President Donald J. Trump has taken on the Federal Reserve (Fed),
saying that Fed chairman Jerome H. Powell is threatening US economic growth
by further raising interest rates. Mainstream economists, the financial press
and even some politicians react with indignation: the president’s comments
undermine the Fed’s political independence, potentially endangering the
confidence in the US dollar. Such a public reaction is, at first glance,
understandable – as mainstream economists have declared the political
independence of the central bank a "golden calf" issue.
Monetary theorists argue that a politically independent central bank is
best for the currency and the economy. As a result, most central banks around
the world, including the Fed, have been made politically independent. But is
this so? Well, if the economy thrives, politicians leave the Fed alone. If
the economy stumbles, or if the Fed pursues unpopular measures, it runs the
risk that Congress or the president may revise the Federal Reserve At of
1913, stripping it of its power. In fact, the Fed’s monetary policy cannot
deviate too much from the Congress’ and the president’s political agenda.
Granted: In good times, the Fed is more or less protected from the demands
of political parties. But what about the influence from ‘special interest
groups' such as the banking industry on Fed policymaking? There should hardly
be any doubt that the Fed caters, first and foremost, to the needs of
commercial and investment banks. As the monopoly producer of the US dollar,
it creates – in close cooperation with the banking community – new Greenbacks
mostly via credit expansion out of thin air. In this sense, the Fed and
private banks represents a cartel.
This cartel produces inflation, leading to increases not only of consumer
prices but also of the prices of assets such as stocks, housing and real
estate. This, in turn, debases the purchasing power of the US dollar and
benefits some at the expense of many. The Fed-banker cartel, which keeps
issuing ever more quantities of US dollar, also causes economic disturbances,
speculative bubbles, and boom-and-bust cycles; and it tempts consumers,
firms, and the government to run into ever more debt. Especially so as the
Fed sets the interest rate for bank credit, and in doing so basically
controls all interest rates in credit markets.
As the Fed-banker cartel expands the money supply via credit extension,
the market interest rate gets artificially suppressed: It is pushed to a
level that is lower compared to a situation in which the Fed does not expand
the credit and money supply out of thin air. As a result of the lowered
market interest rate, savings decline, while consumption and investment go up
– setting into motion an economic boom. However, this boom will turn into
bust if and when the market interest rate rises – which inevitably happens
once no more new credit and money is pumped into the system; if the Fed
raises interest rates after having lowered them beforehand.
It might be frightening to hear, but the Fed does not know where the
"right" interest rate level is. In terms of interest rate policy,
it purses a ‘trial and error' approach. As history shows all too well, the
Fed lowers interest rates sharply in times of financial and economic crisis.
If incoming data suggests that the economy is returning to growth, the Fed
starts raising the interest rate and keeps raising it until the interest rate
becomes ‘too high', turning the boom into yet another bust. It would not be
surprising if the Fed's current interest hiking cycle were going to trigger
yet another debacle.
Viewed from this perspective, President Trump certainly has a point in
criticizing the Fed's latest series of interest rate increases. However,
forcing the Fed to keep interest rates at artificially lowered levels for
longer does not solve the real problem. It would only lead to more
distortions in the financial and economic system, foreseeably increasing the
costs of the inevitable crisis even further. In other words: The truth is
that Fed policy is not the solution to the problem, it is the most
significant part of the problem. If shutting down the Fed right away is not
an option, one path that is open to the president is to end the Fed's money
monopoly. This could be done by, first and foremost, ending all taxes and
regulatory requirements standing in the way of using means of exchange such
as precious metals, gold and silver in particular, and cyber currencies for
monetary purposes. In fact, it would open up a free market in money. People
would be getting a greater choice and thus could easily diversify away from
the US dollar if they wished without incurring undue costs.
The Fed-banker cartel’s scope of maneuvering would be significantly
reduced because they could no longer keep inflating the credit and money
supply as before. For if they do, the US dollar will depreciate against
alternative monies for all eyes to see, making the Greenback less
competitive, potentially driving the US dollar out of the market altogether.
In the early stage of a free market in money, people would presumably divert
part of their US dollar savings and time deposits into gold and silver as a
store of value. Later, businesses that provide not only storage and
safekeeping services but also offer payment and settlement services would
emerge, finally opening up the possibility to make daily payments with
‘digitised' gold and silver money. If the US administration truly wishes to
"To Make America Great Again", there is no way around addressing
the US dollar fiat currency problem at some point. The president's latest
criticism of the Fed's interest rate policy no doubt points in the right
direction. To underpin his criticism with the unquestionably right reasons,
it should be accompanied by manifest efforts to set up a free market in
money. Fortunately, a good number of US states has already been moving in
this direction. President Trump would arguably have the best reasons to
follow up – and push for a free market in money on a federal level.
