The Case For Root And Branch Reform Of The Fed, Part 2
The Fed’s subservience to Wall Street has an ironic source: Namely, a Keynesian economic model which is purportedly pro-main street but is actually profoundly inimical to middle class prosperity.
In turn, that’s because the Fed’s model—derived from the left/right statist amalgam of Maynard Keynes, Milton Friedman and their syncretist disciple, Ben Bernanke—falsely assumes that capitalist markets have an inherent tendency toward subpar growth, deflation and depressionary collapse.
Accordingly, activist and continuous counter-deflationary intervention by the state and its central banking branch are purportedly essential. In recent years that has been formalized to include an explicit +2.00% pro-inflation target. The latter is deemed to function as a monetary guardrail, preventing the macroeconomy from veering too close to the edge of the alleged deflationary abyss.
Moreover, while this anti-deflation model is completely bogus, as we demonstrate below, it has nevertheless been coupled with the Greenspan “wealth effects” doctrine in what amounts to a veritable witches brew of monetary humbug. Together they provide an excuse for the Fed to continuously pleasure Wall Street with cheap gambling chips under the phony guise of promoting growth, jobs and an inoculation against incipient deflationary entropy.
The theory is that when prices are falling people won’t spend or invest today because purchases will be cheaper tomorrow, on the one hand; and, on the other hand, that when people feel wealthier today owing to rising asset prices they will spend even more tomorrow.
Thus, Keynesian central banking is ultimately an elitist mind game: To wit, people are too stupid to make proper economic decisions or understand their own best interest—so the central bank must guide and trick them into doing the right thing.
Needless to say, the Fed’s excuse for showering Wall Street with ultra-cheap credit and nearly limitless liquidity is utterly lacking in merit, and nothing less than history provides the conclusive evidence. As it happened, the 19th century industrial boom long ago dispatched the deflation bogeyman, while the the claim that the Great Depression was due to the lack of timely government intervention is actually upside-down. Government actions, not capitalism, was the actual cause of the 1930s contraction.
As to deflation, the period from 1870 to the eve of WWI tells you all you need to know. There was actually no net inflation at all during that four-decade interval, which included intermittent periods of deflation that, in turn, corrected themselves with no helping hand from Washington. Yet prosperity was no worse for the wear: Real economic growth averaged nearly 4% per annum, representing a period of robust industrial expansion and rising working-class living standards like never before.
As shown in the graph below, the US economy experienced a multi-decade period of deflation after the civil war, with wholesale prices dropping by 60% from the wartime peak through the mid-1890s. A modest rebound occurred thereafter, however, so that by 1914 the wholesale price level was still essentially at the same as it had been 54-years earlier.
For avoidance of doubt, here is the US wholesale price index for the most recent 54 years. During this identical span of time, wholesale prices rose by +611%!
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