WHAT IS UP WITH THE FED?

One thing I don't get is why PhDs at the FED rely so much (basically totally) on "formulas," and not enough on how it "feels" to the average person, when analysing our economy's health.

I understand that inflation is "bad" and that it is important to control the growth of our economy's "core" prices; even though I personally find it more important to control the growth of our non core prices such as food and gas.

However, isn't it also bad when people can't afford their mortgage payments and end up loosing their homes? I mean, the first people to suffer when the FED raises its rates are the poor and the shrinking middle class.

In today's global economy, I also understand that it is not always easy to grasp (or control) the various factors that might impact the USA's core inflation numbers. So maybe all the FED feels that it can do is raise rates. But then again maybe it is time to take a different approach? Maybe the government (Treasury) could control the supply of money more?

Let me give you an uneducated example. From a non-formula driven point of view, it just seems that the FED rate of 5.25 is too high for the average working person. After all, the first person that really feels the Fed's rate increases is the less well off person. Credit card rates go up, which I guess is the point to stop spending. But what if someone already has a bunch of debt?

I guess, things are going to cost more for the have nots either way, right? But is this going to slow down our economy? Are the poor really causing our core prices to increase too fast? [And doesn't a slower economy imply an increased rate of unemployment?]

And what about the lagging mortgage rates? If someone doesn't have a large sum of money saved to make a significant (20%) down payment on a home, then how is this person suppose to afford to buy a new home with a FED rate above 5 percent?

So why is inflation "bad?" There are many good discussion regarding this, but here is just one.

. . . If inflation is indeed just a general rise in prices, why is it regarded as bad news? What kind of damage does it do? Mainstream economists maintain that general price increases cause speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.

Despite all these assertions regarding the side effects of what they define as inflation, mainstream economics doesn’t tell us how all these bad side effects are caused.

Why should a general rise in prices hurt some groups of people and not others? Why should a general rise in prices weaken real economic growth? Or how does inflation lead to the misallocation of resources? Furthermore, if inflation is just a rise in prices, surely it is possible to offset its bad side effects by adjusting everybody’s incomes in the economy in accordance with this general price increase. However, once it is established that inflation is about the destruction of the process of wealth generation then all the above questions are easily answered.

We have seen that increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price increases as such, which is only the manifestation of this misallocation.

Moreover, the beneficiaries of the newly created money, i.e., money out of "thin air"— are always the first recipients of money, and so they can divert a greater portion of wealth to themselves. Obviously, those who either don’t receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the pool of real funding.

Additionally, real incomes fall not because of general rises in prices, but because of increases in the money supply, which gives rise to nonproductive consumption. In other words, inflation depletes the real pool of funding, which undermines the production of real wealth—i.e., a lowering of real incomes.

General increases in prices, which follow increases in money supply, are an indication that the erosion of peoples’ purchasing power has taken place. It is not the symptoms of a disease but rather the disease itself that causes the physical damage. Likewise, it is not a general rise in prices but increases in the money supply that inflict the physical damage on wealth generators . . .

I know the rates are still historically low (or at least that is what they say), but we are at a point in our history in which the gap between the have and "have nots" is also really growing.

If one of the main goals as a people is to buy a home, then (in lieu of our increasing poverty numbers) how can we expect the average person to afford a home with the FED rates above 5 percent?

I guess the argument is that if core inflation gets out of hand, then this makes things even more difficult for the "have nots." But core inflation excludes food and gas prices so this reasoning doesn't totally make sense to me. I think it would be more important for someone to be able to afford a home than a new plasma TV.

I would think a FED rate of between 3 and 4 percent would be ideal. How about you? Why not deal with inflation with controlling the money supply or our governments spending?


. . . It also becomes obvious that rather than fighting inflation, it is the Fed itself that generates the inflationary process. On this Mises wrote,

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.

It is amazing that almost forty years ago the champion of present inflationary policies, Fed Chairman Alan Greenspan wrote the following,

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion . . .