Redefining Capitalism (II)

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so" (attributed to Mark Twain)

We conclude our look at Redefining Capitalism in the context of monetary policy. No one participating in the previous MM 7/26/21 Redefining Capitalism(I) session claimed to "know for sure" all about monetary policy, whether applied generally or with specific reference to the workings of the Federal Reserve. We shall continue to approach the subject with what the Buddhists refer to as a beginner's mind.

The Power Of The Fed documentary from the previous session raised as many questions as it answered about how the Fed operates and the resulting real-world effects. The Fed seems intent, despite its vow of transparency, to work in the shadows. Let us thus share our understandings and perspectives of the Fed as we attempt a further dive into the Rabbit Hole.

One may emerge from the Rabbit Hole somewhat dazed and confused but with one blinding insight -- that we are moving into the age of central planning. When the creation, cost, and distribution of money, the very life blood of a free market, is controlled, the illusion of capitalism is fundamentally distorted. 

Who or what pulls the levers is somewhat secondary but consider this from Thomas Jefferson, "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

There's the unmistakable whiff of deprivation in the air. While many, among "the people" may not "know for sure" that the game is rigged, they certainly do sense they've been deprived of their share in the ever-diminishing economic spoils, no matter the fancy words and convoluted explanations delivered from on high. There's the sense of an expanding spiral such that the falcon no longer hears the falconer (The Second Coming).

We are here, however, not to judge but to simply better understand. The fundamental question for us to address is how do you see this all playing out. More of the same? The Fed would seem to be in a box of its own making. Any interest rate rise out of the basement, any palpable tightening, would seem to unleash the massive debt burden via interest cost strangulation, to be experienced by companies and the country alike. The prospect of a stock market taper tantrum actually seems today to be the one and only principle guiding the Fed.

On the other hand, what are the consequences of maintaining these below-natural rates, not to mention further "easing?"  One Fed scenario has it that it might just continue to balloon its balance sheet and "monetize" (fancy word for buying up assets with newly-created money) on the way to owning most everything. That path ahead would then appear to be one of plutocracy with the further prospect of a "progressive revolution" Where does all that put democracy? 

Cue the words of Thomas Jefferson.

 Now, per my invitation to Bob Davis, our very own Harvard Phd economist, is a thoughtful retort (slightly edited for length and clarity) from. Securus Locus.

 (Bob: we are all ignorant, just ignorant about different things; the referenced documentary deserves a barely passing grade, the clearest parts of it were from the Minnesota Reserve Bank President explaining the Fed's mission (to stabilize the economy, maintain full employment, and regulate banks), all within the Fed's legislative mandate; the lifeblood of the economy is the interaction between the producers and consumers; let's not inflate the importance of money, it (simply) serves as the medium of exchange, the grease that facilitates the turning of the wheels; note that Jefferson was addressing the dangers of an unregulated private banking system, would probably have sounded an alarm about the shadow banking system; forget the poetry, better applied to the power of the wealthy with their union stifling, tax cutting influence, and lobbies for deregulation and derivatives as their game is wealth achieved through rent and transfers from losers to winners; go back to the Fed's purpose and be thankful it is staffed by professionals, is free from political meddling and the economic fundamentalism that has clouded its decisions for half a century, note Greenspan blew it too with his naive faith that the financial markets would sort out the 2008 problems).