounts of certain ‘primary’ banks/dealers. Those institutions are then responsible for placing the securities with numerous other dealers and so on, down the line.
The largest amounts are sold to foreign governments and (very) large investors. Some are held by dealers as part of their investment inventory and some by banks who hold them as part of their reserves. The proceeds of those placements, of course, flow back to the US Treasury.
Acting for and in behalf of the US Government in the placement of US Treasury securities is the primary role of the Federal Reserve Bank. And it is the source of their power.
Buying from and selling to certain primary dealers in Treasury securities is an ongoing function of the Fed. It is done for the purpose of expanding and contracting the supply of money and credit already in the system. Which is an active way for the Fed to execute their mandate to “manage the economic cycles” and ‘hopefully’ ensure that economic conditions and operation of the financial system allow for continued issuance of more and more debt by the US Government (i.e., more U.S. Treasury Bonds).
This has supposedly worked reasonably well for several decades. But since the supply of money and credit is always expanding, the value (purchasing power) of the US dollar continues to suffer. Which is precisely why “a dollar today doesn’t buy what it used to” or “doesn’t go as far”.
And therein lies the rub. Confidence in the dollar is critical to the US Government. If that confidence is not sustained, then all bets are off.
The US Government must be able to sell enough Treasury securities. Otherwise, they will not have enough money to operate. If they don’t have the money to operate, they lose control – and power. And they will do whatever they can to avoid that outcome.
Any policy or ‘action’ by the Fed is always taken with this objective in mind: Maintain the viability of the market for US Treasury Securities. This enables the ongoing operation and function of the US Government.
As long as people continue to “look to the Fed” for direction, then they are demonstrating a degree of confidence that keeps things from unraveling. And it helps the Fed maintain a semblance of status quo. Which in turn benefits the US Government.
The Fed’s power lies in their manipulation and ongoing expansion of the supply of money and credit.
Unfortunately, expecting, wishing, and hoping that an isolated few individuals can control, avert, or stop the economic consequences that have been brought to bear on their own citizens and the rest of the world is a pipe dream.
Sooner or later, the dam will burst.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!