Friday, February 25, 2011

Federal Reserve Too Smart or Too Dumb?

Charles Hugh Smith posted a very interesting article at Daily Finance on 02/23/11.  In the first half of the essay he makes a convincing argument that inflation is spiking worldwide.  In the second half he explains why the Federal Reserve gets the blame.

For those not familiar with business terms, the explanation of the “Business Cycle” will be informative. My only criticism is that he skips over one important point. While a cycle of boom and bust is part of the DNA of capitalism, the length of stability, the size of the artificial boom, and the depth of the bust are influenced by human decisions.  More caution and hard work do make things better for longer; more greed and irresponsible risk do make things worse quicker.

But the more important point is that in an effort to eliminate the Business Cycle (a perennial socialist dream) the Fed has created a problem that has no easy way out.  Under capitalism, easy money is its own punishment; cautious investment its own reward.  But the Fed’s policies have pumped more money into the system without punishing and cleaning up the behavior of the past. Result: long term investors are stuck with debt while short term speculators are flush with cash.  Their speculation drives prices up but without a rise in jobs and productivity. So we get “stagflation,” not as an accident of nature but as the logical result of bad economic policy.

The big question is why?  Did the Fed really just mess this up, trying naively to save the world only to be bested by those bad old capitalist speculators?  Or did the masters of progressive economic theory realize that massive inflation achieves all their objectives: it redistributes from anyone who works and saves, and makes life easier for anyone with huge irresponsible debts.  Like say if you have spent $14 trillion more than you have, you get to pay it back in dollars that are not worth as much as those you borrowed. 

Is the Fed that stupid or that smart?