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Wednesday, May 2, 2012

Massive Inflation or Collapse

Robert Wenzel of the Economic Policy Journal recently gave a speech at the New York Federal Reserve Bank discussing the failures of the Federal Reserve, and suggesting that the best option was to simply shut it down. I would recommend that you read the whole thing, but here is a portion that is extremely relevant as to the Fed's failures:
Since the start of the Fed, prices have increased at the consumer level by 2,241%. That’s not me misspeaking, I will repeat, since the start of the Fed, prices have increased at the consumer level by 2,241%.

So you then might tell me that stable prices are only a secondary goal of the Federal Reserve and that your real goal is to prevent serious declines in the economy but, since the start of the Fed, there have been 18 recessions including the Great Depression and the most recent Great Recession. These downturns have resulted in stock market crashes, tens of millions of unemployed and untold business bankruptcies.

I scratch my head and wonder how you think the Fed is any type of success when all this has occurred.

I am especially confused, since Austrian business cycle theory (ABCT), developed by Mises, Hayek and Rothbard, has warned about all these things. According to ABCT, it is central bank money printing that causes the business cycle and, again you here at the Fed have certainly done that by increasing the money supply. Can you imagine the distortions in the economy caused by the Fed by this massive money printing?

According to ABCT, if you print money those sectors where the money goes will boom, stop printing and those sectors will crash. Fed printing tends to find its way to Wall Street and other capital goods sectors first, thus it is no surprise to Austrian school economists that the crashes are most dramatic in these sectors, such as the stock market and real estate sectors. The economist Murray Rothbard in his book America’s Great Depression went into painstaking detail outlining how the changes in money supply growth resulted in the Great Depression.
Relevant to us, however, is his conclusion:
I will now give you more warnings about the economy.

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.

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