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End the Fed… and replace it with what?
We need to end the Fed.
The Federal Reserve makes interest rates artificially low to encourage lending. This is popular in the short term because people can buy more stuff, but it inevitably leads to massive bubbles.
The Fed has a 2% inflation target, but since it completely abandoned the gold standard in 1971 inflation has averaged around 3.9% per year, which may not sound like much, but it’s a cumulative price increase of 600%. And the only reason it isn’t higher, despite a massive increase in the money supply, is because velocity has been decreasing.
Velocity is the “rate at which money is exchanged in an economy.” A low velocity indicates “a general reluctance to spend money.”
Once countries who use the dollar as their reserve currency start to lose faith in the dollar’s ability to retain its value then they’ll spend them on other currencies and commodities. Velocity and inflation will then pick up. Inflation acts as a hidden tax on workers and savers so looking ahead you can expect to see your wages and savings depreciate as inflation starts to converge with the money supply again.
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. — Milton Friedman
The Fed is cronyist. It’s a private institution with public power. The big banks sit on its board (revolving door), receive salaries, divide the Fed’s profit among themselves, accumulate interest on government bonds, sell crappy assets to the Fed (quantitative easing), are protected from risk with the Fed acting as a Lender of Last Resort (bailouts), and those who benefit the most from an inflationary currency are those who get to touch the newly printed dollars first because they get to buy things in the economy at a discount before prices have a chance to readjust to the new money supply.
The Fed is opaque. As Ron Paul said, “Freedom and central banking are incompatible.” The Fed has never been fully audited so we don’t know exactly how much money they owe and to who. How can any voter confidently consider themselves politically informed when we are kept in the dark over trillions of dollars? The Fed is not only unelected, but it’s unaccountable. Fed chairman Bernanke acknowledged that the Fed was responsible for the Great Depression, “We did it. We’re very sorry.” The Great Recession was also largely due to the Fed. Janet Yellen, president of the Federal Reserve Bank of San Fransico, said in 2005, “If the bubble was to collapse on its own, would the effect on the economy be exceedingly large? No.” And then in 2007, “I think the concerns we used to hear about the possibility of a devastating collapse — one that might be big enough to cause a recession in the U.S. economy — have been largely allayed.” She was then fired. Just kidding, she was promoted to the two most powerful monetary positions in America — Fed chair and now Secretary of Treasury. In government, it apparently pays to be wrong because had she been one of the few who had sounded the alarm then she would’ve been perceived as a poor team player. The Fed then spends billions of taxpayer dollars to indoctrinate the public on how great the Fed is while corrupting academia to the point where many PhD economists are Fed apologists because their profession’s top two employers are academia and government. As Milton Friedman said, “The Fed’s relatively enhanced standing among the public has been aided by the fact the Fed has always paid a great deal of attention to soothing the people in the media and buying up most of its likely critics.” This opaque cronyism lies at the heart of our financial system where literally 50% of every transaction is money and so this unethical way in which its managed has undeniably infected the rest of our culture.
The Fed is unconstitutional. Our government is a government of enumerated powers. Among the powers given to Congress is to “coin money and regulate the value thereof,” but there was no such statement saying Congress could issue paper money (“coin” undeniably referred to gold and silver) or create a central bank. The federal government only started issuing paper money in 1861 to fund the Civil War. In 1791, the First Bank of the United States was chartered, but it didn’t set monetary policy, regulate private banks, hold their excess reserves, or act as a lender of last resort. And yet even with these constraints, Thomas Jefferson (Father of the Declaration of Independence) and James Madison (Father of the Constitution) still believed it was unconstitutional and tyrannical so they discontinued it in 1811.
The Fed has enabled massive debt. Politicians can spend your money more easily when they don’t have to force you to send it to them, but instead can just depreciate it by printing more of it. We have more national debt than at any other point in our history both in real terms and as a percentage of GDP, which works out to roughly $350,000 per person. This much national debt would be impossible without a central bank. Our national debt has also enabled the rise of personal debt and the trade deficit. Due to the Fed, America’s greatest export has become pieces of paper.
So now that you know why we should end the Fed the next question is… what should replace it?
If we stick to a fiat currency then without a central bank the dollar’s supply would be determined by rules.
Economists have widespread disagreement over what those rules should be, but Ron Paul suggests leaving the money supply as it is. Moving forward, all the treasury would do is replace deteriorating dollar bills. The problem with a constant money supply though is it’s deflationary. Too much deflation would make people less likely to spend. This is why virtually every central bank targets 2% inflation, but what is considered “too much” deflation or inflation is subjective. Bankers give deflation a particularly bad rep because in an economy “dominated by debt-fueled asset bubbles,” deflation is particularly bad for risky investment bankers, but in general, lowering prices is a good thing for consumers.
Another idea is to automatically grow the dollar supply by 2% each year, which would make the dollar more stable and predictable. Like George Selgin, I’d love to see a cryptocurrency gain popularity that has this built-in rule.
Another idea is Milton Friedman’s K-percent rule where the money supply would grow in accordance to GDP growth since that’s what fundamentally creates long-term inflation. In other words, if GDP growth is 3% then the money supply would automatically increase by 3%. The K-percent rule could be altered to target 5% NGDP so that if GDP is 3% then you’d increase the money supply by 2% (3 + 2 = 5), which the benefit of this approach is if GDP growth fell to 1% then monetary policy would help stimulate the economy by increasing the money supply by 4% (1 + 4 = 5).
Any of these rules (maintain, grow at a constant rate, grow relative to GDP or NGDP) would be preferable to a central bank not just because it’d remove all the aforementioned negatives, but because it’d also introduce more predictability into our monetary system.
With that said, better than a rules-based fiat currency might be a commodity currency, specifically gold and silver.
Every fiat currency in the world has eventually gone to 0 whereas if you find Ancient Egyptian gold coins they’d still have tremendous value because of their inherent value. Gold and silver are the most constitutional forms of currency and when the US had its fastest economic growth it was on the gold standard during a deflationary period.
But this isn’t to say we should go back to a gold standard where the US government uses greenbacks to buy and sell gold at a fixed price (current market value $1,975/ounce), but we could literally go back to gold itself where federal, state, and private minters could coin gold and silver. After all, now that transactions have become more digital it’s much easier to transact in gold and silver.
Cashier: That will be 1.2 grams of gold.
Philosophically, I like the idea that our monetary system wouldn’t just be backed by trust in our government. And one of the advantages gold has over crypto is it doesn’t depend on computers so that in the event of the power grids going down people could still have access to their money. But four downsizes to gold, in my opinion, is its deflationary because the gold supply on average increases by less than 1% (although goldbugs see this as an upside), its future supply could radically shift with the discovery of a new mining technology/mine/asteroid, its resource cost disproportionally benefits those countries who happen to have large gold mines (China), and lastly, if every country moved to gold then it’s value would astronomically increase, which such concentration of power in any one commodity could lead to more conflict.
Ultimately, what I believe in is free market money.
We should repeal taxes on currencies (gold, silver, crypto) so the dollar wouldn’t have a money monopoly.
This is the ultimate empowerment of the individual. If you want to buy stuff in crypto, cash, or coins then that should be up to you and the seller. Not Uncle Sam.
But Uncle Sam should also be happy to accept taxes in the form of gold, silver, and crypto. Utah and Oklahoma allow state residents to pay state taxes in gold and silver again.
Over time, the best monies will rise to the top, which means people would be better able to safeguard their wealth from hidden and overt confiscation.
Now, some people dislike monetary freedom because during a recession they like that a central bank can just print endless amounts of money to hand out, but this is the monetary equivalent of taking crack to get through your shift. It may work, but it’ll just make future shifts that much harder.
The Fed has a dual mandate of “stable prices” and “maximum employment,” but monetary policy should be focused on stability (which FYI the most stable systems usually aren’t centralized like the Fed and are counterintuitively decentralized like evolution and enterprise) and fiscal policy should be focused on employment (the Fed has clearly failed at it anyway) where instead of unelected bureaucrat-bankers in dim-lit rooms injecting cash into big banks it should be the choice of our elected officials on whether or not they want to vote for stimulus spending. Ideally, this stimulus spending should come from a Rainy Day Fund rather than IOUs, but that’s a topic for another day.
In the end, free market money empowers free markets and therefore a free people.
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