Are Fed policies hurting America?
Ludwig von Mises, the great Austrian-school economist, predicted the fall of the Soviet Union in the 1940’s, well before anyone else, academic or politician, was willing to go on record with such a prediction. His basis for this prediction was as subtle as it is succinct — a society that denies itself a free market to price capital will invariably collapse as it will not be able to determine what to produce. “Price discovery” is the system of signals a free market sends to the world. For the price of capital, entrepreneurs get the signal to produce more or cease production. In place of a free market, the Soviet state had a price-fixing board that used bureaucratic methods to set the price for over 10 million items.
This system proved their undoing. Soviet goods were noteworthy for mediocrity, when they were available. Any quality goods, (with the possible exception of military goods) from ball point pens to blue jeans, had to be imported.
The better question — is America making the same mistake?
America does have one price-fixing board — the Federal Reserve. This board, using bureaucratic methods, sets one critical price — the price of interest. It has now set this price to near zero for over five years. The question that is never posed to the talking heads on the business news programs is how does this policy distort the economy? Is the current five-year stock market rally just a distortion — based on speculation and fueled by cheap money courtesy the Federal Reserve?
It most likely is, as the fundamentals do not support the current historically high valuations. This is the same mistake the Soviets made, only in different manner. The result is the inability to correctly price capital which has the result of “mal-investment.” Too many empty shopping malls and too many overbuilt housing developments are examples of mal-investment.
The Federal Reserve’s “zero interest rate policy” (“ZIRP,” in talking head jargon) preserved the status quo, but at the cost of stagnation. America today would be much more prosperous if the free market had been allowed to function and those responsible for the worst credit excesses of 2008, allowed to fail.
But as long as Wall Street has its tentacles deep into Washington, failure for it is not an option, but taxpayer-financed bailouts will be. Only when the Federal Reserve is recognized for what it is — the engine of inequality — will this cease.
The true effect of the Fed’s policies is to transfer wealth from Main Street to Wall Street. Protecting the bankers from their own stupidity has always been the Fed’s Priority No. 1. All the talk about maintaining “price stability” or “full employment” is so much propaganda to feed to the great unwashed slobs on Main Street, as necessary. So far, it has worked. But every scam has a limit. Enough people are wising up to how this scam actually works. That is why politicians, such as Hillary Clinton, who have never wavered from being pro-Federal Reserve, pro-Wall Street and pro-interventionist, will find any groundswell of enthusiasm elusive. The public, at a minimum, is tired of “more of the same.”
— Matthew Alig