The Federal Reserve seems a difficult critter to envision. It began back in 1913, created by the government as the bank to head all banks, yet not part of the government, but assigned to control the dollar and and the money supply. This puts “the Fed” even more difficult to control.
So among the biggies of the Federal Reserve is it’s job of controlling the money supply. It’s game is messing with supply and demand. That game has been going on long before Adam Smith made his statement. We are learning “don’t mess with Mother Nature” but somehow the mystics believe one might mess with the economy despite generations of experience to the contrary.
If the Fed feels demand is faltering, it may increase the money supply — increasing inflation. If the Fed feels that the economy is “heating up” it would do the opposite — a recessionary move. Either is usually accomplished by adjusting key interest rates. Again, the-privateer.com provides a chart of the Fed’s activity since 1990. I haven’t checked it, but it’s reasonable to assume one could see boom and bust cycles by tracking the economic conditions against the chart.
Lower interest rates result in more demand for dollars. That’s not a problem for the Fed, as they control the printing presses — the only control apparent is Congressional approval of a raised debt limit. As we moved into the computer age, the printing presses were less needed, so the new money becomes largely a blip on a spreadsheet, again controlled by the Fed, where the bankers flock to get new money to lend.
Most of us have learned “Don’t mess with Mother Nature”. Clearly the Fed is not the best possible scheme, given it’s stupendous power and autonomy. I am not convinced that a return to the gold standard is either necessary or possible. I am convinced that the manipulation must end. We cannot have a stable economy without inflation unless we also have an absolutely stable money supply which cannot change the rules of the game at every hand.
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