Vigilant Investor

A recent AP article questions the power fo the Federal Reserve (How powerful is the Federal Reserve?Nov 26, 2005)

We couldn’t help note the fallacies that this article perpetuates. For example:

The Fed has two missions, said Quincy Krosby, chief investment strategist at The Hartford, the Connecticut-based insurance company. Its primary mandate is price stability, keeping inflation at bay.

Let’s stop right there. Its primary mandate is “price stability, keeping inflation at bay”??? Well — that is about as solid an example of misleading Orwellian Newspeak as you’ll find since the Federal Reserve exists with the primary purpose of creating inflation.

Long ago dropped down the memory hole, the original definition of inflation has been lost and replaced with the consequences of inflation. Hence, today if you check for the definition of inflation, you’ll find today it will say something about the rate of increase in the general price level of all goods and services over time. Inversely, this is a loss of purchasing power of money.

However, if you check a dictionary from long ago — say, Webster Dictionary 1913 for example — , you’ll find inflation defined in its original meaning: “Undue expansion or increase, from over issue; said of currency.” In other words, printing money — or as The Fed calls it, “an expanding money supply.”

Quite naturally following the basic laws of supply and demand, as the abundance of any currency increases, its exchange rate for other goods (e.g. its purchasing power) declines. A simple illustration explains it best: Let’s say that only $100 dollars exist in an economy and my neighbor sells oranges for $1. In my basement I counterfeit-print exact dollar replicas in the amount of $100, effectively doubling the supply of dollars. Very quickly after I spend my fresh $100 into circulation, all things remaining the same, prices will adjust and oranges will cost $2. No new wealth was created: Existing wealth was cut in half. Holders of the original $100 only retain $ 0.50 / dollar of the original purchasing power while I made off with the other $ 0.50 with my counterfeit money. (The real world model is obviously more complex, but the gist remains the same.)

Generally this is why we don’t allow counterfeiting. Not only is it tantamount to stealing, it causes substantial dislocations from the functioning economy which creates wealth via production, and sends that wealth to others who have produced nothing to back it up.

Yet, the very policies The Fed pursues, from outright printing money for open market purchases, to facilitating low rates, are all geared towards expanding the money supply, and as a matter of policy — causing prices to rise.

But the connection between the Fed and inflation somehow lost. Discussions about inflation almost always revolve around the symptoms of the real cause without ever touching on the real cause, and even along the lines that controlled inflation is good for the economy. This reinforces Orwell’s own observation on the concept of “blackwhite”, where black can actually be white if the concept is repeated enough… Soon enough, not only does black now become white, but folks learn with certainty that black is white while forgetting that it was ever believed to the contrary. Strangely, however, this transformation regarding the word inflation required no Big Brother to force on people into this mode. Its as if the educated gladly embraced being relieved of being bound by the laws of economic gravity, while those entirely illiterate of economics are oblivious.

At any rate, the article continues about The Fed:

It’s secondary charge is maintaining an environment of sustainable economic growth, which is interpreted to mean sustaining jobs.

Whatever the case, give the article mentioned a read as it is not all bad. It at least reveals the many ways the Fed can monkey with the economy, pretending it knows best.

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