Insanity – Fed Considering Options That Are Sure to Fail

Albert Einstein is quoted as saying: “Insanity: doing the same thing over and over again and expecting different results.”  The Federal Reserve is expected to initiate a new round of Treasury purchases, thus monetizing more debt to add to the $1.7 trillion in longer-term assets it has already bought. 

Typically, “if a budget deficit persists for a substantial period of time then the monetary base will also increase, shifting the aggregate demand curve to the right leading to a rise in the price level” (The Economics of Money, Banking, and the Financial Markets, 7^th edition, Mishkin), also known as inflation.

The Wall Street Journal reported, a week ago, that The Federal Reserve was considering lifting inflation above the Fed’s normal target.  The reasoning was that higher inflation, even if temporary, “would push real interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.” (WSJ, October 7, 2010)  Additional reasoning for this consideration is to avoid a “Japan-like,” drawn out battle with deflation.

The “reasoning” in all of this has a political aspect to it.  The Fed is under tremendous pressure to remain relevant under calls for its elimination.  Since its formation, with the goal of stabilizing the economy,  The Federal Reserve Board has presided over; 1)The crashes of 1921 and 1929, 2) The Great Depression (1929 to 1939), 3) Recessions in 1953, 1957, 1969, 1975, 1981, and 2008 to present, 4) The stock market “Black Monday” in 1987, and 5) Inflation 0f 1000% which has destroyed 90% of the dollar’s purchasing power (The Creature From Jekyll Island, G. Edward Griffin, American Media Publishing).  Much of these have occurred under tremendous political persuasion from Congress and the Executive Branch

Make your own conclusions about the Feds effectiveness.  One has to consider, however, the impact of inflation on the buying power of the general population, especially fixed-income baby-boomers.  Ultimately reduced government intrusion and the application of free-market principles will pull us out of our current economic malaise.