“The drum-fire of propaganda that the Federal Reserve (the Fed) is manning the ramparts against the menace of inflation brought about by others is nothing less than a deceptive shell game. The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about ‘inflation,’ for which virtually everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts shouting ‘Stop, thief!’ and runs down the street pointing ahead at others.” Murray Rothbard

The Federal Reserve was created in 1913 with the dual mandate of maximizing employment and stabilizing prices. Since the value of the dollar has depreciated 96% since its creation, it is a complete and unmitigated failure. You often hear about how hard it is to make ends meet today but rarely is the true culprit (the Fed) identified. Prior to the complete abandonment of the gold standard in 1971, it was common for Americans families to make ends meet quite well on just one paycheck.

In the long long ago, the Fed’s main tool in tinkering with the economy was the federal funds interest rate which was the short term rate used in inter-bank loans. For example when the gold standard was abandoned, inflation went haywire in the 1970s. To combat this the Fed raised interest rates to the high teens. This carried on into the 1980s. Many credited the Fed with slaying inflation but that is far from the truth as it was the root cause of the inflation. After the dot com bubble burst, the Fed lowered its rate to lows not seen since after WW2 then it raised them to just before the great recession.

As the economy imploded it in the great recession, it lowered the rates pretty close to zero but it proved not to be the magic elixir that it was in the long long ago. Accordingly, the Fed approved round after round of quantitative easing (QE) which was somewhat the equivalent of printing money, but not exactly. Actually, it was just a key stroke and what occurred was the creation of money out of thin air which was used to buy mortgage backed securities. The Fed did not create QE as the Japanese had been doing it for sometime ever since their boom ended.

After the Fed adopted QE, it spread like wildfire to central banks across the globe. Many claimed that QE would cause the return of inflation but this did not occur. Actually it really did but no one noticed because all central banks were depreciating there currencies with random abandon. Actually it helps that the Fed calculates the inflation rate so it can exclude things like college tuition and it can substitute ground chuck for filet mignon in its calculation.

This went on for a few years until the Fed decided under Janet Yellen that it was time to return to normal. At first, she raised the interest rates very gradually. Then it was on to quantitative tightening (QT) which results when the Fed lets the securities it had purchased in QE mature.

Everything was going quite well until the end of 2018 when the stock market had its first serious correction since the great recession. At that point, the new Fed chairman, Jerome Powell put the breaks on QT. The stock markets rebounded accordingly. To be Continued.