After observing monetary policy for decades, the one message the Fed Reserve FOMC (the elite committee that sets monetary policy) continually sends is that they don’t know what they are doing.
Or worse, they do know, and they choose to devalue the US Dollar, and with it, cause imbalance in the economy. I’m not trying to be divisive or harsh, however, we need to face a terrible truth: Our economic situation is in extremis.
In truth, the central bank’s monetary policy has cycled, but the trend is to ignore its prime directive, ignore the reason for its formation. They can talk about full employment or monetary elasticity or promoting green banking, but these are diversions from the Fed’s directive: To protect the value of our currency.
The currency, the dollar, is so common we forget that this simple concept, that a piece of paper has value, is the foundation, the bedrock or our entire economy. We take it for granted at our peril.
In fact, the pain we feel today, economically, is that we must dispense with far more dollar bills to buy the same commodity as one year ago, certainly a decade ago. The culprit is devaluation of the US Dollar. The other side of the same coin is called price inflation.
Since the Fed’s inception in 1913, under President Woodrow Wilson, the central bank has managed Monetary Policy (interest rates and money supply). It appears they have ignored the prime directive, established in the Federal Reserve’s founding charter, which is to protect the value of our nation’s currency. Since the Fed’s inception, the purchasing power of the dollar has declined over 95%.
We see the net effect of dollar devaluation in today’s inflation. Everything we buy today requires a larger number of dollars than a year ago. That’s due to dollar devaluation, called price inflation. This latest bout of devaluation started in 2008 when the Federal Reserve started printing US Dollars, called Quantitative Easing (QE) and sold those dollars to the Treasury Department so Treasury could fund federal spending demanded by Congress.
The instigators of dollar printing gave no thought to the moral question: Should they place every citizen into debt to pay for current spending? The $36 Trillion debt ($8 Trillion due to QE) will be payed by every taxpayer, now and future generations. Did you agree to this debt burden? Did your unborn great grandchildren? Did the FOMC not know that excessive dollars in circulation would cause inflation?
Every economic principle that leads to and supports a free and thriving market suggests that a strong national currency is the basis of all economic activity. Business leaders and innovators can’t plan for the future, or make capital decisions today, when the most basic medium of exchange (the US Dollar) is declining in value. They will not invest capital in future projects when monetary policy depletes private capital to satisfy government spending.
That said, we can debate the method by which the central bank should manage its business, but first we need to agree that the free exchange of goods and services is the foundation of individual independence and is a foundational Principle of our nation. Further, that principle is established in our founding documents. It’s not here-say, it’s written in our Declaration and Constitution. Citizens have “certain inalienable (G-d given) rights to life, liberty and ownership of property.”
If we agree that the premise of our nation is individual freedom to choose, and if we agree that financial freedom is the bedrock of individualism, then we need a strong and stable dollar to facilitate economic freedom. Third, we must look at the single principle of a stable medium of exchange and see if we can agree on the way to stabilize the dollar. That stability is established through judicious and careful control over the supply of money.
Too many dollars chasing too few goods leads, inexorably, to devaluation of every other dollar in circulation. To say it another way, every dollar printed in excess of that needed to support economic activity is inflationary because it devalues the purchasing power of every dollar in circulation.
Therefore, the solution to inflation is to protect the value of the dollar: Drain excess money supply from circulation. But first, in order to accomplish a lower and stable money supply, Congress and all of us must reduce spending.
This concept can be confusing, so view the cycle of economic suicide (QE) as a circle with three nodes, each invigorating the other. These nodes are dependency, federal spending and national debt. Money supply provides the liquidity to allow the flow of transactions.
This is a closed cycle that does not exist in a natural environment. It was artificially created to facilitate central control, or dependency on government largess. It is this cycle to which the Federal Reserve FOMC and Congress have been complicit. A closed system cannot generate profit, it must siphon from an outside system (through taxation and debt) to sustain itself.
\There is a far different economic concept. It is an open concept that allows for natural expansion of economic activity. Each free person can choose to participate. Its basis is free exchange of goods and services by willing individuals in a fair market transaction.
\The bedrock of this economic system is the individual and his liberty to decide of his own free will. Which requires freedom from outside interference by a central government through rules, regulations, and bureaucrats.
\Anarchy is avoided because we all adhere to Law and have a vested interest is living to an ethical code. This open economic system sprang from the freedom recognized in our nation’s founding: The sanctity of the individual, his right to choose free of coercion. It’s called capitalism. And it springs from our Declaration and Constitution, and from our Creator who bestowed Individual freedom in each of us.
Long discussion to get to the point, the solution to our current economic woes is less government spending, less money in circulation, less debt on each citizen meaning less government or a government that is limited by our Constitution.
There have been great civilization throughout the ages. Each was marked by the concept of freedom for the individual. How fortunate we are that we have the roadmap to freedom codified in our founding documents.
“A Republic, if you can keep it” indeed.
Jay Davidson is founder and CEO of a commercial bank. He is a student of the Austrian School of Economics and a dedicated capitalist. He believes there is a direct connection between individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.