Fed's rise to tyranny has no end in sight
By Noureddine Krichene
A country needs a constitution for the sole purpose to protect citizens against totalitarian government. Confiscating wealth of citizens via money inflation is totalitarian power. To protect against this power, the US Constitution entrusted congress with the authority to coin and regulate the value of money. The US Constitution sought to protect citizens against totalitarian power of government.
The US Federal Reserve, founded in late 1913, acquired the power to create money. Its original purpose was modest; namely to provide an elastic money supply for the economy. Soon after, it monetized the US debt; it extended its powers to subsidize
traders in capital markets, abolish the gold standard, and then to assume the mandate of full-employment of labor.
Now it is the central planner of the economy with unlimited power to create money and manage all segments of the economy. It observes no rules. It bails out banks at the expense savers and workers. It is a tool of politicians seeking votes. Speculators in capital markets earn fortunes on Fed's cheap liquidity and the government relies on it to force near-zero interest rate and monetize monumental fiscal deficits.
Through its negative real interest rate and money expansion it inflicted severe financial crises in the 1930s, 1970s, 1980s, and recently the 2008 financial crisis. It has impoverished masses of people and pushed food prices to forbidden levels - in 2013, close to 50 million US citizens live on food stamps. It caused trillions of dollars in fiscal deficits to cope with bailouts and welfare spending caused by the crisis.
At present, its policy of massive money printing and near-zero interest is setting off bubbles in the stock markets, housing markets, and a currency war among leading industrial countries. Its pillar achievements are: debauching money, impoverishing workers and fixed-income recipients, economic disintegration, and financial crises and disorders.
The creation of money out-of-thin air by the banking system was denounced long time ago. Senator Daniel Webster (1782-1852) noted that "we have suffered more from this cause than from every cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even arms and artifices of our enemy."
Frederic Bastiat (1801-1850) deplored the redistributive injustice of paper money inflation. It steals wealth from its owners and showers it for free on gainers. Bastiat wrote: "I must inform you that this depreciation, which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief. Sharp men, brokers, and men of business, will not suffer by it; for it is their trade to watch the fluctuations of prices, to observe the cause, and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it."
In the same vein, Charles Holt Carroll (1799-1890) severely condemned the redistributive effect of fictive money. He noted that "of all the contrivances for cheating mankind, none has been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man's field with the sweat of the poor man's brow."
Carroll noted that "the truth is, an expanded and consequently cheap currency is the most costly and wasteful machinery a nation can possess; the history of the world shows it to be uniformly unprofitable or disastrous. There was never a greater mistake in any science, and never one so fatal to the stability of property and the well-being of society."
Carroll deplored the devastating effects of paper money. He stated that "the value of money is regulated to disorder, to the impairing of contracts, and to the confusion of all just ideas regarding the rights of property."
Thomas Jefferson (1743-1826) wrote: "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
The Fed theory is as simple as 1-2-3: (1) set interest rates at zero; (2) shower unlimited money out-of-thin air, called "quantitative easing", on government and borrowers; (3) then full-employment and prosperity are secured. In sum, fake money and price distortions turn stones into bread. Call it unorthodox money policy. This policy has been in effect now for five years.
It is a fatal error to believe that near-zero interest rate and unlimited money creation will achieve full-employment or promote prosperity. Such money creation is counterfeiting; it redistributes wealth to beneficiaries who enjoy free wealth. The Fed counterfeits money; but it cannot counterfeit employment and growth.
The 2008 financial crisis demonstrated this plain truth; people bought houses, cars, and everything on credit; they were unable to pay for it; they enjoyed it free; banks were bailed out by the Fed and the government. The Fed is now pushing monumental loans out-of-thin air.
People are happy to take as much credit as the Fed is willing to extend; buy houses, furniture, and cars; this will create a false boom in these sectors. However, as in 2008, the beneficiaries will default with certainty; the economy will go through another crisis. Those who saved will find out their saving has been stolen by the Fed, through inflation and near-zero interest rate, in favor of borrowers.
The "legal" counterfeiting of the Fed is worse than the crime of disgraced stockbroker Bernie Madoff; both have indulged in an immoral swindle scheme; both defraud victims in favor of beneficiaries. The only difference is that Fed officials and beneficiaries are reaping legally stolen wealth; Madoff and similar beneficiaries reaped wealth illegally.
Money creation out-of-thin air never meant capital creation; if that was true, then the multi-trillions of dollars created by the Fed would have eradicated poverty in the world. The Fed created trillions of dollars in fake money; it did not create one gram of wheat or one drop of oil.
Near-zero interest rates are imposed by force; they deny savers any income on their saving; this is equivalent to the Fed forcing you to let tenants live in your house without paying rent. Your house cannot be maintained and ends up by being destroyed.
Near-zero interest rate, combined with high inflation, yield negative real interest rates that curtail saving, capital, and growth. Only an economy of thieves, legal or illegal, has negative interest rates. If you price wheat at near-zero price you will have no wheat. If you force interest rates to zero, you will have no capital produced. The economy will stall.
So far, the Fed has achieved its goal of setting off bubbles in housing and the stock markets under the guise of restoring full employment. It is showering again massive wealth to speculators and beneficiaries of loans and government doles. It has created too much speculation and uncertainty. The inflation of stock and housing prices is seen by the Fed as a sign of recovery; it is no threat to the economy. The inflation of food and energy prices is of no Fed concern even if people starve to death. Core inflation, computed by the government, is less than 1% for the past 10 years, so the Fed has still plenty of room to print money and redistribute wealth and income.
The Fed will not abandon its money debasing and financial disorder policy. In view of the excessive indebtedness of the US government and the household sector, the Fed will step up its money debasing and inflation policy and maintain near-zero interest for decades to come.
The government and debtors need inflation as a form of default. There are gainers from inflation who outnumber losers, which makes Fed's policy appealing. Inflation and prohibitive food prices will be a daily fact of life. More people will get accustomed to free wealth from cheap money. However, the prying ground will be exhausted and there will be less prey for hunting.
The Fed may celebrate its centenary with a dollar that is worth, in terms of the consumer price index, less than 2 cents in 1913, and in relation to gold, less than 0.01 cent. This shows the record of the Fed in terms of price stability and maintaining the value of the currency.
Only more agony and disorder lie ahead with the Fed's tyranny - a Fed that has the full blessing of the president, congress, and all free profiteers.
The Fed wants to inculcate the view that it saved the US economy from depression during 2008-2012. Without the Fed's unorthodox money, the US economy would have sunk in depression instead of growing at a timid 1%-2% per year during 2008-2012. A professor of economics claimed that, by preventing the unemployment rate from going to 20%-25%, the US Fed had indeed created 25 million jobs.
One is entitled to claim that had the Fed renounced its mischievous policies in 2008, the US economy would have grown at 5%-6% during 2008-2012. Ronald Reagan said "Government is not a solution to our problem, government is the problem."
Likewise, the Fed is not the solution, it is the problem. In an era of deep political corruption no one knows how the Fed's crimes will end.
Noureddine Krichene is an economist with a PhD from UCLA.