The world’s major central banks, led by the U.S. Federal Reserve, have always manipulated interest rates and money supplies. In recent years, however, the extent to which they intervene in the economy has increased dramatically—not only in degree, but also in kind. Central banks are no longer content merely to manipulate aspects of the economy; they now aim to own portions of the economy in the form of equities in major corporations. This is an ominous and seismic shift toward government ownership of the means of production. And, if we want to advocate and defend liberty and capitalism, we need to understand the nature of the problem, how it came to be, and what must be done to reverse the trend before it’s too late.
Toward that end, let us begin by reviewing what central banks traditionally have done and how their policies have evolved in recent years, in particular since the financial crisis of 2008. We’ll focus primarily on the actions and evolution of the U.S. Federal Reserve, not only because it sets monetary policy for the world’s largest economy, but also because it is in many ways the leader of practices for central banks worldwide.
Although central banks engage in both monetary policy and bank regulation, our concern here is with the former and related developments. The equally problematic regulatory actions of central banks are a subject for another day.
Traditional Monetary Policy
For decades, the objective of the Fed and other central banks, as articulated by their administrators and defenders, has been to “nudge” the economy to grow (or to slow) by setting short-term interest rates and managing the money supply. The primary means of nudging for growth has been “open-market operations,” which consist essentially in printing (or otherwise fabricating) new money with which to purchase government bonds.
For an indication of how this works, suppose the Federal Reserve Open Market Committee (FOMC)1 believes the economy is growing “too slowly.” Perhaps their forecasted growth rate is 1 or 2 percent, and they believe 3 or 4 percent would be “better.” After a long technical discussion, the FOMC votes to “boost” the economy by increasing the money supply and pushing interest rates downward. This is often called “loose” monetary policy, or “easy money.”
To implement easy money, the Fed buys a quantity of U.S. Treasury notes on the open market.2 This purchase increases demand for Treasury notes, pushing up their price and pushing down short-term interest rates.3
How does the Fed pay for this purchase? If, as is usually the case, the central bank does not have enough cash on hand, it pays for the Treasury notes with brand new money of its own creation. This new money is generated by fiat or bureaucratic decree—literally by a government employee making a few keystrokes or mouse clicks on a computer. This new money—technically known as “base money” or “reserves”—is deposited at the Federal Reserve Bank of New York in an account (similar to a checking account) for the commercial bank that handled the sale.
When the commercial bank loans these funds to a customer, the new money feeds into the economy and is spent on investments, land, houses, yachts, or whatever. All else being equal, an injection of money into the economy tends to decrease the value of money in circulation and thus to increase the price of goods and services. According to the theory of John Maynard Keynes—the theory embraced by all central banks—this new money and consequent spending “stimulates” economic growth.4
By contrast, if the Fed deems that the economy is growing “too fast,” it “tightens” monetary policy by reversing the procedure: It sells Treasury notes (thus taking money out of circulation), increases interest rates, and thereby slows economic growth. In practice, the Fed has been strongly biased toward expanding the money supply, tightening it only rarely.5
Central banks possess exclusive legal power to fabricate new money. Any other institution or individual who attempted to fabricate money would be arrested for counterfeiting. And, in the United States, as in most countries, there is no legal limit on the amount of money the central bank can create. As we will see, the Fed has in recent years taken advantage of this absence of limits on the fabrication of money, creating enormous quantities of fiat money, and laying the groundwork for new kinds of interference.
From Conventionalism to Activism
For most of the Fed’s history, open-market operations functioned essentially as described above. But beginning in the late 1990s, under Fed Chairman Alan Greenspan, the central bank took a more active role in the economy. For example, in 1998, the Fed orchestrated a bailout of the private hedge fund Long Term Capital Management; in 1999, it “provided liquidity” (i.e., fabricated extra money) in anticipation of a Y2K panic; and in the aftermath of the 2001 dot-com bust and ensuing recession, the Fed temporarily pushed key short-term rates to 1 percent, the lowest since World War II.6 Despite these aggressive moves, the Fed was still seen by most people as a benign facilitator. Americans on Wall Street as well as on Main Street by and large still believed free-market principles dominated the economy.
Many private-sector economists now think the Fed’s easy money policies in the early 2000s helped create the housing bubble, a major factor in the 2008 financial crisis. But central bank administrators continue to deny that their actions were responsible for that crisis or for any boom-bust economic cycles. On the contrary, instead of considering the possible destructive effects of their actions, central banks have become increasingly confident in their ability to “correct” economic maladies.
Quantitative Easing: Crossing a “Bright Line”
As the housing bust and banking crisis unfolded in 2006 and 2007, the Bernanke Fed responded by cutting short-term interest rates. After peaking in late 2007, the stock market began to fall. In October of 2008, the Fed again reduced short-term rates to 1 percent, but the stock market kept falling. In December, the Fed introduced a “zero interest rate policy” (ZIRP) for the first time in history and started purchasing mortgage-backed securities in large quantities. The stock market continued to fall. Finally, in early 2009, Bernanke drastically expanded open-market operations under a program he called “Quantitative Easing” (QE). As the name suggests, QE consists in the Fed purchasing massive quantities of government-backed bonds in order to “ease” financial conditions. And, in order to make these purchases, the Fed created massive amounts of new money.7
This new policy of “quantitative easing” came in waves, sporting catchy names such as QE1, QE2, Operation Twist, and QE3. Other major central banks—including those of the UK, Europe, Japan, and China—soon followed with similar bond-buying programs of their own.8
Although both ZIRP and QE were enacted using traditional open-market mechanics, the huge increase in the quantity of money fabricated, the quantity of bonds purchased, and the extreme suppression of interest rates were unprecedented. This was a newfangled Fed. As University of Chicago professor John Cochrane concluded in August 2012—even before the Bernanke QE program was fully implemented—central banks had become full-fledged central planners. In a Wall Street Journal op-ed titled “The Federal Reserve: From Central Bank to Central Planner,” Cochrane wrote:
Momentous changes are under way in what central banks are and what they do. We are used to thinking that central banks’ main task is to guide the economy by setting interest rates. Central banks’ main tools used to be “open-market” operations, i.e. purchasing short-term Treasury debt, and short-term lending to banks.
Since the 2008 financial crisis, however, the Federal Reserve has intervened in a wide variety of markets, including commercial paper, mortgages and long-term Treasury debt. At the height of the crisis, the Fed lent directly to teetering nonbank institutions, such as insurance giant AIG, and participated in several shotgun marriages, most notably between Bank of America and Merrill Lynch.
These “nontrax`ditional” interventions are not going away anytime soon. . . . In his speech Friday in Jackson Hole, Wyo., Mr. Bernanke made it clear that “we should not rule out the further use of such [nontraditional] policies if economic conditions warrant.”
But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed’s independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.
In addition, the Fed is now a gargantuan financial regulator. Its inspectors examine too-big-to-fail banks, come up with creative “stress tests” for them to pass, and haggle over thousands of pages of regulation. When we think of the Fed 10 years from now, on current trends, we’re likely to think of it as financial czar first, with monetary policy the boring backwater.9
Although the Fed has (at least for now) suspended its QE program, it still maintains short-term rates at zero. Other central banks continue their bond-buying binge to this day, with no end in sight. Veteran stock market analyst Fred Hickey recently described the worldwide reach of central bank activism as follows:
In an alleged attempt to fight off the forces of economic stagnation unleashed following the debt driven global financial crisis in 2008, central banks around the world have engaged in every conceivable monetary pumping notion they can think of. In addition to the quantitative easing (money printing) programs, the Fed has quintupled its balance sheet to $4.44 trillion by buying US treasury securities and mortgage-backed securities with printed money, the European Central Bank is in the midst of a $1.1 trillion bond buying binge, and the Bank of Japan currently has an open ended $65 billion per month QE program. Additionally, central banks globally have cut interest rates 700 times since the beginning of 2008. China and India’s central banks have each cut rates three times this year.
The interest rate cuts just keep on coming, despite the fact many industrialized central bank borrowing rates are already at 0 per cent, including the US Federal Reserve’s. Some central banks (Switzerland, Denmark, and Sweden) have cut rates below 0%. On Thursday, the Swedish Riksbank, already with a negative repo rate (-.25%) cut it another 10 basis points to a record low (-.35%) and noted it could cut rates again in the fourth quarter, if necessary. The Riksbank also increased its bond-buying program (QE) by an additional $5.4 billion.
Why are all these central banks taking such extraordinary steps? They’re attempting (unsuccessfully) to fight the forces of economic stagnation caused by years (decades) of bad government policies that have led them to pile up historic amounts of debt and incredible entitlement liabilities (over $100 trillion in the US alone). These massive debts have weighed down growth globally.10
How do central bankers justify their new, massive money printing programs? In November 2010, shortly after announcing QE2, Chairman Bernanke provided an explanation in a Washington Post op-ed:
This approach [i.e., quantitative easing] eased financial conditions in the past [i.e., QE1] and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.11 [Italics added]
Virtuous Circle or Vicious Cycle?
Central bankers such as Mr. Bernanke may believe they are doing “virtuous” work, but can the injection of fiat money into the marketplace actually make the economy healthier and stronger? As the famous 19th-century economist Frederic Bastiat warned, to understand economic cause and effect, we must look beyond what is seen and consider the unseen as well. Let’s examine some of the adverse effects of fiat money that Bernanke and company choose to ignore.
Unjust Economic Inequality
In a free-market (i.e., capitalist) economy, inequality of economic condition is normal and just. Over the long run, a capitalist economy rewards ability and hard work, providing financial rewards and upward mobility for the rationally ambitious, be they rich or poor or anywhere in between. Although their economic achievements may differ dramatically, individuals and businesses all have the same freedom to think and to act on their best judgment in pursuit of their values and goals. Everyone’s rights are equally recognized and protected by law. This is the essence of the American dream: freedom to act on your judgment and to keep what you earn. Capitalism is the system of justice. And the economic inequalities inherent in the system are just inequalities; they are consequences of different people’s vastly different thoughts, goals, choices, and efforts.
In stark contrast, an economy manipulated by central banks—banks that print fiat money and forcibly dictate interest rates—entails all manner of unjust economic inequality. For instance, by flooding the banking system with liquidity at low interest rates, central banks encourage large corporations and wealthy investors to borrow money on margin at very low cost (often at 1 percent or less) and buy stocks in an artificially “stimulated” stock market. Such easy money policies also encourage public corporations to borrow cheaply and use the funds to repurchase their own stock. This increase in demand pushes up stock prices, unfairly lines the pockets of those who understand the mechanics of the game and have enough money to play, and leaves in the dust those with insufficient knowledge or insufficient funds to invest in stocks (more on this below). And, the longer the Fed floods the stock market with cheap money, the higher share prices will rise—making those who already are wealthy increasingly wealthier and leaving those who are not able to participate at an unfair disadvantage.12 This kind of inequality—Fed-rigged inequality—is the antithesis of the American dream and the antithesis of justice.
Despite their professed sympathy for the middle class and the poor, central banks and their defenders are fully aware that their policies transmit direct and immediate windfall gains to “the 1 percent.” Bernanke, in the op-ed cited above, proudly takes credit for inflating the stock market, knowing full well that the wealthy, not the poor, deal in stocks.
Although they are not responsible for central bankers’ actions, many hedge fund managers are consciously and explicitly “in on the game.” And some of them have adopted the attitude that, although they may not advocate the Fed’s easy money policies, neither will they oppose them. Hedge fund manager David Tepper—whose 2013 personal earnings in the stock market were $3.5 billion13—is a typical example. His approach to the easy-money policies of central banks was noted in a Barron’s report on a major investment conference in May of 2015. In reaction to the fact that “four major central banks (central banks of the US, the EU, China and Japan) are pumping liquidity into the system” and “will create another tailwind for equities, even after six years of central-bank fueled growth in stock markets,” Tepper said, “It’s kind of hard to fight money . . . Don’t fight the Fed. Now you’ve got four Feds. Don’t fight four Feds.”14 In other words, don’t fight the Fed that feeds you.
When central banks create money to purchase bonds in large quantities, short-term interest rates (money market rates) are forced down to levels much lower than what would prevail in a free market. The artificially low interest rates prop up marginal companies that could not afford to borrow at higher, free-market rates but that can borrow at lower, Fed-set rates. The Fed’s suppression of rates also undermines credit analysis, making it difficult for lenders to distinguish between deadbeats and creditworthy borrowers. And this, in turn, leads to further market distortions—which, in turn, inspire the Fed to attempt further corrections—and so on. James Grant, editor of the highly reputable Grant’s Interest Rate Observer, puts it this way:
Interest rates . . . are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.
The central banks lifted off [i.e., “stimulated”] the stock market so that aggregate demand is going to rise. But they forgot to consider that aggregate supply is likely also to rise: Oil drillers will have it easier to find financing with which to drill the marginal well and to produce the marginal barrel of oil. This will weight on the market causing lower oil prices which will lead the central bankers in return to print still more money to save us from what they call “the risk of deflation.” So it’s seemingly a never ending, circular process of so called stimulus leading to still more stimulus and unconventional ideas leading to radical ideas. I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.15
As a vivid example of malinvestment caused by the Fed’s easy money policies, consider the automobile industry. Because of the Fed’s artificially low interest rates, banks can borrow massive amounts of money in the short-term credit market and relend it to consumer finance companies at low rates. This results in a huge increase in the number of people willing and “able” to buy new cars. On the surface this might appear to be a good thing, in that “Look, people can now buy new cars.” But is going into debt for a new car the right thing for these now-able consumers to do? Low-interest debt is still debt. And if a person cannot afford to take on debt in the context of the realities of the marketplace, making it artificially easy for him to take on debt is not doing him any favors. At best, artificially low rates pull consumer demand forward, increase consumer debt, push the day of reckoning further into the future, and make the problem of repaying debt even worse when rates rise again.
We also have to ask: Was producing all those extra cars the best use of limited economic resources? And who should be allocating those resources: individuals and businesses assessing actual facts on the ground in a free market, or central bankers who allegedly know how to manage the whole complex economy from an armchair with a computer mouse?
Republican Presidential candidate Senator Rand Paul explains malinvestment with an analogy:
When the U.S. Forest Service took a zero-tolerance approach to forest fires 100 years ago, what ultimately happened was a massive wildfire at Yellowstone National Park in 1988 that wiped out more than 30 times the acreage of any previously recorded fire. Paradoxically, by refusing to allow small fires to run their natural course, the forest managers made the entire park vulnerable to a giant inferno.
What is true of forests holds for the economy: When governments create a lie, whether it’s a fabricated ecology of no fires or a fabricated economy of no failures, the truth reveals itself even more violently than otherwise. Attempts to stop any dips in the stock market with monetary stimulus postpone the necessary adjustments to how and where resources and workers are deployed. Interest rates are a vital signal in the market; they must be allowed to do their job—that is, they must be allowed to be free.16
You may own your home and your car, and you may have a 401k or an investment portfolio consisting of stocks and bonds, but the market value of every one of those assets, as well as the purchasing power of the cash in your bank account, is being manipulated in some way by the U.S. Federal Reserve. You are still free to sell your assets and purchase others, but, whether you know it or not, your decision-making processes are being heavily influenced by the garbled price signals from a rigged interest rate market.
Penalization of Savers
Perhaps the most obvious victims of ultra-low interest rates are traditional, conservative savers, the bedrock providers of capital in a free economy.
To the same extent that early recipients of fiat money “prosper” from these mouse-click handouts, savers eventually suffer an equivalent decay of their earned purchasing power. When interest rates are artificially pushed down, those who would otherwise accumulate wealth over time via interest from their savings cannot do so. Their savings do not grow, and, consequently, they often must consume capital or cut back their standard of living. Would-be savers who want to grow their nest egg must attempt other means of doing so. Some invest in the stock market. But if they do not possess the requisite knowledge to deal in such risky assets—and many do not—they may well lose their life savings or huge amounts thereof—as many have. The Fed’s easy-money policies are not easy on the poor and less knowledgeable. And they are not fair. They are unfair in myriad ways.
Market-set interest rates—which are fundamental aspects of capitalism—are essential to fairness in the marketplace because they are essential to the assessment of risk, the allocation of resources, and the creation of wealth. As the famous bond investor Bill Gross commented recently, “Zero percent interest rates are destructive to the real economy because capitalism can’t survive at zero percent. It wasn’t meant to be that way.”17
Money-printing schemes are unjust not only in terms of investments and savings, but also in terms of employment—especially for the wage-earning poor.
Contrary to claims of central bankers and their supporters, Fed-suppressed interest rates do not in the aggregate result in more employment. Among other reasons, businessmen have limited funds, and when they make investment decisions, they must choose between investing those funds in labor (more employees or higher wages) or capital (machines, buildings, etc.). Artificially low interest rates bias investment toward capital rather than labor, because financing capital projects becomes comparatively cheap. So, in fact, the reverse of the central bankers’ claims is the case. Fed-suppressed interest rates result in lower real wages and higher unemployment than would exist in an unhampered market. This is not to say that labor and capital are naturally antagonists. In a free market, they exist in harmony because unhampered wages and interest rates can constantly adjust to real economic demand. But in an atmosphere of interest rates pushed artificially downward, investment in capital gets the advantage.18
Now consider the combination of these negative effects on the poor. Fed-fabricated fiat money and Fed-suppressed interest rates cause malinvestment (wasted capital), which results in a slowed or stagnant economy with fewer job opportunities, lower real production, lower real wages, declining purchasing power, and a dearth of interest on savings. The Fed’s activities in this regard not only transmit windfalls of wealth to certain people (and businesses) who are “in the know”; they also manifestly penalize those who are not.
Government Spending and Wealth Destruction
Since the 2008 financial crisis, the total (direct) debt of the U.S. government has grown from $12 trillion to more than $18 trillion, while annual spending has grown from $5 trillion to $6.5 trillion. About $2 trillion of the federal spending between 2008 and 2015 was financed directly by the Fed’s printing and mouse clicks.19 In addition, the U.S. Treasury has issued new debt and rolled over trillions of dollars in maturing government debt. What makes all such spending and debt accumulation possible? The Fed’s easy money policies do.
All such profligate spending is heavily subsidized by fiat money and artificially low interest rates, which provide cheap, practically free financing and transfer wealth into government spending programs that would not be funded under free-market conditions.20
Not only do the Fed’s easy money policies enable unchecked government spending; they also throttle genuine wealth creation and business expansion. Businesses spend money and consume resources with the aim of generating future revenues and profits. Insofar as businesses succeed, they replenish the wealth consumed in production and generate profits to boot. Business activity, in aggregate, creates wealth. By contrast, nearly all government spending and resource consumption proceeds without replenishing the wealth consumed, let alone generating a profit. Government projects don’t merely consume the fiat money with which they are funded; they also consume a great deal of genuinely valuable resources—such as labor, materials, and land—which, when used by government, cannot be used in productive business activities. If government did not consume these resources in its unproductive projects, then businesses could use them to produce values and create more wealth and prosperity. But because government consumes these resources—and to the extent that it does—businesses cannot use them productively. The wealth consumed by government is simply destroyed. Little wonder that, under massive government spending financed by fiat money, aggregate productivity declines and growth slows.
A New, New Direction: Central Banks Purchase Private Business Assets
The vast increase in the quantity of money fabricated by central banks in recent years is bad enough, and, as noted above, this alone means the central banks are operating as central planners. But the intrusion of central banks into the market has recently taken an even more ominous turn: Central banks have ventured beyond purchasing government bonds and have begun purchasing equities in the stock market.
According to a June 2014 press release from The Official Monetary and Financial Institutions Forum (OMFIF), an association of central banks and other public sector investors:
Central banks around the world, including in Europe, are buying increasing volumes of equities as part of diversification by official asset holders that are now a global force on international capital markets. This is among the findings of Global Public Investor 2014, the first comprehensive survey of $29.1tn worth of investments held by 400 public sector institutions in 162 countries.21
According to the report, central banks need investments that produce income. Having already raided the incomes of savers and investors, central banks are now raiding the stock market.
OMFIF also discusses the role of other public sector investors such as “sovereign wealth funds,” which are quasi-governmental investment firms that operate at the pleasure of their respective government.22 These funds have operated in the stock market for years, and many are joined at the hip with their nation’s central bank. For example, they might invest using foreign currency that was bought by the central bank with fiat money. But only recently have central banks jumped directly into the equity market, dropping all pretense of being mere facilitators of a market economy.
Since the first OMFIF report was issued in June 2014, central banks have ramped up their purchases of equities even more. For example, whereas in March 2015 the Bank of Japan owned in total a little more than 1 trillion yen (about $80 billion) in equity market value,23 currently (October 2015) the BOJ is on record as purchasing more than 80 trillion yen annually (about $60 billion per month) in government bonds, corporate bonds, real estate investment trusts, and common stocks—and is considering additional “stimulus.”24 In a 2015 update, OMFIF reported that the stock-buying practices of central banks are continuing unabated.25 Coverage by Bloomberg News confirms the trend.26
By far the frontrunner today in stock market manipulation is the People’s Bank of China (PBOC). As reported in The Economist, as of June 2014 “China’s central bank has now become the world’s largest public investor in equities.”27 But the PBOC doesn’t merely prop up stock prices by printing money, lowering interest rates, and purchasing equities. It and other regulators in China have also arrested short sellers, detained traders who speak negatively about the stock market, and suspended trading in companies that were not performing up to the state’s standards.
Lest we think China’s policies in that latter regard are an outlier—China, after all, is still a communist nation led by a politburo—Jim Grant reminds us that its tactics were invented by Western central bankers:
If I were a member of the ruling elite of the Chinese communist party I would say to myself: “Wait a second, we were just doing what the capitalist West was doing for the sake of economic recovery: Manipulating interest rates, administering asset prices through QE and inducing people through broad winks and nudges to taking risks and thereby seeding bull markets. When things went to smash in 2008 they didn’t arrest short sellers but they did threaten them . . . So what are we doing that’s different?” What China is doing different is that they’re doing it more ham handed. But aren’t there rather obvious analogies between old fashioned Marxist central planning of the entire economy and our style of western central banking in which they seek to impose certain outcomes through the manipulation of prices?28
Coming to an Economy Near You
You might be relieved to learn that, here in the United States, the Fed, unlike many other central banks, is not permitted to purchase private assets such as stocks directly. Your relief, however, would be unwarranted. The strategic groundwork for open market operations in private assets in America has already been laid.
In a 2002 speech to the National Economics Club, Ben Bernanke, then head of the Federal Reserve Bank of New York, outlined a number of creative ways in which the Fed, acting in cooperation with the Treasury, could “stimulate” the economy. Here is one of several policies he proposed:
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.29 [Emphasis added]
When the next financial crisis hits and the stock market plummets, with interest rates already at rock bottom and the Fed unable to engage in its traditional means of manipulation, expect this kind of action in the name of “saving the economy.”
Other ideas recently floated by central bankers and their apologists include negative interest rates (already tried in Europe, and recently suggested by Fed Chair Janet Yellen); “QE for the people,” which would involve the central bank writing checks directly to the poor; and “direct monetization,” which would allow treasuries to directly fabricate money for the government’s use, bypassing the central bank altogether.30
Fascism or Socialism? Pick Your Poison
In exchanging fiat money for private assets, are central banks merely expanding their traditional role of “facilitating” or “stimulating” the economy—or have they crossed an even brighter “bright line” on the road to full government control of business?
In discussing the nature of fascism and socialism, Ayn Rand observed that fascism involves a “semblance or pretense of private property, but the government holds total power over its use and disposal.” Outright socialism skips that pretense and establishes “public ownership of the means of production, and, therefore, the abolition of private property.”
Under fascism, citizens retain the responsibilities of owning property, without freedom to act and without any of the advantages of ownership. Under socialism, government officials acquire all the advantages of ownership, without any of the responsibilities, since they do not hold title to the property, but merely the right to use it—at least until the next purge.31
By flooding the economy with fiat money, manipulating prices, and pressuring financial markets—all the while formally leaving property in private hands—central banks walk the fascist line. By assuming outright ownership of private assets, such as stocks, central banks venture into socialism. Either way—or in any combination—central banks control the economy while shirking responsibility for it.
Recent actions of central banks have made even clearer the pretense of “independence” from their respective governments. Central banks are now, more than ever, powerful agents of government intrusion into the marketplace. They are poised to become monetary politburos.
What to Do?
Most Americans, when asked, say that they are solidly against government control of private business.32 Why, then, are so few objecting to the growing powers that central banks are acquiring over businesses?
The answer is that very few people understand what is happening, because it is not readily seen. As noted above, the problems here are substantially in the realm of what Bastiat called the “unseen.” Ironically, John Maynard Keynes—the intellectual inspiration for the economic policies that led to this nightmare—put the point succinctly:
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.33
Keynes may be correct in the sense that the average citizen is unlikely to decode the Byzantine central bank bureaucracy. But that doesn’t mean the average citizen cannot understand the basic problem and what to do about it. Americans still possess an uncommon degree of common sense, and if we help them to recognize the essence of what central banks are doing to their money and their freedom, many of them will be appropriately outraged.
If Americans discovered that a counterfeiter in their midst was fabricating billions of dollars and flooding the market with fake money, they would readily understand the threat to their economic well-being and they would call the police. If they further learned that the counterfeiter was working with the permission of elected government officials, they would rise up, throw those government officials out of office, and demand that they be prosecuted.
Few Americans are economists, but most know a con game when they see one. Most can understand that a government bureaucracy endowed with the power to print money without limit poses a direct threat to prosperity and freedom. And many would join the battle to curb the Fed’s powers if they know what was going on.
What we can and must do is (a) understand and help others to understand the dangerous and destructive nature of central banking; and (b) advocate and urge others to advocate the kinds of steps necessary to reverse this increasingly ominous trend.
We must arm ourselves intellectually and help others to understand the issues at hand and the values at stake. In this regard, in addition to understanding the nature of the specific problem as outlined above, we need to understand the basic principles of economics and the nature and role of money in a free market. Toward that end, reading (or rereading) Economics in One Lesson by Henry Hazlitt, and Francisco D’Anconia’s “money speech” in Ayn Rand’s Atlas Shrugged, will go a long way. And, of course, recommending and sharing these books widely will help to educate others in these crucial areas.
We would also do well to broaden and deepen our understanding of how central banks came to be and what can be done to phase them out of existence. Toward this end, Richard M. Salsman’s two-part article, “The End of Central Banking” (TOS, Spring and Summer 2013), is supremely edifying.
Bearing in mind the need to ultimately end central banking, we should look for and support any proposals or legislation that work to move policy in that direction. As an example of this, see Sean Fieler’s recent Wall Street Journal op-ed, titled “Competition for the Fed’s Money Monopoly,” in which he advocates using Bitgold, a gold-based bank account (and ATM card) as an alternative to fiat currency.34 Just as Uber has disrupted the entrenched, government-backed monopoly on taxis, so too innovative alternatives such as Bitgold can help to loosen the stranglehold the Fed and other central banks have on currencies and the economy.
Further, we should support political candidates who credibly advocate placing limits on the power of the Fed to fabricate money or manipulate interest rates. And we should let candidates know that if they want our support, they must set forth actual proposals explaining how they aim to limit the Fed. This should be a top priority in all presidential and congressional elections.
Finally, we should speak wherever and whenever we can reach active-minded people who might recognize the nature of the problem and join our vital cause. We should speak up on social media, write letters to the editor, call in to talk shows, and generally do whatever we can to inform active-minded people of the relevant facts.
Central banks have put us on a disastrous trajectory, but as history has shown, historical trends are reversible. The Enlightenment largely supplanted superstition and ignorance, ushering in an era dedicated to reason and science. The American Revolution replaced the “divine right” of kings with the genuine rights of individuals. The Civil War ended slavery and extended the application of America’s founding principles. And the civil rights movement struck a further blow to racism. We can cause a better political-economic future—if we fight for it.
A future of sound money and free banking is worth fighting for. And, as Ayn Rand said, “Anyone who fights for the future, lives in it today.”
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1. For details on the FOMC, see “Federal Open Market Committee,” July 27, 2015, http://www.federalreserve.gov/monetarypolicy/fomc.htm.
2. See “Primary Dealers,” http://www.newyorkfed.org/markets/primarydealers.html.
3. In addition to Treasury notes, the Fed purchases Treasury bonds and bills as well. For our purposes here, the differences are irrelevant.
4. See “Keynesian Economics,” https://en.wikipedia.org/wiki/Keynesian_economics.
5. This explanation is intended as a factual description of the Fed’s practices, not an endorsement of those practices.
6. See “Effective Federal Funds Rate,” https://research.stlouisfed.org/fred2/series/FEDFUNDS.
7. For an indication, see “St. Louis Adjusted Monetary Base,” https://research.stlouisfed.org/fred2/series/BASE.
8. Lingling Wei, “For the People’s Bank of China, Bond Buying Is Both Easy and Hard,” Wall Street Journal, April 20, 2015, http://blogs.wsj.com/chinarealtime/2015/04/20/for-the-peoples-bank-of-china-bond-buying-is-both-easy-and-hard/.
9. John Cochrane, “The Federal Reserve: From Central Bank to Central Planner,” Wall Street Journal, http://www.wsj.com/articles/SB10000872396390444812704577609384030304936.
10. Fred Hickey, “The Return of Stagflaction,” The High Tech Strategist, July 5, 2015, http://www.lemetropolecafe.com/img2015/Midas/0710/FredHickeyLetter.pdf.
11. Ben Bernanke, “What the Fed Did and Why: Supporting the Recovery and Sustaining Price Stability,” Washington Post, November 4, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html.
12. See George Reisman’s essay, “Credit Expansion, Economic Inequality and Stagnant Wages,” Goerge Reisman’s Blog on Economics, Politics, Society, and Culture, http://georgereisman.com/blogWP/?p=293.
13. Nathan Vardi, “The 25 Highest-Earning Hedge Fund Managers and Traders,” Forbes, February 26, 2014, http://www.forbes.com/sites/nathanvardi/2014/02/26/the-highest-earning-hedge-fund-managers-and-traders/.
14. Avi Salzman, “Live from Sohn: ‘Don’t Fight Four Feds,’ David Tepper Says,” Barron’s, May 4, 2015, http://blogs.barrons.com/stockstowatchtoday/2015/05/04/live-from-sohn-dont-fight-four-feds-david-tepper-says/.
15. James Grant, “Jim Grant on Helicopter Money and the Comeback of Gold,” Contra Corner, September 26, 2015, http://davidstockmanscontracorner.com/jim-grant-on-helicopter-money-and-the-comeback-of-gold/.
16. See Rand Paul, “If Only the Fed Would Get Out of the Way,” Wall Street Journal, September 15, 2015, http://www.wsj.com/articles/if-only-the-fed-would-get-out-of-the-way-1442356924?cb=logged0.1367488316166745.
17. Matt Egan, “Bill Gross: Capitalism ‘Can’t Survive’ at 0% Rates,” CNN Money, October 6, 2015, http://money.cnn.com/2015/10/06/investing/bill-gross-capitalism-zero-rates/.
18. Reisman, “Credit Expansion.”
19. See “U.S. Treasury Securities Held by the Federal Reserve: All Maturities,” October 29, 2015, https://research.stlouisfed.org/fred2/series/TREAST.
20. Indeed, today’s blatant money-printing schemes help expose the real reason central banks exist: to fund government spending without the knowledge of the public.
21. See OMFIF press release, “Global Public Investors—The New Force in Markets,” June 16, 2014, http://omfif.createsend1.com/t/ViewEmail/j/AD679A12EEB1FB26.
22. See David Marsh, “Dangers of Central Banks Public Investments,” USA Today, June 15, 2014, http://www.usatoday.com/story/money/markets/2014/06/15/david-marsh-new-force-in-world-markets-global-public-investors/10548183/. For additional discussion, see Ralph Atkins, “Beware of Central Banks’ Share-Buying Sprees,” Financial Times, June 19, 2014, http://www.ft.com/intl/cms/s/0/460ca86a-f6fa-11e3-9e9d-00144feabdc0.html#axzz3pu1VEeQN. See also Dan Kadlec, “Safe Bet? Central Banks Suddenly Start Buying Stocks,” Time, April 26, 2013, http://business.time.com/2013/04/26/why-are-central-banks-suddenly-buying-stocks/.
23. See Nikkei, “BOJ’s Stock Portfolio Swells to 10 Trillion Yen,” Asian Review, March 25, 2015, http://asia.nikkei.com/Markets/Tokyo-Market/BOJs-stock-portfolio-swells-to-10-trillion-yen.
24. Ko Sato, “Bank of Japan Maintains QE but Hints at October Stimulus Expansion,” Market Pulse, September 15, 2015, http://www.marketpulse.com/20150915/bank-of-japan-maintains-qe-but-hints-at-october-stimulus-expansion/.
25. See “Global Public Investor—Press Release,” OMFIF, 2015, http://www.omfif.org/media/announcements/2015/global-public-investor-press-release/.
26. See “Central Banks Buy Stocks as Low Rates Kill Yields,” Bloomberg News, April 25, 2015, http://www.bloomberg.com/news/videos/b/5fbafe1a-7513-45b5-a952-d860cbab68bd.
27. P. W., “The March of the Sovereigns,” The Economist, June 17, 2014, http://www.economist.com/blogs/freeexchange/2014/06/private-markets-public-investors.
28. Grant, “Jim Grant on Helicopter Money and the Comeback of Gold.”
29. Ben Bernanke, “Deflation: Making Sure It Doesn’t Happen Here,” The Federal Reserve Board, November 21, 2002, http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm.
30. “If the economic outlook ‘were to deteriorate in a significant way so that we thought we needed to provide more support to the economy, then potentially anything—including negative interest rates—would be on the table,’ [Yellen] said. ‘But we would have to study carefully how they would work here in the U.S.’”, Ben Leubsdorf, “Fed’s Yellen: December Is ‘Live Possibility’ for First Rate Increase,” Wall Street Journal, November 4, 2015, http://www.wsj.com/articles/feds-yellen-december-is-live-possibility-for-first-rate-increase-1446654282”; Ambrose Evans-Pritchard, “Jeremy Corbyn’s QE for the People is Exactly What the World May Soon Need,” The Telegraph, September 16, 2015, http://www.telegraph.co.uk/finance/economics/11869701/Jeremy-Corbyns-QE-for-the-people-is-exactly-what-the-world-may-soon-need.html; and John Lounsbury, “Martin Wolf: ‘Lord Turner Thinks the Unthinkable,’” New Economic Perspectives, February 14, 2013, http://neweconomicperspectives.org/2013/02/martin-wolf-lord-turner-thinks-the-unthinkable.html.
31. Ayn Rand, “The Fascist New Frontier,” The Ayn Rand Column (New Milford, CT: Second Renaissance Books, 1998), p. 98.
32. Emily Ekins, “Poll: Americans Like Free Markets More Than Capitalism and Socialism More Than a Government-Managed Economy,” Hit and Run Blog, February 12, 2015, http://reason.com/blog/2015/02/12/poll-americans-like-free-markets-more-t2.
33. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe, 1919), p. 228. If readers have any doubt that Keynes’s theory paved the way to statist controls, consider the following passage from his preface to the German edition of The General Theory of Employment, Interest and Money, September 1936 (thanks to Richard Salsman for the reference): “Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution and of a given output produced under conditions of free competition and a large measure of laissez-faire” [emphasis added].
34. Sean Fieler, “Competition for the Fed’s Money Monopoly,” Wall Street Journal, November 2, 2015, http://www.wsj.com/articles/competition-for-the-feds-money-monopoly-1446416015.