Understanding Monetary Policy

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Because economists as a rule believe in the imaginary incentive to serve, they work on the basis that Federal Reserve Open Market Committee members are selflessly doing all they can to do what is right for the economy.  Because the Federal Reserve is defined as being unbiased and independent, they act on the basis it is.

These notions are fantasy. Monetary policy always comes down to just a few incentives. The members cannot ignore the political agenda of the people who have appointed them. The political agenda always comes down to enhancing the economic lives of all who support and keep politicians in power. This accounts for their total devotion to elevating asset prices and forcing profit margin higher over the past several decades.

The most important factor though is how each individual member of the committee appears others who are observing them. Appearing to doing the right thing is of utmost importance. Saving face as a motivation is absolutely imperative. There is nothing the Federal Open Market Committee members will not do to escape blame.

There will be many statistics cited. Philosophies will be explained. Mountains of mush will be thrown out for everyone to read an listen to. None of that makes any difference. Nothing will matter other than what actions make them look the best.

They are working against the clock. Why do certain economic numbers look good? Because asset prices have been elevated and that translates into consumer demand at the highest income levels. The poor and middle class have been devastated financially during the long term asset enhancement initiative.  They have nothing to spend.

When the stock market finally crashes, the driving force behind the recovery will evaporate and work in reverse. Not only will wealth be destroyed in terms of assets. No other consumer demand will emerge fast enough to keep the bottom from falling out of the overall economy.

Every ounce of energy possessed by the combined staff of the Federal Reserve will be focused on finding a way to blame the coming economic disaster on something other than what they have been doing.

 

 

 

About Fantasy Free Economics

James Quillian is an independent scholar and economist.

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