Posted Mar 1, 2015 by Martin Armstrong
QUESTION: Do you believe the Federal Reserve, or any such system as it, is the cause for such extreme boom bust cycles or are those cycles inevitable even if the Fed did not exist?, or perhaps if it did not exist the amplitude of the swings would at least be lessened
Do you agree the Fed should be audited?
ANSWER: To be accurate, the Fed is NOT the source of all our problems. To be objective and fair, the central bank has been manipulated by Congress. The assumption has been based on the faulty idea that inflation is linked to the quantity of money. It is really linked to the CONFIDENCE in government. But that aside, Congress has accepted this assumption and sold it to the public. Therefore, like blaming deficits and tax increases on the rich for not paying their fair share instead of Congress spending without limit is reflected in the same idea that the Fed is the source of the problem.
If you assume inflation is created by the expansion in money supply, then the Fed has the ability to create elastic money and hence they must be the culprit. This suits the politicians nicely for it misdirects the blame for economic instability to the Fed deflecting any fiscal irresponsibility from them to the bankers.
Now, let us introduce the next fallacy. BEFORE 1971, it was assumed that if you borrowed rather than printed money, then it would be less inflationary. That made sense when you could not BORROW on US Treasury notes, bills, and bonds. Then 1971 changed everything moving to a floating exchange rate system. Suddenly you could trade futures by putting up collateral using US TBills. This altered the entire assumption that has not been considered by those who focus only on the Fed. The Fed cannot be the sole source of inflation for the Treasury issues the debt according to what Congress has spent. That is now money that pays interest.
Since 40% of the US National debt is used to park cash, the elastic creation of money by the Fed is but a tiny fraction. The Fed can control ONLY monetary policy but it cannot control the fiscal policy. The bulk of the money is created not by the Fed, but by the Treasury in the form of bonds, notes, and bills. The actual amount of money in circulation in the form of printed notes has been declining sharply over the years.They use to print $10,000 bills in 1934. Today $100 is the biggest.
Should the Fed be audited? Of course. But so should every branch and department. The banks have manipulated the Fed and lied to them on so many occasions. Right now, the Fed pays interest on excess reserves. The banks argued that the Fed was buying back 30 year bonds so they had no place to park money. That is over $2 trillion and that facility negated in part the entire purpose of QE1-3. That should be ended immediately. It is deflationary, not inflationary, for it created an incentive for banks not to lend and supported the transactional evolution of the banks ending the era of relationship banking.
The Office of Inspector General should be separated from the Department of Justice and be given the real power of a Roman Tribune to charge and prosecute members of government. That should be an elected official in 2 year terms. Then and only then will we ever get some transparency.
The entire premises of Marxism is that government can control the economy. They never get it right and all they do is increase the volatility. They are incapable of altering the business cycle as the ECM has continued to work before and after the creation of the New Deal. If they could manipulate the economy or any market perpetually, then the ECM should have failed.