Wednesday, April 17, 2019

Should the Fed raise or lower rates? NOTA





      President Trump wants the Federal Reserve (aka "The Fed") to lower interest rates.  He says it's necessary to stimulate the economy, which of course is a major selling point for his re-election.  

      Wow.  So simple!  Use the power of your office to spur the economy and create jobs and all that other wonderful stuff, and the people rejoice and reward you with another term.  Evidently, being President IS a no-brainer after all!

      Is there are downside to this scheme?  Well, according to the economics textbooks, if the Fed lowers the interest rate too much, it could cause inflation.  But how much is "too much"?  Besides, who cares about inflation as long as the economy is booming and paychecks are abundant, right?  Or not?

      This dilemma deserves some reasoned analysis.

      A big reason for the Fed's existence is to control interest rates and their cousin, the money supply.  The thinking goes something like this:  we mortal humans are not intelligent enough to spend, save, and invest money correctly.  Left to our own devices, we would spend more than we take in, and we'd be incapable of running businesses, and build bridges to nowhere, and so forth.  Thus, the super-intelligent gods of government must take control and run things so that, you know, it's done correctly.  They shall be the ones who decide how much money shall be in the economy. 

      Let's back up a few millennia.  In the beginning, the concept of "money" was not even invented by government.  Eons ago, people figured out that, in order to buy, sell, trade, and make an economic system work, we need a standard of exchange.  Bartering was great, but it only worked when all parties in a transaction were exchanging things worth exactly the same amount.  They experimented around with assorted items of value, but the one commodity that worked best was precious metal, especially gold.  It was durable, easily divided, had intrinsic value, and reasonably stable quantities. 

      But governments are always looking for ways to accumulate more money and power.  So they commandeered the whole "money" thing, using the ole' dependable argument that they were "protecting the common good".  They banned trading in gold, and printed up little pieces of paper with pictures of dead politicians, and told the people:  "This is money.  Use it, else go to jail."

      The Federal Reserve Notes that you have in your wallet are just that:  a piece of paper, not backed by gold or anything.  There's nothing in the world to stop the government from cranking up the presses and printing as many of them as they wish.  The alternative is taxation, but that is forever unpopular; so simply taking over a nation's currency is a far easier way for government to spend all it wants.

      That takes us up to where we are today, and the controversy over how much money shall be in the economy.  Lowering the interest rate and increasing the money supply creates an illusion of a booming economy, but make no mistake:  the Fed has not created one smidgeon of wealth.  It's just a scam.  They call it "monetary policy"; I call it "counterfeiting".  But if "monetary policy" can "stimulate the economy", why is it illegal for ordinary citizens like me to do likewise?  They would probably answer that they are smarter than me and only THEY know how to do it properly.   

      Don't fall for the scam.  These self-righteous bureaucrats cannot possibly know what zillions of consumers, businessmen, investors, spenders, marketers, entrepreneurs, innovators, volunteers, workers, and even Mother Nature will do tomorrow.  They do NOT know what's best for you and me and everybody else across the land.  I don't care how many diplomas and letters they have behind their name; in the final wash, they're just mortal humans, not super-human deities. 

      A good analogy would be if the government was in charge of deciding how many SHOES that manufacturers shall be permitted to produce.  The bureaucrats, each with a pile of impressive credentials, would accumulate tons of data and prepare all their complicated-looking charts and graphs that us less-educated citizens would never understand.  Then they'd issue their edicts, and any shoe manufacturer who exceeded his/her quota would be prosecuted to the full extent of the law. 

       But of course this is ridiculous because the free market can figure out how many shoes (or anything) to produce without governmental "help", thank you.  The free market ALWAYS figures out a way to make it work, at the lowest cost and highest customer satisfaction possible.  The concept applies to shoes as well as any other good or service.  Why do we assign to bureaucrats something as vital as money and finance?

      And if you think that bureaucrats with their brag-worthy credentials are bad, here's what's even worse:  clueless, semi-literate politicians with their Twitter accounts, focused only on the next election.

      Now back to the original question:  What should the Fed do, raise rates or lower rates?  The correct answer is:  NOTA.  None Of The Above.  What we should do is abolish the Fed.  Tell the banks: you are on your own now; if you wish to continue to make a profit, I am certain you will figure out a way to do it without the government holding your hand.
     And abolish all "legal tender" laws.  Allow people to conduct business using whatever currency they choose.  It could be gold, silver, Mexican Pesos, Japanese Yen, bitcoin, or perhaps United States Federal Reserve Notes, whatever.  Banks may even create their own currency.  Which currency or currencies will prevail in the market?  The answer is:  whichever has the best integrity and stability.  People will reject any currency that is unstable or if there is doubt over its real value. 

      The free market works, if you let it.


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