Wednesday, March 18, 2015

What Is a Central Bank NOT Supposed to Do?

Yesterday we looked at what central banks were designed and intended to do.  Today we look at what central banks have been diverted or hijacked into doing, i.e., shifted from providing an elastic, asset-backed reserve currency to finance the private sector by supplying liquidity for qualified agricultural, commercial, and industrial purposes, to providing virtually unlimited financing for government using an elastic, debt-backed currency to expand the power of the State.

R.M.S. Titanic: Too Big To Fail
Thus, despite the fact that the rediscounting mechanism was intended under the Federal Reserve Act of 1913 to be the primary means for controlling the American money supply for the benefit of the private sector, it has long been abandoned as an integral part of the United States financial system. The discount window has been used instead to help bail out a few companies or countries considered too big or too important to fail.

Not worth a Continental
Overall, however, the money creation powers of the Federal Reserve have been used to monetize government debt.  These are the bills of credit by means of which the federal government creates money, but which the power to emit was specifically removed from Article I, Section 8 of the Constitution. This was to prevent the devastating problems associated with a debt-backed currency under the control of the politicians that the country had experienced with the debacle of the Continental Currency. Since the system was designed to implement an asset-backed currency not under political control, a number of problems have resulted from the shift.

Tyrannosaurus Debt
Citizens usually blame decisions by Congress or the President for our economic problems, particularly those decisions that result in nonproductive or counter-productive spending and tax policies. People usually don’t take decisions by the Federal Reserve into account, many of which (as Louis Kelso and others have pointed out for decades), have been equally counter-productive.

Federal Reserve policies, albeit in response to the political control over the institution established in the 1930s contrary to the original intent of the Federal Reserve Act, have added to the problem of government deficits, fueling the growth of the booked (i.e., acknowledged) national debt to over $18 trillion. This has made the United States the highest government debtor in the world. This has artificially and unnecessarily slowed the growth rate of the private sector, and allowed for massive expansion of government.

Louis O. Kelso
As a result, what Kelso and other expanded ownership pioneers predicted is becoming increasingly evident:

• Continuing economic disenfranchisement of the American people.

• Low rates of peacetime economic growth.

• Rates of private sector investment far below U.S. potential.

• Excessive use of non-productive credit in the public and private sectors.

• Downsizing of U.S. companies in competition with foreign companies with lower labor costs.

• Mounting trade deficits in the global marketplace.

• A growing gap in consumption incomes between the wealthiest Americans and ordinary workers and the poor.

• Under-use of human talent and advanced technologies developed by the military and in our space and energy programs that could be employed to improve America’s competitiveness in the global marketplace.

So — what should the Federal Reserve be doing?  Tune in tomorrow.


No comments: