The Fed is Not To Blame

One of several books I was able to read over the last few weeks was Peter G. Peterson's Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It. This is an interesting read and is highly recommended to all - Peterson is a former chairman of the Federal Reserve Bank of New York, and, as he mentions about ten times - he's a rich Republican.

It chronicles thirty years or so of failures by both the Democratic and Republican parties regarding fiscal discipline and long term planning. It places the blame for our current economic woes squarely on the politicians, political processes, interest groups, and various changes to American culture. The four solutions to all of our problems are:

• Reform Social Security
• Reform Medicare
• Reform the budget process
• Reform politics

Conspicuously absent from the discussion is the role of the Federal Reserve over the last thirty years. In fact the title of the book seems to absolve the Federal Reserve of any blame - politicians have bankrupted your future. They have borrowed and spent too much money and have made promises they can't keep - where all this money comes from is not important.

How America has turned into a nation full of crazed consumers/speculators who have gotten hooked on cheap money and now believe that they are entitled to cheap money from the government is not addressed.

How we have developed a standard of living that is so far out of whack with the global labor marketplace is not addressed.

No, it's all the politicians fault for not acting responsibly.

How can anyone talk about current and future financial problems in the US without talking about the role of the Federal Reserve since Nixon closed the gold window in 1971 and turned the US dollar, the world's reserve currency, into pure fiat money. We all know what happens when a social democracy is combined with a currency backed by nothing other than faith in a government and an economy (i.e., the currency reverts to its intrinsic value of zero). The role of the Federal Reserve is to delay that ultimate outcome for as long as possible, as Easy Al has said, to "mimic" the gold standard.

Instead of mimicking the gold standard, and limiting the amount of money that can be created and spent by both the government and individuals, this Federal Reserve has done the exact opposite - they have used more money creation as the solution to every problem under the Greenspan Fed. They have enabled all this reckless behaviour.

I guess since I'm not an economist, I just don't get it.