Posted by
Andrews on Tuesday, July 21, 2009 4:35:20 PM
Next time anyone argues that the Federal Reserve is compatible with the free market, read
this article by Ben Bernanke. It is not particularly surprising to anyone familiar with the Federal Reserve, but for people who understand banking in general, but not government monetary policy, it is eye opening.
Then again, there are parts that are eye opening even for those already cynical about the Fed. For instance, I am well aware of all the monetary manipulation, but failed to think through the implications of some Fed practices. For instance, Mr. Bernanke argues for controlling growth by increasing the interest paid by the Fed on member deposits.
However, think about what this really means.
To keep banks from lending too much, the Fed will pay higher interest. Now a normal bank would do this by paying out real money. The Fed, however, creates money. So they would not pay out of revenues, but simply credit the member with imaginary funds. When the Fed decides to stop discouraging lending, those funds could then be used to support 2-3 times as much in demand deposits. In other words, to stop excessive lending, the Fed would inflate the money supply, or at leats set the stage for a massive inflation in the near future.
And to encourage lending? Well, the Fed would engage in open market operations, thereby creating new funds and depressing interest rates. That is, it would inflate.
I know it shouldn't shock me, but is there anything the Fed does where the solution doesn't, in some form, lead to inflation of the money supply?
And yet people ask me again and again how I can support an "anachronism" such as gold? I wonder how they can look at the Keynesian farce which is our "monetary policy" and not run screaming to join me.
POSTSCRIPT
I write on this topic quite often, so I will just suggest a few articles. Clearly "
Why Gold?" is a good place to start, as well as "
The Inflation Engine". Most recently I wrote "
WSJ Misses the Mark Again", but I also would recommend "
Inflation and Uncertainty", "
Mathematical Deception", "
The Rubber Yardstick" and "
Proof Keynes (and Krugman) Are Insane". There are probably more, but the links in those articles should lead you to the rest. Of course I must promote "
Greed Versus Evil", as it is long, but still provides the best argument yet against the necessity of government intervention in matters economic. Beyond that one plug, I will leave it to the reader to follow my huge lists of links which follow most of my recent writing.