A Confidence in the Poison

The Wall Street Journal subheading indicates that Fed Chair Janet Yellen “says gains in labor market bolster her confidence that inflation will return to 2%.” As I have indicated in previous blogs and articles, we must remember that the modern definition of inflation, an increase in the general price level (as measured by the CPI), is wholly deficient and leads to a skewing of the actual problem.

At any rate, Yellen has placed her confidence in the completely arbitrary inflation level of 2%, hoping, apparently, that such inflation levels will be a sign that the economy is ready to handle an increase in the federal funds rate.  But this is a very confused way of looking at the problem. The general rise in prices is the result of the inflation, which is better understood as the increase in the supply of money and credit in the system. Moreover, rather than indicating that the economy is ready for the so-called normalization of interest rates, an increasing price level is normally the cause of higher interest rates as a market response, not a Fed response, to an economy with too much credit.

In other words, whereas the Fed pretends like it is in control of all interest rates and therefore it can determine when “the economy is ready” for their decision to push up rates, in actuality, the Fed only sets the baseline rate (there are a few other rates it controls, but this is for another time), from which other rates are influenced. The other rates in the economy, from credit cards to home loans to car loans, are built off of that baseline rate.  But if price inflation is heating up and lenders calculate that they need to adjust their interest rate offerings to account for the inflation, they will do so– with or without the Fed. Thus, while it may be against the Fed’s desire that the interest rates rise, the Fed has to respond to market forces eventually.

And yet, Yellen and other central bank leaders continue to pretend like they can keep interest rates down forever. While the artificial suppressing of interest rates is dangerous (see my previous post here) for the economy, it must be remembered that, in the end, the market works to correct itself against the interventions of the Fed. In this way (and this is a general principle of “monetary policy”), the Fed and the market are actually at odds with each other. For if they weren’t, the Fed needn’t do anything, since the market would be doing it anyway.

Janet Yellen, rather than having confidence in the market and the solutions that capitalism can provide a system broken down by central banking, has placed her confidence in inflation: the very thing that has been the unhappy result of decades of money printing and the falsification of interest rate levels. Yellen has chosen the Keynesian way: to place her confidence in the poison rather than to “Let the Market System Work.”