Goldman Sachs published a very interesting chart (via AEI) this week that looked at the history of the 10-year U.S. Treasury yields from 1790 to 2012. When you look at the interest rates, they were very much more stable prior to the creation of the Federal Reserve, even though defenders of the central bank say they were more chaotic before 1913.
It’s the monetary policy of the United States central bank that causes distortions in the market and turns mild recessions into depressions.
Here is what Richard Ebeling writes on the Fed’s monetary policy:
In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.
Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.
The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.
The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.
It’s time to end the fed.
Again with the money out of thin air mantra. The economy functions no matter where the money comes from. If a Bank gives me a $2,000 line of credit and I pay the loan back plus interest, it creates $2,000 in economic activity. The bank makes money, I have the goods and services I wanted and the money is now at the bank ready to be loaned out again. The consumer and government has taken of Trillions in debt over the last 8 years yet inflation has remained low. As long as people have a job or retirement income and are willing to take on modest debt there will be enough to produce the goods that consumers want to buy. Enough with this money out of thin air crap.