Is the FED the Employer of Last Resort?

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Central banks are one of the worst institutions of the state. There is no justification for an institution that supports fractional-reserve banks, what with their known tendency to over-extend their loans, creating booms and depressions. There is no rationale for an institution that can print base money so as to bail out banks that have made bad loans or other financial institutions that have mis-managed their businesses.

Since there is no rationale whatsoever in support of central banks, rationales have had to be invented. These are necessarily false. By repeating them over and over and teaching them, members of the economics profession convince themselves and others that these false rationales are truths. They are really superstitions that are widely believed. It is to be expected that most economists within the FED, trained by the FED on a visting basis, or who receive grants from the FED will absorb these false rationales that obscure an understanding of what the FED actually can and cannot accomplish. If a great many economists who have some training in correct modes of economic thought have adopted the witchcraft reasoning of the FED, just think what must be the case among reporters and those lacking any training.

Janet Yellen’s testimony contains all the current myths and superstitions perpetuated by the FED. The collection of these false ideas may be called FEDSPEAK. Here is an example:

“Our current program of asset purchases began in September 2012 amid signs that the recovery was weakening and progress in the labour market had slowed. The Committee said that it would continue the program until there was a substantial improvement in the outlook for the labour market in a context of price stability.”

The idea expressed here, that the FED’s asset purchases can strengthen the labor market, is totally incorrect. This is superstition. What, is the FED the employer of last resort, even indirectly? Is a central bank able to create a strong labor market by buying mortgages and U.S. government debts? Is a strong labor market one that depends on a constant infusion of base money printed out of thin air by the FED and directed toward a target market like the housing market? Does a strong economy actually depend on such programs of puchases by a central bank? Is central planning of base money and central interference in financial markets required in order to make an economy work? Are they necessary so that people will work? Are they necessary so that people will see fit to hire others to work?

Pardon me if I answer all these questions with a “NO”.

How did the world ever get along without central banks before they became prevalent in the 20th century?

Could it perhaps be the case that central banks and the fractional-reserve banks they support both caused and exacerbated the Great Depression?

Here is another snippet of FEDSPEAK from Yellen, whose words and ideas expressed here are not different from her predecessor or from the FOMC itself:

“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases…”

The FOMC actually wants higher inflation! Not only that, it thinks that it should generate higher inflation as long as the labor market remains weak.

In order for people to put themselves to work, what do they need? They need to have wants to fulfill and they have to have a good idea of what these wants are. Check. This condition exists all the time. People need time, resources and know-how of how to produce goods. Check. People have these all the time. In an exchange economy, it helps to have money, especially a money whose supply doesn’t alter in a volatile way, for that causes changes in prices that can disrupt the productive activities of those producing, transporting, selling, and buying the goods. Before there were central banks throughout the world, gold and silver performed that function and prices were stable.

My point: Inflation is not a precondition or a lever to produce strong labor markets. All it takes is human wants and capabilities combined with a stable money. We do not need a FED buying mortgages or any other financial assets. We do not need a FED bailing out the institutions whose policies lead them to failure.

The central bank cannot be an employer of last resort. In order for a production cycle to be complete, the work that was done to produce the goods has to be compensated and paid to those workers who then take the goods off the market and consume them. The goods must be wanted by those buying them, and they must be capable of buying them. THEY CANNOT INDEFINITELY INCREASE THEIR DEBTS SO AS TO BE ABLE TO BUY WHAT IS PRODUCED.

When the FED buys securities, it disrupts this cycle in several ways. It alters asset prices, so that they provide false signals to everyone. This alters what is produced, moving it away from what people would otherwise be producing and buying. Debts are created that otherwise either would not exist or would be held by a different set of persons. This enables transactions based on a higher level of debt in the economy, but this is unsustainable. Uncertainty rises. Financial institutions are incentivized to make loans of lower credit quality. This endangers them and eventually leads to a recession, depression or crash.

We do not need a central bank. We do not need a FED.

8:44 am on February 12, 2014