February 19, 2023

Talk about a tale of two realities.  Certain Wall Street Journal articles quote two Federal Reserve presidents saying interest rates will remain high for a couple more years, until business activity eases.  In other words, that’s until the central bank’s handling of monetary policy puts our economy into recession.

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Then the Journal lists several stories about softening labor markets, which translates into lower wage pressure.  And a slowdown in shipping.  Both items indicate a slowing economy.  And isn’t that the reason the Federal Reserve raised interest rates so rapidly, in so short a time?

Then why are these Fed presidents, voting members of the Federal Open Market Committee (FOMC), touting higher rates for years?

Remember when Federal Reserve chairman Jerome Powell called inflation “transitory”?  Their slow reaction to pricing inflation led to the Fed’s panic interest rate increases a year later.  One can only conclude that the smartest bankers (just ask them) in the world were asleep at the wheel.  Again.

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The present Fed reaction to inflation was poor, but it is an effect of certain egregious acts in which the Fed engaged 15 years ago.

In 2008, a former chair of the Fed Reserve, Ben Bernanke, started the Fed Reserve on the path of the least understood and most devastating aspect of Federal Reserve malfeasance: Modern Monetary Theory (MMT).  That theory postulated that no restraint is needed on printing money.  Thereafter, three Fed chairs presided over printing $9 trillion U.S. dollars between 2008 and 2019, thereby ballooning the Fed’s balance sheet by a factor of ten.

The supply of money in the economy, governed by a powerful and highly autonomous Federal Reserve, has major implications for economic activity or economic destruction.  Every U.S. dollar printed in excess of that needed to liquefy the private economy devalues every other dollar in circulation.  This is an immutable fact.  Our highly regarded Federal Reserve unilaterally chose to ignore it.

The Federal Reserve’s actions are the root cause of the inflation we have today.  Inflation is devaluation of the U.S. dollar — which is caused by too many dollars in circulation.  

Rising prices are the symptoms not the cause.  

Federal Reserve rate increases will affect only the symptoms, not the cause.  In the end, the Federal Reserve’s current policy will significantly harm the economy by shutting down business activity and destroying jobs, but will not stop inflation.  Reducing the money supply will increase the buying power of each dollar.