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For
the past three decades, the Federal Reserve has been given a dual mandate:
keeping prices stable and maximizing employment. This policy relies not only
on the fatal conceit of believing in the wisdom of supposed experts, but also
on numerical chicanery.
Rather
than understanding inflation in the classical sense as a monetary
phenomenon-- an increase in the money supply- it has been redefined as an
increase in the Consumer Price Index (CPI). The CPI is calculated based on a
weighted basket of goods which is constantly fluctuating, allowing for
manipulation of the index to keep inflation expectations low. Employment
figures are much the same, relying on survey data, seasonal adjustments, and
birth/death models, while the major focus remains on the unemployment rate.
Of course, the unemployment rate can fall as discouraged workers drop out of
the labor market altogether, leading to the phenomenon of a falling
unemployment rate with no job growth.
In
terms of keeping stable prices, the Fed has failed miserably. According to
the government's own CPI calculators, it takes $2.65 today to purchase what
cost one dollar in 1980. And since its creation in 1913, the Federal Reserve
has presided over a 98% decline in the dollar's purchasing power. The average
American family sees the price of milk, eggs, and meat increasing, while packaged
household goods decrease in size rather than price.
Loose
fiscal policy has failed to create jobs also. Consider that we had a $700
billion TARP program, nearly $1 trillion in stimulus spending, a government
takeover of General Motors, and hundreds of billions of dollars of guarantees
to Fannie Mae, Freddie Mac, HUD, FDIC, etc. On top of those programs the
Federal Reserve has provided over $4 trillion worth of assistance over the
past few years through its credit facilities, purchases of mortgage-backed securities,
and now its second round of quantitative easing. Yet even after all these
trillions of dollars of spending and bailouts, total nonfarm payroll
employment is still seven million jobs lower than it was before this crisis
began.
In
this same period of time, the total U.S. population has increased by nine
million people. We would expect that roughly four million of these people
should have been employed, so we are really dealing with eleven million fewer
employed people than would otherwise be expected.
It
should not be surprising that monetary policy is ineffective at creating
actual jobs. It is the effects of monetary policy itself that cause the boom
and bust of the business cycle that leads to swings in the unemployment rate.
By lowering interest rates through its loose monetary policy, the Fed spurs
investment in long-term projects that would not be profitable at
market-determined interest rates. Everything seems to go well for awhile
until businesses realize that they cannot sell their newly-built houses,
their inventories of iron ore, or their new cars. Until these resources are
redirected, often with great economic pain for all involved, true economic
recovery cannot begin.
Over
$4 trillion in bailout facilities and outright debt monetization, combined
with interest rates near zero for over two years, have not and will not
contribute to increased employment. What is needed is liquidation of debt and
malinvested resources. Pumping money into the same sectors that have just
crashed merely prolongs the crisis. Until we learn the lesson that jobs are
produced through real savings and investment and not through the creation of
new money, we are doomed to repeat this boom and bust cycle.
Ron Paul
www.house.gov/paul
Copyright Dr. Ron
Paul
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