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There has been some news lately about moderate resistance from Republicans to Federal Reserve Chairwoman nominee Janet Yellen, who is likely to be easily confirmed. Yellen predictably opposes Senator Rand Paul’s Audit the Fed bill, which currently has 27 co-sponsors. Opponents of the bill insist that enough auditing of lending practices and deliberations is done already. The reality is that the opponents of the bill don’t want the connections of the government-banking sector revolving door exposed any further. When the “no more audits are needed” argument is shot down with “then why would more audits hurt?”, the debate quickly shifts to the issue of “independence.”
The Constitution authorizes Congress “To coin Money, regulate the Value thereof” (A1, S8) and prohibited the states from making “any Thing but gold and silver Coin a Tender in Payment of Debts.” (A1, S10)
These two provisions of the Constitution have been violated for a long time. The Constitutional argument for the Federal Reserve is the so-called elastic clause, or necessary and proper clause. The proper understanding of this clause allows Congress to establish agencies in order to carry out the decisions it makes. For example, for the Congress to coin money, establishing the U.S. Mint was necessary. But this clause has been misunderstood as an excuse for Congress to delegate its own powers. This is a very flawed doctrine. Only the states have the right to delegate the powers they gave the federal government, and the Constitution is the specific embodiment of that power. The Federal Reserve, therefore, represents a grossly illegal transfer of authority. Not to mention the Federal Reserve performs many functions which were never enumerated as powers of Congress in the first place.
When the Constitution was written, precious metals were considered money. Both the phrases mentioned above specifically state “coin”, which can only apply to metals. The prohibition placed upon the states clearly indicates that gold and silver were the primary units of money. My theory on reason the federal government is not prohibited from using metals other than gold and silver is because of the need for smaller denominations, such as pennies, nickles, quarters, and dimes, which are all made out of other metals. Still, their value is in relation to either the gold/silver standard value of the currency. It is true that everyday transactions would be dificult to conduct if they could only be paid in physical coins. But it is not unreasonable to equate paper notes with coins as long as the paper is actually backed up by the full value of the coin. In that case, there is no real difference. Fast forwarding to today, the same can be said about transaction cards and online accounts.
With the understanding that only Congress has control over the money supply and that their own institution is invalid, it is very arrogant for the Federal Reserve to claim the right to independence. The enormous significance of currency demands that monetary policy can be controlled by the people through their representatives. Arguing for Fed independence is like arguing for Presidential independence.
The most common argument against Congressional control of the money supply is that Congress, being big spenders (no argument here), will simply print money instead of collecting taxes to finance their budgets. There are a few flaws in this theory. First of all, if Congress followed the Constitution, discretion on money creation would be severely limited by a metallic standard. Secondly, the Federal Reserve is responsible for more money printing than Congress ever did, so the argument is self defeating.
The Yellen Doctrine
What does Janet Yellen basically believe in?
That quantitative easing should continue until unemployment is down to normal levels.
Is that possible? Questionable.
But here is what is known that those like Yellen refuses to acknowledge:
1-That the consequence of money creation is inflation.
2-That inflation-induced booms only last as long as the inflation continues.
But people like Yellen say even though we have expanded the money supply to historic levels, there is no threat of inflation. They are wrong.
Where is the inflation?
Here is a graphic of the total amount of U.S currency, since it has been kept track of this way in 1984.
And here is consumer inflation dating back to 1980, using both official government stats and John Williams alternate (ie-lack of government bias) calculations.
Courtesy of ShadowStats.com
Without too much difficulty, it is easy to see that inflation in consumer prices, even if you go by Williams estimations, does not seem to correspond with the amount of money creation we have seen in the past few years.
For those unaware on how this new money is being injected into the economy, here is the lowdown: The Federal Reserve is purchasing Treasury bonds (funding our own debt) and mortgages (artifically sustaining the failed housing bubble) with money it literally creates out of thin air. The people who sell these assets to the Fed receive the money, who in turn spend it into the economy. The financial institutions which facilitate these transactions earn a good deal of money, although often they are participants in the transaction themselves.
For an increase in consumer prices to take place, money must be loaned to businesses, which in turn increase payrolls. This is not happening (rightly so) because businesses are still trying to restructure from the last malinvestment bubble, with no help from the current administration of course. Instead of fueling increasing prices in consumer products, recent inflation is primarily concentrated in several other sectors:
1-Sitting in the accounts of the big banks, yet to be loaned.
2-It is being exported overseas.
3-It is propping up the record-breaking stock market. (Yes, this is why the stocks are doing so good in a structurally unsound economy)
Now, think about what happens when there is increased confidence in the economy. Business loans will increase. Consumer prices will increase. Inflation will rise. The surge of loans spurs a continuing series of new loans, creating an unsustainable growth spiral.
The Federal Reserve will be forced to act. It will have to increase interest rates and sell of its assets to decrease the money supply.
But when that happens, the stock market will crash due to a stoppage in money. It will be catastrophic. This is exactly what happened in 2007 and 1929. The economy will halt and we will be back in a major recession again, if not a depression. This is actually preferable to hyperinflation, which would signal the end of America as the reserve currency of the world and as a respectable borrower.
What would Yellen do, continue the printing and destroy the economy through hyperinflation or stop the printing and bring the economy to a screeching halt?
I suspect she would continue the printing and rely on blaming the free market.