General Question

CuriousLoner's avatar

Does the Federal Reserve Cause Inflation?

Asked by CuriousLoner (1808 points ) July 24th, 2011

I don’t have any particular details to add, just looking for opinions and a interesting discussion.

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16 Answers

laureth's avatar

What causes inflation is having too much money chasing too few goods. (We’ve had periods of inflation and deflation before the Fed existed, and we’ve had periods of deflation and inflation after it existed.) The Fed, however, is a way of managing our money supply to limit the preponderance of financial disasters.

To say that the tool (Fed) causes an outcome (inflation) is like saying that guns shoot people. ;)

By the way, without the Fed, we had similar banking crises in 1814, 1818, 1825, 1836, 1841, 1857, 1861, 1864, 1873, 1884, 1890 and 1907, or an average of one every 8 years. (The Bank of England bailed us out in 1836 and 1857, and J.P. Morgan in 1907.) I tend to favor the banking system that had banking crises in 1914, 1929, 1984, and 2008, or an average of one every 25 years.

CaptainHarley's avatar

You do greatly err. Printing too much money, as the Fed is now doing, can indeed cause, and IS causing inflation.

The answer is most definitely yes!

cockswain's avatar

To expand on what @laureth said, the Fed controls the money supply by buying or selling bonds. If they sell bonds, they absorb money from the economy and hang onto it, which decreases the money supply. This is one way they combat inflation.

Alternatively, they can buy bonds and securities, which puts more money into the economy, thereby increasing the money supply. Increasing the money supply is a way to combat deflation.

dabbler's avatar

@laureth Nice comprehensive list of crises!
It seems very odd to me that
– Way back when it was established, the Fed was established in private hands (not coincidentally, the biggest bankers of the time). It is not owned by the US government, it is just in the monopoly position of getting to execute US government policy, and take a piece of the action along the way as they wish. We outsourced our National Bank to private companies.
– there has never been an accounting of the Feds books to the US government. Their books have never been publicly audited.

CaptainHarley's avatar

@dabbler Which is precisely why Ron Paul insists that the Fed be either controlled or eliminated. There truly is no provision for organizations such as the Fed in the Constitution.

dabbler's avatar

@CaptainHarley He’s not alone on that, and I’d agree completely with him and you and anyone on that, it’s due for fundamental overhaul. It’s in a parasitic relationship with We The People as far as I can tell.

CaptainHarley's avatar

More like with the bankers and derivitives traders, et al, and with certain politicians.

laureth's avatar

@dabbler:

Re: ” It is not owned by the US government, it is just in the monopoly position of getting to execute US government policy…”

Half right. It’s a weird public-private hybrid. Its Board of Directors (Federal Reserve Board of Governors) is appointed by the President, subject to the advise and consent of the Senate. (This is why it was a big deal when the Senate Republicans filibustered a Nobel Laureate in Economics into withdrawing his appointment, a few months ago.) The managers of regional offices (President of the Federal Reserve Bank of _____) are appointed by the banks in that region. Every year, the annual profit of the Federal Reserve is sent over to the Treasury, and applied to the national debt; this is why worries that the Fed would lose money over TARP were a big deal: No profit, no annual tax-free reduction in the debt.

Re: “there has never been an accounting of the Feds books to the US government. Their books have never been publicly audited”

The Government Accountability Office (GAO) audits the Fed.

They are also audited regularly by private firms. As you can see in their most recent Annual Report, the auditing firm was Deloitte & Touche LLP.

dabbler's avatar

@laureth Thanks that is an eye-opener. (GAO audits the Fed)

cockswain's avatar

@laureth While I understand people’s suspicion of the Fed since they handle such large sums of money and have so much power, I’m personally unaware of any scandals or unethical practices in which the Fed has been a party. Not that I’m saying it hasn’t happened, just that I’m unaware. So I’m not clear why some people are anti-Fed.

CaptainHarley's avatar

@laureth

Nobel Laureates are overrated, especially in fields like economics and peace. These prizes are often used by the Nobel Committee to push social or political agendae, as opposed to any real worth of the work in question… viz. Al Gore’s Peace Prize and Obama’s Peace Prize, which were thinly disguised attempts to influence US politics. Neither one of these men did diddly-squat to deserve a Nobel.

laureth's avatar

@CaptainHarley – Do you know anything about the Nobel laureate that was filibustered, or do you judge all prize winners by the ones you don’t like? I would be interested in hearing what you dislike about Mr. Diamond, other than his prize and the man who nominated him.

@cockswain – I agree.

CaptainHarley's avatar

I wasn’t necessarily speaking of Mr. Diamond, but more in general. Sorry if I gave the wrong impression.

laureth's avatar

I thought something like that was the case. I think it’s wise to judge people based on themselves, and their fitness for the job, in this kind of situation.

CaptainHarley's avatar

@laureth

And your judgment of Paul Ryan? : )

laureth's avatar

I think the ideas of his that I’ve heard about are for the birds. ;) But I don’t want to get too off-topic here.

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