The Federal Reserve Declares War

In the late 1980’s the Berlin Wall fell and with it the Soviet Union collapsed thereby freeing hundreds of millions from the destruction of an oppressive economic system that could not perform economic calculation. It was precisely because socialist economic systems are incapable of economic calculation, and as a consequence incapable of distributing scarce resources to their most efficient uses, that the Soviet Union collapsed in 1991. We would be wrong, though, in believing that with the collapse of the Soviet Union and the market reforms in China that socialism is on the decline. In fact, virtually every economy around the world has a socialist institution that is manipulating it to one degree or another with the potential to bring about serious hardships for the participants in those economies.

These institutions I am primarily speaking of are central banks, and they rival the survivability of cockroaches and the destructiveness of locusts. Our own central bank is called the Federal Reserve (Fed), and it has a unique place in our democracy, similar to the place of the president in cases of national defense, that is, the Fed supersedes the democratic process. Unlike the president though, the Fed needs no special circumstances to arbitrarily distribute the property of the people, though, it will manufacture such circumstances as a cover for its actions.

In recent days the Fed has announced that it has declared war against deflation, and as a consequence will purchase $600 billion in treasuries. This is what is called monetization of debt, and it is only possible when governments, or institutions granted monopoly status by governments such as the Fed print up money to purchase government debt. The problem with this is that the Fed is subject to the theorem of the impossibility of socialism as developed by the economist Ludwig von Mises in the 1920’s and expanded upon by the economist Jesus Huerta de Soto in his book Money, Bank Credit, and Economic Cycles.

This theorem explains that the Fed cannot know what asset prices should be or what the interest rate should be. Only through the process of consumers buying and abstaining from buying on the free market can prices and the interest rate be determined. No central institution has the necessary knowledge, which is diffused through hundreds of millions, to make decisions about distributing resources to where the market demands them most. The Fed cannot know how best to distribute the newly created $600 billion.

The actions the Fed has taken to boost the economy is tantamount to a declaration of war on Americans. The purchasing of government debt will only prop up a structurally flawed system temporarily. The costs will be huge for the average American. Already the Fed, through printing money (which devalues the dollar), has drained 99% of the original value out of the dollar. This has been a massive hidden tax and it will continue until the Fed is stripped of its powers and is no longer in control of money supply.

Geoffrey S. Shough
OFA Economic Policy Analyst
[email protected]

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