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Philosophy, Religion & Society / Inflation and the Federal Reserve
« on: June 10, 2007, 02:52:24 AM »
So, this is the stuff I want to talk about nowadays.
Everybody has heard of inflation. It means that things seem to be getting more expensive over time, uniformly throughout the economy. In other words, money is worth less than it used to be. Last time I checked, the general cost of stuff in the U.S. is 3% more in any given year than it was the previous year, or, money was worth 3% more last year than this year.
I know that inflation happens in Canada and that it's also about 3% every year.
Now comes the part that I'm pretty sure about but am ready to be corrected or argued against.
In the U.S., inflation happens because the Federal Reserve ("the Fed") puts money into circulation. There are two ways of doing this: first, they can buy government securities ("T-bills"). Second, they can print money.
In the U.S., the government likes inflation because it is the means by which the government operates; i.e., pays its bills. The U.S. treasury doesn't actually have enough money to pay its bills; instead, it creates money out of thin air, thereby inflating the economy. Inflation isn't enough to cover all of government spending and therefore the U.S. experiences a deficit every year.
Allegedly, due to inflation, the U.S. dollar is worth 1/25th its value in 1913, the date of the creation of the Fed. (This drop in value corresponds to inflation of 3.48% per year, on average). Prior to that, fluctuations in the value of the dollar were caused by fluctuations in the supply of gold.
Aside from permitting deficit spending, the other function of the Fed is to set the target interest rates on loans. To do so, the Fed can inflate the economy (causing interest rates to drop), or tinker with a variety of the parameters in the Federal Reserve system. Fluctuations in interest rates have a serious effect on the economy: when rates drop, it becomes easier for people to get loans, which makes it easier to spend money, which is good for business. When rates go up, yadda yadda, businesses get hurt. Wall Street is like a well-trained dog at the heel of the Fed, jumping at a kind word and recoiling from a harsh one.
The Fed is accountable to no one and transcripts from meetings of its Board of Governors are confidential for five years. They do not discuss their reasoning when they change the rates. In a very real sense, our economy is not free; it is controlled by the Fed. The current chairman of the Board at the Fed recently apologized for causing the Great Depression -- ironic, because the goal of the Federal Reserve system is to make sure that growth can always happen unimpeded and to prevent recessions and crashes.
Last but not least, the Fed is not a part of our government. Its Board is appointed by the president, but they do not answer to him, and the banks which make up the Federal Reserve system are all privately owned.
Now I have some questions:
Why do we need the Federal Reserve? It has not shown itself to be a useful service; the market is its own best regulator, and the minting of money is, according to the Constitution, the sole purview of the federal government. The Fed does more harm than good.
Why do we have inflation? Inflation is a mechanism by which the government steals from the people. When the Fed prints money, all the money in circulation goes down in value by a certain amount. That value is now held by the Fed.
Why do countries that do not engage in deficit spending (like Canada) have inflation?
And here's a seemingly-unrelated question: Why is there an income tax in the United States?
Everybody has heard of inflation. It means that things seem to be getting more expensive over time, uniformly throughout the economy. In other words, money is worth less than it used to be. Last time I checked, the general cost of stuff in the U.S. is 3% more in any given year than it was the previous year, or, money was worth 3% more last year than this year.
I know that inflation happens in Canada and that it's also about 3% every year.
Now comes the part that I'm pretty sure about but am ready to be corrected or argued against.
In the U.S., inflation happens because the Federal Reserve ("the Fed") puts money into circulation. There are two ways of doing this: first, they can buy government securities ("T-bills"). Second, they can print money.
In the U.S., the government likes inflation because it is the means by which the government operates; i.e., pays its bills. The U.S. treasury doesn't actually have enough money to pay its bills; instead, it creates money out of thin air, thereby inflating the economy. Inflation isn't enough to cover all of government spending and therefore the U.S. experiences a deficit every year.
Allegedly, due to inflation, the U.S. dollar is worth 1/25th its value in 1913, the date of the creation of the Fed. (This drop in value corresponds to inflation of 3.48% per year, on average). Prior to that, fluctuations in the value of the dollar were caused by fluctuations in the supply of gold.
Aside from permitting deficit spending, the other function of the Fed is to set the target interest rates on loans. To do so, the Fed can inflate the economy (causing interest rates to drop), or tinker with a variety of the parameters in the Federal Reserve system. Fluctuations in interest rates have a serious effect on the economy: when rates drop, it becomes easier for people to get loans, which makes it easier to spend money, which is good for business. When rates go up, yadda yadda, businesses get hurt. Wall Street is like a well-trained dog at the heel of the Fed, jumping at a kind word and recoiling from a harsh one.
The Fed is accountable to no one and transcripts from meetings of its Board of Governors are confidential for five years. They do not discuss their reasoning when they change the rates. In a very real sense, our economy is not free; it is controlled by the Fed. The current chairman of the Board at the Fed recently apologized for causing the Great Depression -- ironic, because the goal of the Federal Reserve system is to make sure that growth can always happen unimpeded and to prevent recessions and crashes.
Last but not least, the Fed is not a part of our government. Its Board is appointed by the president, but they do not answer to him, and the banks which make up the Federal Reserve system are all privately owned.
Now I have some questions:
Why do we need the Federal Reserve? It has not shown itself to be a useful service; the market is its own best regulator, and the minting of money is, according to the Constitution, the sole purview of the federal government. The Fed does more harm than good.
Why do we have inflation? Inflation is a mechanism by which the government steals from the people. When the Fed prints money, all the money in circulation goes down in value by a certain amount. That value is now held by the Fed.
Why do countries that do not engage in deficit spending (like Canada) have inflation?
And here's a seemingly-unrelated question: Why is there an income tax in the United States?
