Want to know what is the biggest threat to your prosperity? Look no further than the policy statement released last night by the U.S. Federal Open Market Committee (FOMC)– America’s monetary politburo, the nation’s committee for financial central planning staffed with a select group of highly educated bureaucrats and guided by a former economics professor, and continuously engaged in administratively setting interest rates, manipulating asset prices and determining the extent of lending in what is really the pseudo-capitalist economy of the U.S. of A.
I don’t mean the specific wording of the statement that gets the economists on Wall Street so excited – what phrase did they change? Is this more hawkish or more dovish than last month’s statement? – Who cares? What matters is the sheer and utter economic idiocy underlying the Federal Reserve’s ‘mandate’ and at the core of practically every fiat money central bank. What you see in this statement – black on white – is the conceptual lunacy at the heart of our global paper money system, the reason we are in a massive crisis and about to get deeper into it.
The core belief enshrined in this document, and indeed in every Fed policy statement, is this: the central bank can and should, via discretionary changes in the supply of state paper money, affect interest rates in such a way that the economy reaches full employment and enjoys stable prices. What frivolous hubris! In a proper market economy, interest rates would, of course, be set by the market and result from the free interplay of voluntary saving and voluntary investment decisions by independent agents. Alas, not so in our semi-socialist system of state-controlled fiat money with a central planning bank. The committee knows better what interest rates and asset prices the economy needs to reach its full potential. After all, the committee is staffed with really clever people. Such things cannot be left to the public – or the market.
Think about the puerile assumption behind this: good, lasting and competitive jobs, one assumes, not as a result of saving, capital formation and entrepreneurial risk taking but as a result of clever monetary manipulation by the FOMC. And as the committee has ascertained that, presently, the US public is not reaching its full economic potential, Americans need to be cajoled into doing better with continuing super low interest rates that encourage them to go further into debt, and with bond prices delicately manipulated via the Fed’s debt monetisation program. This is such unspeakable rubbish, and such a shameless declaration of administrative arrogance, I can’t believe that many people outside the common-sense-free ivory tower of the MIT economics department and the privileged paper money aristocracy take this seriously. My sense is that fewer and fewer people in the real world do.
This idiotic assumption is the reason the entire world has, over the past forty years, converted from commodity money, or, paper money at least tentatively linked to commodities, to complete fiat money systems in which the supply of money is not only fully elastic and unrestricted by any ‘barbaric’ raw materials – shudder! – but under the full control of the enlightened and well-meaning state bureaucracy. By injecting new money into the economy, full employment can be generated. Fantastic! No really, it is fantastic. I mean fantastic as in imaginary, fanciful, implausible, incredible, insane, ludicrous, mad, irrational, nonsensical, outlandish and preposterous. That type of fantastic.
Make no mistake. This system is not only suboptimal, it is unsustainable. And we have already reached the endgame.
Continue reading at Paper Money Collapse.
The Economic Calculation Problem precludes the FOMC from having any success. Their mandate is impossible to achieve economically.
I agree with Detlev that the optimum interest rate is the free market rate, i.e. that central banks should not interfere with this rate. I also agree with his criticism of stimulating economies by encouraging households and firms to go into debt. Indeed, Mervyn King, the man who tried to boost our economy by dropping interest rates so as to encourage all and sundry to borrow more was in the European Parliament a couple of days ago. Unbelievably, this is what he said “the sheer volume of debt in the economy, is still very large and this poses massive macro- economic challenges”. Now if that’s not a self-contradiction, I don’t understand the phrase “self-contradiction”.
But I don’t agree with Detlev’s attack on paper money, nor with his claim that money has to be commodity based. Why is gold valued? Fashion – that’s all. Gold is shiny and doesn’t corrode, which for some bizarre reason makes large numbers of idiots want some of it. I could buy a kilogram of the stuff tomorrow, but I’ve no desire to. I own no gold at all. If the fashion changed and everyone became like me, the price of gold would plummet.
In contrast, everyone wants central bank created money (monetary base) because it’s the only stuff you can pay taxes with. If you don’t pay your taxes, you go to prison. Now strikes me as being just as powerful a basis for maintaining the value of a currency as that silly shiny stuff. As long as a country does not go mad with the monetary base printing press, that money will not suddenly lose its value due to hyperinflation.
I’m afraid you are both wrong.
Apologies to Detlev. Upon reading the full article I see he advocates taking money out of the control of the state. And as I pointed out, when left to its own devices the market always chooses gold and silver if it is available. At least as far back as recorded history goes.
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