The Fed Is NOT Omnipotent. The Dollar Proves It
What are the implications of central banks not being able to control interest rates, like almost everyone thinks they do?
Seeing central banks as just another participant in the financial system, albeit an influential one, leads to some interesting insights, especially with regards to the USD.
For one, the Fed’s (and central banks’) greatest detractors are detracting against the wrong entities.
These detractors tend to be “hard money” folk, who view the existence of central banks, particularly the Fed given its global influence, as guardians of the paper money regime.
Accordingly, the hard money folk have a tendency to view central bank policy making through the lens of currency devaluation, and strongly advocate for a return to an era of “hard money”. That is, a currency that is backed by gold and/or some other precious metal(s).
In the United States, such sentiment is expressed most stridently by people who criticize the Fed for embarking on loose monetary policies that will further devalue the USD.
Low interest rates, QE, and keeping the Fed Funds Rate too low for too long are all examples of the major criticisms the hard money crowd has levelled at the Fed over the past decade.
But, the USD hasn’t actually lost value since the Fed embarked on QE in the modern era.
Looking at long term trends, the USD has actually gained in value against a basket of international currencies.
The reason for the USD’s decade-long rally in spite of ever larger iterations of Fed QE is quite simply that the Fed does not sit in the middle of the financial system!
It’s policies do not control interest rates, much less the value of the USD.
Hard money folk think the Fed is omnipotent and controls America’s monetary destiny, when in truth, it does not, at least not if it continues to think bank reserves are all that matters to the financial system.
Consequently, the Fed’s detractors are as bought into the inaccurate worldview of central bank omnipotence as its supporters.
The detractors’ real opponent isn’t the Fed, it’s the entities that actually create money in the system – banks. This will remain true as long as central banks continue to cling to the conventional dogma that overemphasizes the importance and utility of bank reserves.
Of course, this will change should the Fed or other central banks switch their focus away from fractional reserve banking to how money is really created, that is, ex nihilo.
Since this means switching from controlling levels of bank reserves to setting policy based on levels of bank loans, it involves quite a drastic change in central banking Paradigm, which unfortunately is extremely difficult to achieve.
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