The Fed Will Fix the Inflation It Allegedly Created? Only In 'Economics'

If the Fed caused the inflation, then why is the Fed empowered to fix inflation? It’s a question not asked enough, but with the Fed a combination of mysticism, myth, and gullibility inform an endlessly ridiculous discussion of the central bank.

The mysticism includes books like G. Edward Griffin’s The Creature from Jekyll Island that claim the Fed was a creation of the Rockefeller’s, the Council on Foreign Relations, and other high-end notions meant to impoverish the rest of us. Forgetting that the Rockefellers were already starting to disappear when Griffin’s book was released, never explained was what the Rockefellers whose wealth was denominated in dollars would have gained from their evisceration.

Moving to myth, disciples of Ludwig von Mises routinely besmirch his towering genius with conspiratorial assertions along the lines that “the dollar has lost 93% of its value since the Fed’s creation in 1913.” It’s the devaluation story once again.

And it’s an interesting idea, but for the fact that the dollar’s exchange value has never been part of the Fed’s portfolio, not to mention that Fed Chairs Eugene Meyer and Arthur Burns were passionately opposed respectively to FDR’s 1933 decision to devalue the dollar from 1/20 th of a gold ounce to 1/35 th, and Nixon’s decision to shrink the dollar even more by severing its link to gold. You see, the Fed was powerless to prevent presidents from devaluing the currency. See above, or consider that even though Alan Greenspan was a gold-standard proponent, the dollar fell substantially versus gold during his last four years at the Fed.

The main thing is that whether it’s the Fed, Treasury, or the President as the source of inflation, they’re all part of government. Yes, governments cause inflation because they issue the exchange media that governments routinely devalue, or not. In a normal world, entities known to cause problems (inflation), wouldn’t be empowered to fix them. Alas, this isn’t a normal world. It's the Fed we're talking about.

Which brings us to Fed Chair Kevin Warsh. The dollar’s exchange value is not part of the Fed's portfolio, but Warsh is supposed to fix incipient (or longstanding?) inflation. Really? How?

The answer is always through a hiking of the artificial rate the Fed sets. The Washington Post editorial board tells us that “Raising rates will curb inflation and maintain Fed credibility.” But if that is true, who needs the Fed? Wouldn’t lenders with actual skin in the game, and fearful of receiving paid back dollars that exchange for less than those loaned out, simply raise rates on their own? The question is never asked.

Instead, the subject is changed. Central bank defenders then say the Fed must raise rates to cool the economy. Yes, the Fed must put people out of work and slow business growth to allegedly tame inflation. It’s the Vietnam, “it became necessary to destroy the town to save it,” narrative.

Except that inflation is a shrinkage of the unit, in our case the dollar, and it’s never been explained why a good, stable dollar must be painful. It’s similarly never been explained how the Fed fiddling with an artificial rate can bring down prices that are the consequence of incredibly sophisticated cooperation among billions of hands and machines all over the world.

Which is the gullible part of the Fed narrative. Assuming the Fed controlled the dollar, interest rates, and growth (it controls none of them), the idea that it can control prices is something only the easily gulled could believe. Which leads to only one rational conclusion: the Fed not only can’t fight inflation, the notion that it can is abjectly stupid.

Originally published on Real Clear Markets.