Onward and Upward at the Fed

The original requirement of the Federal Reserve Bank was to maintain stable prices. But in the 1970s, Congress added the requirement that the Fed ensure maximum employment.

The original requirement of maintaining stable prices was just fine all by itself. In the long run, maintaining stable prices does ensure maximum employment. But when the second mandate was added specifically, the Federal Reserve took it upon itself to ensure maximum employment even in the short run.   

Big mistake. Since high unemployment is a political live wire, the Fed has expanded the money supply much too fast.

How does the Fed do this? It buys bonds and Treasuries and pays for them, in effect, by entering numbers in the bank accounts of the sellers. Those numbers represent new money which the sellers can spend as they please.

Since 2008, the Fed has been creating new money like there’s no tomorrow. For some years prior to 2008, the Fed held about $10 billion of Treasuries and bonds. But after 2008, the number surged, if can believe it, by 160 times, to $1,600 billion.

The results? Employment has not maximized; it has fallen. The rate of unemployment has not diminished; it has soared. And the gargantuan supply of new money has created the potential for disastrous inflation.

Nice job, guys. We’re going to try to find different work for you.