The first principle of reason is that nothing can both “be” and “not be” at the same time under the same conditions. This law or principle of (non) contradiction simply means that something cannot both exist and not exist at the same time, e.g., nothing can be a little bit dead. Something is either dead or alive; Schrödinger’s cat is only half dead and half alive because there’s a fifty percent chance it’s either one, which is known for certain when the box is opened.
Unfortunately, in this day and age, people seem to have abandoned reason altogether and accept contradiction as a matter of course. Schrödinger’s cat continues to be both dead and alive after the box is opened. Nowhere is this more evident than in the near-global acceptance of Keynesian economics, particularly by the world’s central banks. Nowhere has this been more disastrous than by the Federal Reserve System, the central bank of the United States.
As a case in point, take the two mandates that currently drive Federal Reserve policy, 1) keep a lid on inflation and 2) attain full employment.
What’s wrong with that? Well . . . everything. You see, in Keynesian economics, there is a necessary tradeoff between inflation and employment. This is based on a number of false assumptions, e.g., that only existing accumulations of savings can be used to finance new capital formation, that human labor is the only factor of production (capital only provides the environment within which labor can be productive), and inflation isn’t really inflation until full employment is reached (a rise in the price level before reaching full employment isn’t inflation but is due to “other factors” . . . and if you say you understand that . . . you’re lying).
That last is one of the more bizarre assertions of Keynesian economics, because it says that a rise in the price level (inflation), isn’t really inflation (a rise in the price level) until full employment is reached, then it becomes real inflation, but is due to other factors. Translation: inflation isn’t inflation but is due to something other than inflation if you don’t have full employment. In the Keynesian universe, inflation causes itself unless it doesn’t.
Got that? Good. Because now we apply Keynesian logic to monetary policy. According to Keynesian dogma, you need inflation to create jobs. This is because inflation shifts purchasing power from consumers to producers (i.e., from the poor to the rich), and producers use the extra dough to invest in more capital which creates the environment within which new jobs are created, hence inflation creates jobs!
Except that 1) inflation decreases demand and thus the demand for new capital, which is derived from consumer demand, 2) producers when they invest in new capital do so with the intention of replacing human labor, not using more of it, and 3) because there is no real incentive to invest in new capital when inflation is decreasing effective demand, producers invest their money in the stock market, driving up the price of shares.
Given the assumption that there is a trade-off between employment and inflation, the current mandates of the Federal Reserve to keep the lid on inflation and attain full employment are contradictory — it violates the first principle of reason and is therefore nonsense.
It also doesn’t work, for the reasons stated above. That is why we can agree with economist Larry Hatheway on “Why the Federal Reserve Needs a New Plan” (Washington Post, 92/05/23, A-21), but not on Hatheway’s prescription, which is to balance inflation and employment using different techniques than are currently being used, not in returning the central bank to its original purpose of providing a uniform, stable, elastic and asset-backed reserve currency and maintaining sufficient credit for industry, commerce, and agriculture.
That, in fact, is the idea behind the Economic Democracy Act, which overturns virtually all of Keynes’s assumptions, especially as it relates to the role of the central bank. That is why the Economic Democracy Act proposes:
Stop Federal Reserve Monetization of Government Debt. Terminate use of the Federal Reserve’s powers to create government debt-backed money, support foreign currencies, or buy and sell primary or secondary Treasury securities. This would reduce excessive Government spending and improve accountability. It would force Government, when its tax revenues are insufficient to cover all its legitimate costs, to borrow for deficits directly from savers in the open markets.
Stabilize the Value of the Currency. Require the Federal Reserve to create a stable, asset-backed currency measured in terms of a fixed monetary standard reflecting the needs of a technologically advanced, global economy. (Such a monetary standard could be, as some have proposed, the price of a kilowatt-hour.) This policy would avoid both inflation and deflation. It would balance supply and demand, matching future production with broad-based citizen purchasing power (increased by widespread capital incomes) needed to consume future goods and services.
Reduce Dependency on Past Savings for Financing Growth. Require the Federal Reserve to distinguish between “productive” and “non-productive” uses of money and credit. Non-productive uses of money and credit, such as with the debt-backed money and speculative credit that fueled subprime home mortgages and the global financial meltdown, would be financed from the accumulations of savers, wealthy Americans, and foreigners who could afford the risks. America could shift away from the limited understanding and use of “money” as a commodity to be manipulated and speculated upon, as well as from the false limitations of requiring “past savings” for financing future growth and capital ownership opportunities. The nation’s central and commercial banking system could more effectively support the growth needs of businesses and systematically broaden the base of citizen-owners whose purchasing power would increase with their new capital-derived incomes. As binary economist, corporate finance lawyer, and ESOP inventor Louis Kelso explained:
Louis O. Kelso
Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols….
By creating new, asset-backed money and providing an equal allotment of interest-free, insured capital credit every year to every American to become an owner of a viable accumulation of new income-producing assets, America would reduce its dependency on past savings, corporate retained earnings, or foreign government wealth funds advantaged by America’s growing trade imbalances. The Federal Reserve System would supply sufficient asset-backed money and productive credit through local banks to meet the liquidity and broadened ownership needs of an expanding market-disciplined economy. These “Fed-monetized” loans would be subject to appropriate feasibility standards administered by the banks and limited only by the goal of maintaining a stable value for the dollar.
Democratize Ownership of the Federal Reserve. Provide every citizen a single, lifetime, non-transferable voting share in the nation’s central bank and in one of the 12 regional Federal Reserve banks. This will ensure that the Fed’s board of governors is broadly representative of all groups affected by Fed policy, and that power over future money creation is spread widely among all citizens.
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