This has probably been done by a hundred economists already, but I felt compelled to address an article I read today, which is probably the most blatant and poorly contrived propaganda piece I’ve ever seen in the mainstream media. The article is “11 Lies about the Fed”, written by one Bonnie Kavoussi in the ever-objective Huffington Post. I should begin by pointing out that economics is and always has been a very complex and rather inexact science with multiple competing explanations for nearly everything, so any serious economist would be rather hesitant to dub an alternative explanation a “lie”. Clearly Ms. Kavoussi understands precious little about economics, and I am addressing each of these alleged “lies” in order that she and anyone else who may be interested might gain some insight.
“Lie” #1: “The Fed actually prints money.”
In order to get the article started on the right foot, the first “lie” the author cites is actually a tiny semantic technicality. The Treasury prints money at the Fed’s request, rather than the Fed themselves, and sometimes the Fed creates money by simply adding numbers to a bank account in a computer rather than physically printing it. The Fed is fully responsible for both. No, Ben Bernanke doesn’t load the paper in the printing machines and press the button. But the Fed is entirely responsible for creating new money, and that is usually termed “printing”.
“Lie” #2: “The Federal Reserve is spending money wastefully.”
“Wastefulness” is clearly a subjective judgment, and is pretty absurd to label a “lie”, especially with regard to an institution that has become accustomed to annual spending in the trillions and has never been subject to so much as a single external audit. But it gets much worse. The author’s rational: “The Federal Reserve has actually created new money by expanding its balance sheet. The Fed earned a $77.4 billion profit last year.” This frankly makes me wonder if the author even knows what a balance sheet is, much less the implications of “expanding” it (A balance sheet is the accounting statement that lists a firm’s cash holdings, investments, and debts, among other things—in case you were wondering). As is common knowledge to…well…everyone (or so I thought before reading this article), creating new money devalues the existing money in the marketplace, in savings accounts, and in your wallet; and has myriad other harmful effects on the economy. And the “profit” realized by the Fed is not “earned”, it is printed (or typed into a computer) out of thin air at the expense of everyone else that uses the currency.
“Lie” #3: “The Fed is Causing Hyperinflation.”
The argument is that since current levels of inflation are relatively low, this must be a lie. The three articles linked of “conservatives” claiming that the Fed was causing hyperinflation were nothing of the sort. Two predicted high inflation in the future, and one was Ron Paul arguing that Fed-approved core PCE and CPI measures produced an unrealistically low figure for rate of inflation, and that a more accurate measure would be a few percentage points higher. In not a single one of the links did the “conservative” in question suggest that hyperinflation was already occurring. The Fed has expanded the monetary base exponentially, an action which is unambiguously linked to higher inflation. Even many of the Fed’s own economists are beginning to worry that Bernanke’s policies will cause high inflation in the near future.
“Lie” #4: “The amount of cash available has grown tremendously.”
The argument is that the “amount of currency in circulation has not really changed”. Both the “lie” and the explanation are carefully worded to avoid the real issue. Money, and even cash, can be considered several different ways. The Fed in recent years has increased the monetary base astronomically. This means that the Fed has created a lot of new money. The effect of this new money has been offset, however, by a decline in the money multiplier effect, which is a phenomenon (which I won’t explain in detail here) in which lending by financial institutions effectively increases the total amount of money in circulation. The recession and a high degree of uncertainty in the market place have depressed lending, which has in turn suppressed the money multiplier and offset the enormous increase in new money. We will see the full effect of the expanded monetary base once lending goes back to normal, and total currency in circulation will increase drastically.
“Lie” #5: “The gold standard would make prices more stable.”
The argument is that prices today are more stable than they were under the gold standard in the 19th century. First of all, this claim is debatable, as 19th century economic data is incomplete and somewhat difficult to compare to modern data. Some economists, such as Harvard economist Jeff Miron have made the case that prices were actually more stable during that period, even despite the fact that the gold standard was poorly applied and often abused by the government during that time. But now to point out the glaringly obvious: IT WAS THE 19th ***** CENTURY!! If you wanted to buy stock in that time, you would have had to get on a horse and ride to New York. Now trades are lightning-fast, and the whole world market is accessible at our fingertips. Arbitrage opportunities are recognized and trades executed by computer programs in fractions of a second. Prices should be far more stable today, completely irrespective of the monetary regime. The fact that they are not is a stunning indictment of the Fed’s monetary policy.
“Lie” #6: “The Fed is causing food and gas prices to rise.”
If you were looking for an actual lie, look no further than this line: “there is actually no correlation between the Fed’s stimulus measures and commodity prices.” Actually by this point I suspect that the author doesn’t know what “correlation” means (Google it if you don’t know). A quick look through the links the author was kind enough to include (but apparently not to take the time to understand) shows that there is a significant correlation between Fed stimulus and commodity prices. Whether this correlation is the result of direct causation by stimulus or some other factor or combination of factors is debatable, but this “lie” clearly seems to be a plausible explanation at the very least.
“Lie” #7: “Quantitative easing has not helped job growth.”
The argument is that the Fed’s economists say that QE has “saved or created” a bunch of jobs. In other news, scientists working for Marlboro have determined that cigarettes actually reduce the risk of cancer, heart disease, hemorrhoids, and spontaneous human combustion. Meanwhile Kim Jong-Il has made North Korea the greatest nation on Earth…according to Kim Jong-Il. Of course the Fed claims that it has been successful. What we actually see is the slowest recovery from an economic downturn in more than eighty years. Fed policy over the last five years has been an abject failure, and the Fed’s only defense is to blindly declare that we would be worse off without its interventions.
“Lie” #8: “Tying the U.S. dollar to commodities would solve everything.”
The author attributes this one to Paul Ryan, who apparently advocates some sort of mixed-commodity monetary standard (which neither she nor any of the heavily-biased op-ed articles to which she links bother to identify). I’m going to go out on a limb here and guess that Mr. Ryan never made the statement that his proposal would “solve everything”, whatever that means. I think that’s a pretty safe assumption.
“Lie” #9: “Ending the Fed would make the financial system more stable.”
The rationale: “The US economy actually experienced longer and more frequent financial crises and recessions during the 19th century, when the US was using the gold standard and did not have the Fed.”I could’ve sworn we just went over this…see #5.
“Lie” #10: “The Fed can’t do anything else to help job growth.”
The rationale: “Some economists have noted that the Fed could target a higher inflation rate to stimulate job growth.” Very debatable claim by “some economists”…and obviously anyone who disagrees is a big mean lying liar sent by Satan himself to fool you poor innocent victims into doubting your Lord and Savior, Ben Bernanke. A higher inflation rate (read: “printing more money and killing your investments”) MIGHT stimulate job growth slightly in the very short-term at enormous expense to the long-term health of the economy, but that can hardly be taken for granted.
“Lie” #11: “The Fed can’t easily unwind all of this stimulus.”
The author’s argument is that the Fed bought a lot (a LOT!) of Treasury bonds and government-backed mortgages, which are easily tradable on the current market, and therefore selling off these assets will be easy once the Fed is satisfied that the economy is back to normal. This absurdly simplistic (surprise!) argument ignores three important points. First is that just because Treasury bonds and government-backed mortgage securities have plenty of potential buyers now doesn’t mean they will once the Fed begins to flood the market with them. Secondly, many of the mortgage securities the Fed bought are not government backed, and will likely never be paid back. These are pure loss on the part of the Fed (and by extension, anyone who holds US dollars). And third, perhaps most importantly, selling off all these assets will result in a contraction of the money supply, a marked increase in interest rates, and most likely a nasty recession. So even if the Fed technically has the ability to sell off its assets, it would wreak havoc on the economy.
Ms. Kavoussi, you’re welcome. I don’t normally do this for free, but for someone as direly in need as you, I figured I’d make an exception. Might I suggest that in the future you refrain from blindly accusing others of lying regarding subject matter that you don’t understand? And perhaps take a couple writing courses at your local community college—for the sake of your readers.