Carte Blache: Stephen Moore And The State Of The Federal Reserve

Western politics embraces a natural skepticism for propaganda, making it a popular and mainstream notion in our culture. But the institutions most infected with propaganda are not the ones seen by the mainstream, but unseen. For the small minority of Americans that have ever thought about the Federal Reserve, they basically have a unilateral opinion. First, we boil down to this small minority individuals by narrowing down, through the fact that one of the most powerful entities in government is never mentioned in public k-12 education and rarely in a four-year college degree. Economics students are usually presented with one view of the Fed, with no mention of how it operates or how it was formed. Then, from the minority of individuals that are aware of the Fed, we only have the Official Understanding of the Fed ™: Without the Federal Reserve we would have permanent deflation, a boom and bust cycle every week, “instability” under the gold standard, the banks will “literally take over”, five-year-olds will be forced to work in coal mines, and the skies will turn black. In other words, nobody questions the Federal Reserve and its special “non-political” status. The recent appointment of Stephen Moore has given the central bank some media coverage by mainstream pundits, most of which are wrong. As a whole, it is the same Fed-speak that has always been in the business section of every major newspaper.

The creation of the Federal Reserve system is generally an event deleted from US history textbooks. In the years before the Federal Reserve Act of 1913, the economy saw many industries attempted to form cartels. In a cartel, large firms in a particular industry work together to limit supply and raise prices to levels higher than they otherwise would have been in a competitive market. The effects are similar to that of a monopoly. In earlier years, cartels were attempted in railroads, oil, sugar, and agricultural machinery, however, they failed every time. In a voluntary market, members of a cartel, or trust, would eventually break the pact and cut prices to competitive levels, inducing the rest of the firms to do the same, destroying the cartel. This was the story of cartelization for many industries before government involvement. When it was understood that forming a cartel was practically impossible in the free-market, these industries turned to the state and its unique privilege of legal force. For many of these industries, a government-sponsored cartel became the next step, either through a new institution or regulation to increase barriers to entry. This especially increased during the next few decades when business-government cooperation became popular.

Eventually, the government did for the banks what they had done for other industries, to a much larger extent. But a banking cartel operates differently than other trades. In a laissez-faire economy, banks can issue credit that is limited by the number of loanable funds in their reserves. In the time of the gold standard, bank reserves consisted of physical gold that clients had saved for a certain period of time. Banks would issue notes that would be redeemable in gold on demand. However, another way to increase profits is to issue more bank notes as credit than there are real reserves, thereby lowering the interest rate below its market level and inflating the currency. This is the equivalence of a railroad attempting to charge above the market rate, and as the equivalent, it is extremely limited to do so in a laisse-faire economy. If a bank has artificially expanded credit, it has loaned out money that other owners of its notes are entitled to on demand, and is essentially printing multiple claims to the same physical commodity! There is a major flaw to this practice though: there are other competing banks in a free economy. An individual that takes out credit from an inflationary bank will trade it with another individual that will be a client of a competing bank, that will then call on the inflating bank to redeem the notes. In simpler terms, one bank cannot artificially expand credit without limits in a competing economy. This would only be possible in a cartel if all banks agreed to inflate credit together, and it would be even better if sponsored by the government.

At the time, bankers understood the concept of cartels, as central banking had existed in the United States before. Many different proposals for a new central bank had existed in the years leading up to 1913. Finally, in 1910, a group of central banking advocates met at a secret meeting at the Jekyll Island Club, in Jekyll Island, Georgia. The members used fake names on the train ride, and the event was not released to the press for years. The members included Senator Nelson Aldrich, Henry P. Davison (JP Morgan partner), Paul Warburg (Kuhn, Loeb &Co. partner), Frank A. Vanderlip (vice-president of Rockefeller’s National City Bank), Charles Norton (president of Morgan’s First National Bank of New York), and A. Piatt Andrew (Harvard economist and assistant to Aldrich). Here the group forged the plan for the Federal Reserve, and what would become the Federal Reserve Act of 1913. The plan had immense support from the banking sector.

Since the Federal Reserve, economics has embraced the anti-deflation ideology to its full extent. Fed apologists speak of deflation in the Wall Street Journal and New York Times like the shadow of death. Not only that, but they basically speak of“deflation” as inflation of less than 2%. We are told that a general appreciation in the purchasing power of money will cause a downward spiral in demand… and the economy will collapse because our money has too much purchasing power. Although, this should be expected with the motives of the banking cartel and with the amount of influence it has over academia. In a research paper by economist Lawrence White, it is found that 74% of articles on monetary policy  US economists either appear in Fed published journals or have Fed-staffed economists as co-authors. He further writes, “Over the past five years, slightly more than 30 percent of the articles by US-based economists published in the Journal of Monetary Economics had at least one Fed-based co-author. Slightly more than 80 percent had at least one co-author with a Fed affiliation”.

As an economic research device, the Federal Reserve has a track record of being wrong on nearly all of the predictions it makes. A central bank inherently has no interest in predicting negative outcomes in the economy, so therefore,  no matter how much technology is developed to give the institution data, it will generally predict unlimited growth at any given point in time. In recent years, Janet Yellen, Ben Bernake, and Alan Greenspan have predicted no economic downturns in the future, which is interesting given the reality we know. This is how we see the incredible power of Fed influence, by the fact that going forward, the mainstream still believes in the Fed, and dissenters are cast aside as conspiracy theorists.

To take a logical step back, this should not come as a surprise to those with a realistic view of the state. The Federal Reserve is composed of the federal government and the largest banks. So is it more likely to act is the “general welfare of the people” or in the interests of government and banks? Covering the economics of cartels, we already know that the Fed is built as a cartelization device for banking, but artificial credit expansion benefits the state as well. Monetary inflation is, as many have described, the opium of the state. Through quantitative easing, the Fed buys Treasury bonds enabling higher spending, through artificially low interest rates, the illusion is created that the National Debt is lower than reality, and since the state is an early receiver of new money, it diverts real wealth to itself by means of Cantillon Effects.

The state of the Federal Reserve bears no difference to Republicans or Democrats. It holds the magical “non-political” status in the mainstream, similar to the Supreme Court, which means it is composed of unelected bureaucrats that will make sweeping decisions to impact the life of the individual and we, as mere individuals, will shut up and not entertain “conspiracy theories”. The average Leftist views the Fed the same way they do every other government institution: the earth would explode if it did not exist. They have historically favored Keynesian inflationary policies and credit expansion, which the Austrian Theory of the Business Cycle shows caused nearly every major recession. The average Conservative will still say he believes in capitalism, yet ignores the largest central planning agency over the economy. Plus, in the age of unlimited government budget deficits, the Fed is required to monetize the debt to enable even more spending, something both parties cannot resist.

At the current state of the economy, we have experienced the deepest and longest expansion of credit in American history, and many economists realize that the bubble cannot inflate forever. Therefore, Stephen Moore’s plan to keep the low-interest period going is not the correct way forward. All this will do is inflate the bubble and misallocate more resources, keep the stock prices artificially high to make the Trump economy look better than it really is, ensuring his victory in 2020. Keeping interest rates low at this point is to prevent a hangover by staying up another few hours and taking one more shot. The fact that Moore is an “outsider” does not help the economy because he is still wrong on monetary policy. Now, do the Democrats oppose Moore because he believes the ridiculous notion that printing money will grow the economy? No of course not, they oppose him because he is a Trump pick. In reality, Moore supports the same monetary nonsense the progressives have always believed in. To cast even more doubt on the pick, we already know that he understood the problems with monetary stimulus when Janet Yellen was doing it under the Obama Administration, but he fully supports it for this administration. This should cast even more questions on his motives and understanding of the economy.