Watch the Amazing Fed Turn a Dollar into a Dime!
Confronted with housewives who were descending upon ’70s supermarkets to protest prices, Milton Friedman wrote, “Housewives have a justifiable complaint. But they should complain to Washington where inflation is produced, not to the supermarket where inflation is delivered.”
A housewife from Alaska is heeding the New Jersey economist’s advice.
“All this pump priming will come at a serious price,” Sarah Palin explained in Phoenix last week. “And I mean that literally: Everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.” Palin refers to the decision by the Federal Reserve to print $600 billion (money does, in fact, grow on trees for central bankers) and inject it into the economy primarily through the purchase of Treasury securities.
After their stimulus attempt put fiscal policy out of balance through trillion-dollar-plus deficits, the Obama administration’s unwelcome encore seeks an economic quick fix from a monetary policy stimulus. Like the drunken-sailor spending spree, the mad-hatter print-your-way-to-prosperity plan is likely to unleash negative, unintended consequences without a thriving economy to show for it. Specifically, flooding the market with dollars will devalue the money in your pocket, raise taxes without the approval of Congress through bracket creep, and reinforce a culture that encourages profligacy and discourages savings.
Inflation is a euphemism for dishonest currency. If your butcher manipulated weights and your bartender manipulated measures the way governments manipulate currency, the government would put them in jail. But the government isn’t going to put the government in jail. The Fed, with the encouragement of the President, commits fraud with impunity by flooding the market with dollars.
The idea is not just bad. It’s borrowed. Whether calling themselves Greenbackers, Bimetallists, or New Dealers, generations of leftists have made weakening the currency a goal. The record of failure hasn’t broken the spell of the seductive idea.
The populists wished to save their farmer constituents from their debts. The progressives trusted managers more than the market to regulate currency. The New Dealers thought that inflating the dollar would stimulate the economy. The Fed’s move last week owes a little to each of these past motivations—debt relief (the government’s, not farmers’), faith in economic tinkerers, and stimulus.
The Federal Reserve is an example of what happens when cranks get power. The ideas remain as preposterous as ever, but they garner an unearned respectability merely by morphing from mere idea to entrenched policy. According to MeasuringWorth.com, a dollar from the infancy of the Republic became $1.08 the year of the Federal Reserve’s establishment. In other words, inflation was so minimal for the first 125 years of the republic that the dollar had changed in value by less than a dime. The dollar from the establishment of the Fed had $22 the purchasing power of its present counterpart. In other words, today’s dollar ain’t worth yesterday’s dime (or even a nickel for that matter).
Instead of recognizing the Federal Reserve as immoral for its manipulation of a fairly static measure, unconstitutional for wielding a power delegated to Congress, and inexpedient for its record of 22-fold inflation, defenders of the status quo dub Fed critics such as Palin “cranks.” Though Palin may not know economics as well as the Federal Reserve’s board of governors do, those governors don’t know economics as well as they think they do. They assume they possess omniscience, as if capable of remotely directing an economy with 311 million variables. Such direction, however, is a lot further beyond their capabilities than it is for Sarah Palin to see their erroneous thinking and to call them on it. For anyone who doubts that the hubris of wise men is more dangerous than the ignorance of plain people, see the mad-scientist Fed of the 1970s. That’s where America seems headed—back to the future.
If you flood the market with houses, the price of houses will decline. If you flood the market with labor, the price of labor will decline. But if you flood the market with paper money, the Fed seems to believe, all manner of wonder will occur. Americans have recently learned painful lessons regarding the supply of both housing and labor outpacing demand. They are about to learn the same lesson about money.
Politicians can repeal all kinds of laws. The law of supply and demand is not among them.
Cartoon courtesy of Brett Noel.