Tuesday, August 14, 2012

The problem is not the Dual Mandate

Reviewing an old article...

From CNN Money: Republicans to Fed: Forget about jobs, by Annalyn Censky (3 December 2010):

For more than 30 years, the Fed has been tasked with a so-called dual mandate, which outlines two important goals: keep prices stable and maximize U.S. employment.

But some critics are sick and tired of the Fed prioritizing job creation at the risk of rising prices. They say the juggling act of promoting economic growth while staving off inflation has proven ineffective, and has led to a policy of too much cheap money with dangerous consequences for the economy.

A House bill introduced last month by Pence seeks to scale the dual mandate back to a single goal of focusing only on prices, and leave job creation policy up to Congress.

You know, Congress never keeps its hands off job creation policy. They're always spending more to stimulate the economy, or spending less to let the private sector blossom. It's all hokum and hogwash anyway.

Pence is focused on the wrong thing. He has not identified THE problem. He has identified A problem. But if you're not fixing THE problem, then you are just trying to fix results. And that'll never work.

THE problem is excessive debt.

Here's what Congress does to grow the economy. They cut taxes, assuming that people will spend more as a result. They encourage saving, so that we may borrow more and spend it. They encourage spending by means of the business tax code. To grow the economy Congress does all sorts of things to cause spending to increase.

Here's what the Fed does: They fiddle with interest rates and the quantity of money in order to control inflation. They limit the amount of money that is in the economy.

Think of it like in the 1800s when we used gold for money. The Fed is limiting the amount of gold we have to spend, while Congress busies itself doing things to make us spend more. More spending, less money. So, we use credit.

So, our financial costs increase.

So eventually, the money that circulates outside the financial sector becomes insufficient to support both the productive sector and the financial sector. That's when you get a crisis.

So what the hell is Pence talking about?

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