What is the Fed’s Real Choice?

by Nigel Bolton-Shaw on August 31, 2012

In a recent article on the Federal Reserve, The Washington Post tells us that Ben Bernanke is facing more political pressure than ever to accelerate the US economy.

In fact with the US economy still not producing jobs, Bernanke is under pressure to do something – anything – to help provide employment.  And naturally, given the two-party system, there are political differences of opinion regarding what he can and should do.

Simplest perspective: Republicans don’t want Bernanke to do anything and Democrats want him to print money. The Post article, meanwhile, indicates that there is not much Bernanke can accomplish, certainly not in the near term.

Here’s how the Post puts it:

The truth, Bernanke has said repeatedly, is that the Fed’s ability to change the direction of the economy is limited, and it’s not clear the benefits of new measures outweigh the potential costs.

Economists say new Fed actions are likely to have only a small effect on job creation. Bernanke doesn’t have control over the two biggest factors affecting economic growth: how Congress and the President handle the government’s spending and taxation choices, and how Europe’s leaders respond to their continent’s crisis.

Yet global investors are looking to him — and not the two men addressing millions of people this week and next as they campaign for President — for a sign the U.S. government will do something to keep the U.S. economy, and by extension the global one, healthy.

We’re not sure this monetary helplessness is quite accurate. More than that, we don’t think either the Republican OR the Democratic position may be a realistic one.

There IS something Bernanke can do, though it is not an option ordinarily examined.

First let’s examine what the Fed HAS done since the global financial crisis struck in earnest in 2008. These numbers are from Business Insider (among other sources) and show clearly that in stimulating the economy, the Fed has reduced the yield on investments for most people who use the dollar.

Nominal yield on savings account…  0.25%

Inflation-adjusted yield… – 2.25%

Rate of interest the Fed charges banks for “free money”?… 0%

Average interest rate for bank-issued credit cards?… 14.52%

Interest rate for student loans?… 6.8%

Interest on funds banks have borrowed from the Fed for 0% and then deposited with the Fed?… 2% (approx.)

A negative 2.5% savings account rate is a disaster for a middle class anywhere in the world. These numbers are certainly part of the reason for the increasing discontent in the US, which no doubt matches similar discontent in Europe. The system simply is not working – or not working well.

It is not conserving savings and it is not creating jobs.

And that brings us back to our initial point, that neither Republicans nor Democrats have it right – and that the Post is wrong too.

What Fed officials and the mainstream US media could do is advocate a new kind of monetary system based on monetary competition of all kinds rather than Fed monopoly-fiat money printing.

Republicans don’t want more Fed actions, but the GOP is already moving in the direction of discussing out-of-the-box monetary alternatives. The Republicans, for instance, are beginning to discuss a neo-gold standard … and that may become an election issue.

Even better than a gold standard might be a relaxation of legal tender laws and a commensurate rise in every kind of money.  Within this context, of course, gold and silver would be sought out as they have been in the past.

Of course, it may come to this anyway, as the West’s economy is generally so distorted from bailouts and easy money that anything the central bank does at this point shall only aggravate the situation.

What is likely going to happen is that nature will take its course. There will be a great unwinding, just as took place during the Great Depression in the 1930s.

Distortions will gradually relax. This will be illustrated however in continually degrading portfolios of those who do not fully understand the forces at work.

An article in International Man entitled “The 11 Stages of the Crash” provides us with a good sense of how the unwinding – or unraveling – works. See it here.


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