The Federal Reserve has determined that our private economy should be placed into a recession. The decision is revealed not only by the increase in short-term interest rates, but also by the extreme rapidity with which rates have increased.
These comments are meant to disabuse the reader of the fallacy that the Fed is reacting to economic situations; the article seeks to demonstrate that the Fed's Federal Open Market Committee drives recessions.
The Federal Reserve administers Monetary Policy with two tools: interest rates and money supply. As the saying goes: "Don't bet against the Fed — even when they are wrong."
Both the magnitude and the slope of rates has meaning. The magnitude of rate increases costs businesses and consumers greater interest expense, thus depleting earnings. The slope, or rate of increase, causes great uncertainty and makes it difficult for private citizens and business to adapt. These conspire to effectively shut down economic growth by handcuffing the private economy.
One of the best predictors of pending recession is the slope of the Yield Curve. This diagram charts interest rates on bonds of varying maturities, from overnight (Fed) funds to the 30-year Treasury. The normal slope of the Yield Curve is positive: low rates on the short end and higher on the long end. Financial institutions use this slope to borrow at the short end and lend or invest at the long, thus creating an interest spread or margin.
Today, the Yield Curve is inverted: the short end, controlled by Monetary Policy and the Federal Reserve, is higher than the longer end, controlled by money managers. In other words, one can't make a spread on the curve. This is an unnatural curve and will eventually revert. Since the Federal Reserve makes all decisions on the short end of the curve, the people there are responsible for the pending recession.
The Fed Reserve tells us that this inverted curve, with increasing Fed Fund rates, is the way to fight inflation — that by shutting down business activity and thereby causing job losses, the Fed can fight inflation.
Well, here is the greatest irony. The cause of inflation is Federal Reserve action since 2008. Remember the other tool the Fed uses: money supply.
The Federal Reserve unilaterally implemented a disproven theory for monetary policy, called Modern Monetary Theory or MMT. Under this delusional theory, the Federal Reserve printed trillions of U.S. dollars, thereby ballooning the supply of money by $9 trillion. Their balance sheet ballooned from less than $1 trillion to $10 trillion. This printing is called quantitative easing, or Q.E.
There is a strict rule in the law of money supply: every dollar printed in excess of that needed to keep the economy liquid devalues every other dollar in circulation. Dollar devaluation is the cause of inflation; the increase in supply side costs is the effect, not the cause.
Every student of the Austrian School of Economics knows that excessive money supply leads inevitably to devaluation of the buying power of that currency. That was the reason for the Gold Standard, which pegged money supply to a specific amount of gold and backed up the full faith and credit of the dollar. In the 1970s, President Nixon abandoned the gold standard and set the stage for irresponsible Fed action in 2008.
The Federal Reserve's prime directive in 1913 was to preserve the value, the buying power, of the U.S. dollar. Since 1913, the dollars' buying power has declined 95%. Consider the negative impact of 9 trillion more dollars in circulation. It is clear that the Federal Reserve has abandoned its prime directive. With each increase in federal debt, caused by federal spending, the value of the dollar declines, approaching zero. The straight-line relationship connecting spending, debt, and dollar valuation is something to remember. Spending = Debt = 1/$ Valuation.
Federal Reserve monetary policy caused inflation and devaluation by printing dollars. Ergo, the solution is to stop printing and start redeeming the excess dollars in circulation.
However, there is a significant hitch to the dollars the Fed printed: every dollar printed under Q.E. was funneled into questionable federal programs and bureaucracy to run those government-based programs. Therefore, the Congress must reduce government spending along with the Fed reducing money supply.
This is certainly difficult. No politician wants to stop the spending. After all, politicians can use your money to buy votes under the rubric of helping the needy.
In the early 1900s, F.A. Hayek penned a seminal book on the study of human nature or economics, called The Road to Serfdom. Serfdom is where our government's excess is taking us. Our nation is on the road to bondage to another nation if or when we default on payment of our massive, unsustainable debt (Treasuries). Our only solution to the excesses of the past is to reduce federal spending, eliminate government programs and bureaucracies, and reduce the supply of money.
Von Mises, the creator of the Austrian School of Economics, understood the balance between government and the private economy. The correct, most efficient solution is private jobs in the private (non-government) economy, not more federal programs. Therefore, the objective should be to strengthen the private economy by keeping it free of government interference. Federal spending warps the private economy. It distorts the value of things by interfering in free market trades.
Private business and citizens are much better at allocating their limited assets to the greatest benefit because they are rewarded for their work, called earnings and capital growth. The left calls it greed. Further, the marketplace punishes dishonesty, shoddy producers, and poor service. It is self-policing simply because, in a free market, the individual buyer makes all decisions.
Von Mises didn't stumble upon his thesis. He observed the miracle of the creation of the fundamental beliefs of the United States, in particular the deep principles embedded in the Declaration, Constitution, and Bill of Rights. The foundational principle of America is the individual and his ability to decide for himself and to benefit from the fruits of his labor.
From the concept of the rights and freedom of the individual grew capitalism: the right of the individual to private ownership, free of excessive interference by his government.
Individual freedom and responsibility are the foundation of our great country. But it has been slowly eroded by decades of interference under the left, via control. The left uses our own government to interfere in our private lives and hamper our private businesses.
The solution is to return balance to the relationship between government and the private economy. Government intervention in private lives must be controlled, and limited, by adherence to the Constitution. Government and its bureaucracies must not be the solution to every problem. Rather, trust in the drive and innovation of the individual and the private economy.
Current chart generated today at: https://fred.stlouisfed.org/series/CUUR0000SA0R#