Does The Federal Reserve Cause Inflation
SEARCH BLOG: FEDERAL RESERVE
I received an email that cited several sources [for example]regarding an exchange between Dr. Ron Paul and Ben Bernanke, Chairman of the Federal Reserve. The question on the table was whether the Federal Reserve caused inflation. I responded:
"The Fed doesn't cause inflation or deflation, but the Fed certainly mucks up the economy from time to time; e.g., lowering Fed rates to 1% which got everyone on the borrowing bandwagon and many into ARMs that were unrealistic... and then rapidly increasing Fed rates to 5.0%+ which, on a relative basis, put the costs of borrowing much higher than people could afford given their commitments at lower rates... all in the name of protecting the nation against inflation when it simply made a mess out of the financial and housing markets."I went on to say:
"But to the point of inflation:Does raising interest rates exacerbate inflation caused by other factors? To a certain extent, yes, by adding to the cost of goods and services. Does raising interest rates fight inflation? Beyond a certain level, raising interest rates creates huge economic problems by crushing the marketplace under untenable costs which then precipitates a "fire sale" situation.The Fed has created problems... just not the ones that RP is chasing."
- underlying problem is price of oil/energy due to congress [primarily Democrats] restricting U.S. exploration of oil and oil companies failing to build refineries while at the same time not addressing the need for more electric power generated by nuclear power or clean coal... not the Fed changing interest rates
- underlying problem is U.S. business dealing with unions and foreign competitors at the same time which has moved production/sourcing overseas and created massive negative imbalances in the current account leading to a weaker dollar... not the Fed actions... while reducing the better paying jobs in the lower-middle class
- underlying problem is an expensive war that has created significant Federal debt/borrowing lowering the value of the dollar... not the Fed.
I guess that could be called "fighting inflation", but the reality is that it is simply creating major economic losses for many businesses and individuals. It is the equivalent of treating skin cancer with plutonium dust.Furthermore, with the emergence of China as a major driver of the world economy, the ability of the Fed is lessening to affect worldwide inflation by dampening economic activity around the world.
Consequently, when the Fed raises its lending rates, U.S. businesses and individuals increasingly bear the brunt of that action while the rest of the world merrily goes on its own way.Perhaps it is time for a change in the mission and methods of the Federal Reserve.
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