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The Steady and Inexplicable Theft by the Federal Reserve and Its Violation of Mission ⋆ Epeak . Independent news and blogs

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Once there was an emergency.  Now there is not. There was a conflagration in the financial world eight years ago. No more. The bonuses are back on Wall Street, bank CEOs are pulling in huge compensations, and the stock market is holding at all time highs. Yet the fire hoses of the Federal Reserve are still at work, no longer putting out a fire but filling the swimming pool and Jacuzzi.

What the Federal Reserve is engaged in is no longer being a savior of the system, but a featherer of beds.  It is indefensible and inexplicable.  It is largesse to some, tantamount to theft from others, for they are intentionally harming one sector and assisting another at the former’s expense.  Is this the new function of the Federal Reserve?

The Federal Reserve is openly promoting inflation and coincidentally keeping interest rates below the inflation rate.  This inversion is against historical norms, outside the Fed’s mission statement, and tantamount to taxation.

The Federal Reserve, that creature form Jekyll Island, is theoretically bound by the mandates of its mission statement as arranged by Congress. Much is said about the Fed’s “dual mandate”, but the mission statement mentions three.  The Fed is in constant violation regarding two of these mandates. The mission statement charges the Federal Reserve with these goals:

“conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Maximum Employment:

Here the Fed has had some success and honored its mission despite the headwinds of illegal immigration.

Stable Prices:

Violation one.  The Fed is on the record that it is promoting an inflation rate of 2%.  Any inflation rate is by definition not stable pricing and not in concert with its mandate. There is nothing in the granted powers of the Federal Reserve to allow the promotion of inflation.  Stable means stable.

Moderate Long Term Rates:

Violation two.  Moderate means not extreme.  For the past 8 years, rates have hovered near historical record lows.  Extremely low rates are not moderate, they are extreme.

Economist Milton Friedman called inflation the tax that never passes Congress.  Yet the Fed is on record as a promoter of this “tax.”  Unilateral taxing by an unelected body, above its powers and outside its mission… what could be the problem?

When Freidman drew his conclusion, he recognized the detrimental draining impact of inflation — even though at the point of his observation, interest rates actually exceeded the inflation rate.  Inflation was damaging even as interest rates “covered” the inflation rate. What would he say now with the Federal Reserve holding interest rates below the inflation rate, for years, like a beach ball held beneath the surface of a swimming pool?

The silent theft of the Federal Reserve

As we can see from the charts provided below, this contrived arrangement drains money from one sector and moves it to another.  Holders and savers of money are punished, owners of stocks and real estate are winners. Saving was once promoted by the Fed, even as recently as Alan Greenspan’s tenure as chairman.  Nowadays, the savings rate goes unmentioned.

Why this rate inversion — short rates below inflation — remains in effect is inexplicable in terms of the Fed’s mission.  The notion of the Fed’s independence is not airtight, and influence can be other than political.  It is easy to notice that those behind this policy are not so distant from those who benefit from the condition.

The independence of the Federal Reserve necessary for it to conduct its policies, unfettered from external influences, is the defense du jour against threats of oversight or even auditing. But the question must be asked: independence from whom, exactly?  The standard argument is the necessity to be independent from political forces.  But what of the necessity to be independent from the forces of those who profit mightily from certain policies, policies once implemented in emergency mode, but now are maintained for other reasons?

The Federal Reserve, is a curious entity that is neither federal nor has reserves, yet enjoys this unbridled control over markets and the economy.  They are central bankers, central planners, who come with theories and notions, controlled by banking interests.  They can also be a taxing body, as demonstrated here, who reports to no one.

The Federal Reserve has forced and continues to force the current historical departure between interest rates and inflation rates.  Historically and typically, interest rates reside just above the inflation rate.   

Chart 1: Inversion of Inflation over short rates

Chart source

This promotes savings and guards against the depreciation of the currency. It inhibits the reckless creation of debt, for it attaches a real cost to the servicing of that debt.  The real cost now is in holding money, for the Fed is ensuring it declines in value by promoting inflation rates above their short term rates.  By what powers or authority is this allowed?

Chart 2: Federal Funds rate

 

Chart 3: US inflation as measured by the government

Charts

Currently we have near 2% inflation with a Federal Funds rate of .75%.  The chart below points out this contrived abnormality.  This inversion promotes borrowing and debt creation and deters savings.  Is this wise?

Chart 4: Total Consumer Debt (excluding mortgages)

What is the Federal Reserve waiting for?  It is running out of excuses for this position, this tax on savers.  The stock market is making new highs and real estate in many areas of the country is price leaping.  The official unemployment statistic is below the point at which Bernanke promised (2009 WSJ) that rates would normalize and, at 4.8%, is well within the range considered full employment. The Dow Jones has doubled since that promise by Bernanke. Is the Fed accountable for what they say? Or, does the Fed’s pseudo independence insulate them from the responsibility to abide by their own words?

Could the merits of stock and real estate ownership stand alone if unaided by a Fed policy that inverts inflation over interest rates?  So where are we really, exactly?  Where would assets be valued (stocks and real estate) if free market forces set rates rather than a ten member panel of brokerage house, investment bank, commercial bank appointees?

The velocity of money (see chart), a measure of how often a dollar ‘turns over’ in the economy, has been severely harmed by this false environment created by the Federal Reserve. Trump bemoans that businesses can’t borrow, but who asks whether the record low rates are making lenders balk?  In these two instances, low rates are an impediment to economic activity. Central planners cannot detect that which the multitudes of players in a free market can and do detect.

The dangers of this central planning by the Federal Reserve are forewarned by Hayek and Von Mises.  Principle among the cautions of these Austrian School economists is that the certitude with which central planners initiate policies often forbids them the foresight to envision the problems of disengaging or exiting such policies.  Is this where we are now?

The Fed doesn’t because they can’t?

This forced deviation from historical norms via today’s Federal Reserve house of mirrors is untenable.  The Fed has created a cattle drive of sorts.  And just as 10 cowboys can drive 30,000 cattle, the 10 member Federal Reserve Board have created an inertia in the markets that seems unwise and out of control.  Forcing this unnatural inversion in rates, once as a rescue but now as a luxury to the markets, is unwise.  It is also an unfair manipulation by an unelected body operating outside its authorization.

Once there was an emergency.  Now there is not. There was a conflagration in the financial world eight years ago. No more. The bonuses are back on Wall Street, bank CEOs are pulling in huge compensations, and the stock market is holding at all time highs. Yet the fire hoses of the Federal Reserve are still at work, no longer putting out a fire but filling the swimming pool and Jacuzzi.

What the Federal Reserve is engaged in is no longer being a savior of the system, but a featherer of beds.  It is indefensible and inexplicable.  It is largesse to some, tantamount to theft from others, for they are intentionally harming one sector and assisting another at the former’s expense.  Is this the new function of the Federal Reserve?

The Federal Reserve is openly promoting inflation and coincidentally keeping interest rates below the inflation rate.  This inversion is against historical norms, outside the Fed’s mission statement, and tantamount to taxation.

The Federal Reserve, that creature form Jekyll Island, is theoretically bound by the mandates of its mission statement as arranged by Congress. Much is said about the Fed’s “dual mandate”, but the mission statement mentions three.  The Fed is in constant violation regarding two of these mandates. The mission statement charges the Federal Reserve with these goals:

“conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Maximum Employment:

Here the Fed has had some success and honored its mission despite the headwinds of illegal immigration.

Stable Prices:

Violation one.  The Fed is on the record that it is promoting an inflation rate of 2%.  Any inflation rate is by definition not stable pricing and not in concert with its mandate. There is nothing in the granted powers of the Federal Reserve to allow the promotion of inflation.  Stable means stable.

Moderate Long Term Rates:

Violation two.  Moderate means not extreme.  For the past 8 years, rates have hovered near historical record lows.  Extremely low rates are not moderate, they are extreme.

Economist Milton Friedman called inflation the tax that never passes Congress.  Yet the Fed is on record as a promoter of this “tax.”  Unilateral taxing by an unelected body, above its powers and outside its mission… what could be the problem?

When Freidman drew his conclusion, he recognized the detrimental draining impact of inflation — even though at the point of his observation, interest rates actually exceeded the inflation rate.  Inflation was damaging even as interest rates “covered” the inflation rate. What would he say now with the Federal Reserve holding interest rates below the inflation rate, for years, like a beach ball held beneath the surface of a swimming pool?

The silent theft of the Federal Reserve

As we can see from the charts provided below, this contrived arrangement drains money from one sector and moves it to another.  Holders and savers of money are punished, owners of stocks and real estate are winners. Saving was once promoted by the Fed, even as recently as Alan Greenspan’s tenure as chairman.  Nowadays, the savings rate goes unmentioned.

Why this rate inversion — short rates below inflation — remains in effect is inexplicable in terms of the Fed’s mission.  The notion of the Fed’s independence is not airtight, and influence can be other than political.  It is easy to notice that those behind this policy are not so distant from those who benefit from the condition.

The independence of the Federal Reserve necessary for it to conduct its policies, unfettered from external influences, is the defense du jour against threats of oversight or even auditing. But the question must be asked: independence from whom, exactly?  The standard argument is the necessity to be independent from political forces.  But what of the necessity to be independent from the forces of those who profit mightily from certain policies, policies once implemented in emergency mode, but now are maintained for other reasons?

The Federal Reserve, is a curious entity that is neither federal nor has reserves, yet enjoys this unbridled control over markets and the economy.  They are central bankers, central planners, who come with theories and notions, controlled by banking interests.  They can also be a taxing body, as demonstrated here, who reports to no one.

The Federal Reserve has forced and continues to force the current historical departure between interest rates and inflation rates.  Historically and typically, interest rates reside just above the inflation rate.   

Chart 1: Inversion of Inflation over short rates

Chart source

This promotes savings and guards against the depreciation of the currency. It inhibits the reckless creation of debt, for it attaches a real cost to the servicing of that debt.  The real cost now is in holding money, for the Fed is ensuring it declines in value by promoting inflation rates above their short term rates.  By what powers or authority is this allowed?

Chart 2: Federal Funds rate

 

Chart 3: US inflation as measured by the government

Charts

Currently we have near 2% inflation with a Federal Funds rate of .75%.  The chart below points out this contrived abnormality.  This inversion promotes borrowing and debt creation and deters savings.  Is this wise?

Chart 4: Total Consumer Debt (excluding mortgages)

What is the Federal Reserve waiting for?  It is running out of excuses for this position, this tax on savers.  The stock market is making new highs and real estate in many areas of the country is price leaping.  The official unemployment statistic is below the point at which Bernanke promised (2009 WSJ) that rates would normalize and, at 4.8%, is well within the range considered full employment. The Dow Jones has doubled since that promise by Bernanke. Is the Fed accountable for what they say? Or, does the Fed’s pseudo independence insulate them from the responsibility to abide by their own words?

Could the merits of stock and real estate ownership stand alone if unaided by a Fed policy that inverts inflation over interest rates?  So where are we really, exactly?  Where would assets be valued (stocks and real estate) if free market forces set rates rather than a ten member panel of brokerage house, investment bank, commercial bank appointees?

The velocity of money (see chart), a measure of how often a dollar ‘turns over’ in the economy, has been severely harmed by this false environment created by the Federal Reserve. Trump bemoans that businesses can’t borrow, but who asks whether the record low rates are making lenders balk?  In these two instances, low rates are an impediment to economic activity. Central planners cannot detect that which the multitudes of players in a free market can and do detect.

The dangers of this central planning by the Federal Reserve are forewarned by Hayek and Von Mises.  Principle among the cautions of these Austrian School economists is that the certitude with which central planners initiate policies often forbids them the foresight to envision the problems of disengaging or exiting such policies.  Is this where we are now?

The Fed doesn’t because they can’t?

This forced deviation from historical norms via today’s Federal Reserve house of mirrors is untenable.  The Fed has created a cattle drive of sorts.  And just as 10 cowboys can drive 30,000 cattle, the 10 member Federal Reserve Board have created an inertia in the markets that seems unwise and out of control.  Forcing this unnatural inversion in rates, once as a rescue but now as a luxury to the markets, is unwise.  It is also an unfair manipulation by an unelected body operating outside its authorization.

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