The Federal Reserve Moment

If there were ever a moment for President Trump and the Republican Congress to make their move in respect of the Federal Reserve, this is it. That’s because officials of the Federal Reserve are stumped over what the New York Times’s headline writers call a “new reality” — the combination of low inflation and low unemployment. Maybe the Congress can be of some assistance.By, say, making good on the Republican national platform. After all, by the Fed’s formulas — and Keynesian ideology — low inflation isn’t supposed to coincide with low unemployment (or high employment). It’s just holy writ, owing to a theory called the Phillips Curve. It’s named for a New Zealand economist, Wm. Phillips, who propounded the notion that rising wages, resulting from a tight labor market, meant rising prices.There were those who have long recognized the illogic of a theory that made a sow’s ear out of the silk purse of full employment. Then came the Carter years, when the post-Bretton Woods era of fiat money presented an astonishing development — stagflation. It was an economy that saw what had been thought impossible, rising unemployment and rising inflation. The crisis was defeated by the supply-side formula.Supply-siders focussed on sound money and tax cuts. The heroes of the day were the chairman of the Federal Reserve, Paul Volcker, who ran a high interest-rate policy to attack inflation, and President Reagan, who worked with both parties in Congress to put through John F. Kennedy-style tax cuts. The combination resulted in the Reagan boom, which carried through to the early 21st century.During that span, not so incidentally, the dollar — or what Larry Parks of the Foundation for the Advancement of Monetary Education calls irredeemable electronic paper ticket money — gained strength. Its value soared from less than an 800th of an ounce of gold to, on the day that President George W. Bush was sworn in, a 261st of an ounce of gold. From there, it was all downhill.By mid-2011, the Federal Reserve’s irredeemable electronic paper ticket dollar had plunged in value to barely a 1,900th of an ounce of gold. It began recovering, a bit, the following year. And then a newsworthy thing happened that has received too little comment. Beginning in about mid-2013, the dollar began to stabilize, even if it hasn’t recovered anything like the value it had at the start of Mr. Bush’s presidency.In the four years since then, the value of the Federal reserve notes has — for the most part — stayed within a band of between a 1,200th of an ounce of gold and a 1,400th of an ounce. No one would call it a fixed rate. But it was during this period that the economy began its slow recovery. It was also during this period the idea of reforming the monetary system began to ferment in the Congress.That, we have noted many times, is the branch to which the Constitution grants all of the enumerated monetary powers. In that period, the House took a look at the role the Federal Reserve and fiat money played in precipitating the economic crisis and retarding its recovery. Both of the recent chairmen, Ben Bernanke and Janet Yellen, have confessed to failing to foresee the crisis.Yet what the Fed seems to be doing is worrying that there is not enough inflation. It just doesn’t seem to comprehend that jobs growth without inflation might be not only possible but wonderful. It hungers for inflation. Why? It seems to sense the current configuration of the economy — nearly full employment without inflation — casts in doubt not only the Fed’s logic but also its candor.“If the Fed believes that the burden of debt is insupportable — that the real value of that encumbrance must be melted away with ever rising prices — it refuses to say so out loud,” is the way the editor of Grant’s Interest Rate Observer, James Grant, puts it to us in a wire. Sounds to us like a job for Congress. Maybe it can call to testify the ghost of Wm. Phillips — or some of his living acolytes.

The Federal Reserve Moment

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