Why the Federal Reserve is Keeping Our Economy on the Brink

I follow an online video series called, Learn Liberty. This group tackles a lot of difficult economic questions and tries to spell it out in a meaningful and interesting way. One of the frequent presenters for Learn Liberty is Duquesne University Economics Professor Antony Davies.

Professor Davies' online description says the following: "Antony Davies is an Associate Professor of Economics at Duquesne University and Research Fellow at the Mercatus Center at George Mason University. Davies earned his BS in economics from Saint Vincent College, and PhD in economics from the State University of New York at Albany. His areas of research include forecasting and rational expectations, consumer behavior, international economics, and mathematical economics. Dr. Davies has lectured at numerous venues including the Econometric Society, the American Economic Association, the American Psychological Association, the International Conference on Panel Data, the International Forecasting Symposium, the U.S. Department of the Treasury, and the U.S. Congress."

Recently, I have been writing a lot on this blog about money printing and inflation dangers. However, one constant in the inflation debate is "so where's the inflation?"

While there are certainly signs of inflation, the government's statistic for measuring the Consumer Price Index still shows little inflation, this is despite unprecedented levels of new money creation. I emailed Professor Davies this question: "where's the inflation?" Professor Davies took the time out of his busy schedule to write me back the following answer:


Thanks for writing. Austrian and Keynesian economics start at polar opposite ends of the argument. Austrians begin with the question, “what motivates people to make the choices they do?” Keynesians begin by combining everybody into a homogeneous unit and then making assumptions as to how the unit behaves in the aggregate.

I wouldn’t say that Keynesians believe we won’t get inflation. Rather they believe that inflation won’t come about until consumer demand picks up again. We aren’t seeing inflation yet because, while the Fed has increased the monetary base, the banks aren’t loaning out the money. I spoke to some people from the Fed a few months ago and they said that their biggest worry right now is getting the timing right. When banks start to loan out this money, the Fed will need to start contracting the money supply. If the Fed acts too quickly, we have a liquidity problem. If the Fed acts too slowly, we have an inflation problem.

This is the best example I’ve seen of why the money supply should be set by market forces rather than a central authority. It seems not to occur to many that the same problems you get when the government dictates (for example) steel production, you get when the government dictates money production.

IMHO, the Fed is going to come under increasing pressure from the Federal government to keep interest rates low indefinitely – not because of the economy but because of the federal debt. Over the past 50 years, the interest rate the government pays on its debt has averaged 6%. Today, the government pays about 2.6%. If interest rates returned to their 50-year historic average, the government’s annual interest expense (currently $420 billion) would balloon to almost $1 trillion.


In other words, eventually the Federal Reserve is going to have to answer one way or another for its inherently inflationary policies.

This article was originally published at www.thefreeideamarket.com