What a Strong America Requires

There are a couple of behind-the-scenes issues with the Federal Reserve that impact every citizen in profound, and often disastrous, ways. The following are observations from the front row of the Federal Reserve in action. All commercial bankers implement the Fed's monetary policy in the same way that a gazelle observes a lion.

Yes, the Federal Reserve must be independent to make wise monetary policy decisions regardless of the current political climate. The "wise" decision should have been directed to meeting the one objective stated at the creation of the Federal Reserve in the early 1900s. That directive is to protect the value (purchasing power) of the U.S. dollar. Our entire economy and our standing in the world hinge on that statement. This is not hyperbole, but seven decades of observation of real-world events.

To preserve the value of the dollar, the Federal Reserve must control the number of dollars in circulation, also called the money supply. In turn, money supply controls inflation by managing the devaluation of the dollar's purchasing power over time.

This is a balancing act. Too many dollars in circulation decrease the value of every other dollar — i.e., it is inflationary. Memorize this until it becomes second nature. Too few dollars in circulation lead to a stronger dollar but shut down business activity due to a lack of liquidity.

Since 1913, the U.S. dollar has devalued by 97%. The Federal Reserve has failed at its prime directive.

Wages have not increased 100-fold over the past century, so the purchasing power of each dollar we own today buys less than it did a year ago. Another way to say this is that the number of dollars you must spend to buy the same commodity you brought last year has increased. This is price inflation due to dollar devaluation.

The Fed should be independent, and the Fed decision makers should make wise monetary decisions. The last three Fed chairmen — Bernanke, Yellen, and Powell — acquiesced to political influences that harmed the long-term prospects for the economy.

Each acquiesced to political pressure in a manner contrary to the Fed's prime directive. Each Fed chairman was complicit in allowing the Federal Reserve to continue "printing" U.S. dollars through Quantitative Easing (Q.E.). I find it curious that Powell is standing up to Trump, but went along with Biden and Obama.

Too Many Dollars in Circulation

The first mistake was Bernanke's in 2008, when the Fed implemented Modern Monetary Theory (MMT) by expanding the supply of money in the economy. That mistake is with us today, called Quantitative Easing (Q.E.).

Too many dollars in circulation are the cause of dollar devaluation today, which we also call price inflation.

Today's inflation is caused by the Fed "printing" too many U.S. dollars starting in 2008 and for years thereafter. Every U.S. dollar "printed" in excess of that needed to facilitate monetary liquidity (money supply) devalues every other dollar in circulation.

Debt on Every Citizen

To add insult to injury, these three fed chairs, as part of Q.E., used the dollars the Fed created to buy U.S. Treasury Bonds. The Treasury Department transferred that new money supply (Q.E.) to Congress and the president to spend on entitlements and welfare, predominantly. Every Treasury bond, bill, and note is debt, which every taxpayer (and our children and grandchildren) must pay back.

The Fed devalues the purchasing power of every dollar, places us into debt, and forces us to pay down that debt with cheaper (more) dollars. Yet these same people remain in control. This is insane.

In fact, just the interest on $9 trillion in debt is close to $1 trillion today. Because the Fed decided to over-liquefy the economy, we citizens have a massive debt burden. Add inflation to that debt, and we citizens have been materially harmed by Fed action.

Interest Rates

The next mistake is Powell's. He and the FOMC decided to ignore the cause of inflation, which is strictly dollar devaluation caused by too many dollars in circulation, and instead to use interest rate hikes to combat inflation. Today's inflation is strictly dollar devaluation due to excess money supply. High interest rates will not tame inflation. A significant reduction in the supply of money in circulation will strengthen the value of the dollar and end this inflation.

When Powell raised fed fund rates 525 bps in one year, he crushed private business activity and bank earnings. This bout of inflation was not caused by a lack of supply. It was caused by the action the Federal Reserve started in 2008, when it increased the number of dollars in circulation.

Reducing Money Supply Reduces Inflation (Dollar Devaluation)

Further, reducing money in circulation forces government spending to decline significantly. Since all government revenue comes from the taxpaying citizen, and since taxes and debt (Q.E.) reduce the money a citizen keeps, retaining more of the money we earn in the private sector benefits economic expansion and creates greater opportunity for every citizen.

To say it another way, all government spending comes from taxpayers. What is better: allow more of your earnings to stay in your account to be spent as you see fit, or drain more of your earnings through taxation and tariffs to let a nameless bureaucrat decide how to spend your money?

The Federal Reserve must be independent, but that's only half the equation. The full equation requires that the Fed chair and Fed presidents exercise care to keep the Fed's prime directive — namely, maintaining the value of the dollar. In this, the Fed's monetary policy implementation has been sorely lacking for decades. There is a new group of Fed presidents who understand this concept. The sooner they take the reins, the better.

Jay Davidson is the founder and CEO of a commercial bank. He is a student of the Austrian School of Economics and a dedicated capitalist. He believes there is a direct connection between individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.

Image: pasja1000 via Pixabay, Pixabay License.