WHEN ECONOMISTS BECOME THE COURT MAGICIANS — PART 2

bad economySome time back I got the itch to write WHEN ECONOMISTS BECOME THE COURT MAGICIANS — PART 1. With the title I promised there would be a Part 2. So here it is. Why the lack of enthusiasm? Well, I don’t see economics as a dismal science, but I do weary of pointless argument.

Consider. Here of late I have had a debate (see here, here, and here) with Stephen. wants to redesign our entire socioeconomic system. He is smart, but he has a warped understanding of the purpose of government and how economics works. He has a very limited understanding of that thing we call money. He equates interest with usury. What can I say that would change his mind? I don’t know, but I have tried.

Am I an expert on economics? No, I am not. I actually wonder if there is such a thing.

Ask five economists and you’ll get five different answers – six if one went to Harvard. (from here) Edgar R. Fiedler

Instead of promoting my expertise in economics, I am just writing to observe that we don’t know enough to identify an “expert” we should trust as much as the ones are trusting. Look at how we “manage” our economy. How many of us voters even have a clue as to what the “experts” are doing? Let’s see what we know about fiscal and monetary policy.

Fiscal Policy

Fiscal policy is the more transparent of the two policies.

Fiscal policy is when our government uses its spending and taxing powers to have an impact on the economy. The combination and interaction of government expenditures and revenue collection is a delicate balance that requires good timing and a little bit of luck to get it right. The direct and indirect effects of fiscal policy can influence personal spending, capital expenditure, exchange rates, deficit levels and even interest rates, which are usually associated with monetary policy. (from here)

According to some “experts”, Congress is supposed to exercise control over the economy thru taxes and spending. Instead of taxing us and spending our money just to do what the Federal Government is supposed to do, according to some economists  “good” fiscal policy requires Congress to also tax and spend to regulate economic growth. Somehow or another government spending is supposed to stimulate economic growth and taxes are supposed to bring economic growth under control.

As a practical matter,  Congress tends to use “good” fiscal policy as an excuse to tax and spend to excess. So we are in debt up to our ears. Congress has wasted huge sums that undoubtedly would have been better spent by the people who earned that money in the first place.

Want a “good” laugh? Check out some of these quotes on fiscal policy.

Monetary Policy

Almost everyone is familiar with the expression “Federal Reserve“, but what does the Fed do? Here is a brief description.

The “Fed” is an independent agency, one that is self-funded (see here). The Fed is a powerful group of economists, “experts” who regulate the banking industry. We routinely hear the Fed’s latest announcement of the Fed funds rate. The other thing we hear from the Fed these days is its latest announcement of quantitative easing. That’s a fancy way of saying the Fed is electronically “printing money” out of thin air. These two activities are the most visible aspects of the Fed’s role in monetary policy, that is, controlling the money supply.

Since the Fed also supervises and regulates banking institutions, the Fed does stuff in the background that only the financial experts notice. These activities relate to the risky nature of fractional reserve banking.

Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Many U.S. banks were forced to shut down during the Great Depression because too many people attempted to withdraw assets at the same time. (from here)

Not enough money in the vault? That is called a bank run. The bankers want us to believe that that problem is not real. I guess it depends upon one’s point-of-view. What if you want your money, and the bank says you cannot have it?

Audit the Fed

The Fed is one of the Federal Government’s most powerful institutions. It operates as an independent agency.  Some people think the Fed is too independent and needs to be audited so we can find out what it is doing. That proposal has created considerable controversy. Partly, that is because the Fed is already audited to some extent. The issue is that not everything is audited, and what is not audited is actually quite important.

Bottom Line

Our experiments in fiscal and monetary policy have failed.

  • We do not have a fiscal policy, and it is doubtful whether such a policy would be moral. Why should the government spend other people’s money to stimulate the economy? The idea doesn’t even make sense. We cannot spend our own money? Our elected officials just want to spend and spend and tax and tax. Fiscal policy is just another excuse. Unnecessary Federal Government spending diverts capital and human resources into low priority or even unnecessary projects and programs. Most Federal Government spending now goes into Social Security and Medicare. The Constitution does not even charter the Federal Government to spend money on such programs, but these programs serve to bribe voters old enough to know better.
  • Our fiscal policy is also a dubious enterprise. The Fed exists to prop up fractional reserve banking, a dubious practice that most likely would have been replaced with something less risky without government interference. In addition, the Fed works to “hide” Congress’ huge deficits by manipulating the currency and the banking industry. This puts unelected officials in control of huge sums of money, officials who can operate in relative secrecy. That is just a recipe for thievery and other sorts of trouble.

So what is the alternative? We probably ought to try reading our Constitution and doing what it says. Most of the government in this country is supposed to be at the state and local level. The Constitution does not empower the Federal Government  stimulate or regulate economic growth. The Federal Government was supposed to borrow money, if needed, and to regulate interstate commerce to keep the states from interfering in interstate commerce. In addition, the Constitution says the Federal Government is supposed to coin money.

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

…….

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; (from Article. I., Section. 8)

How did we get from that to the Federal Reserve?

The bottom line is we need to elect Donald Trump. Will he get rid of the Fed? Probably not, but who knows what might happen if we thoroughly audit it?

 

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