The False Promise of a Rules-Based Fed [--AND THE GOLD STANDARD]

Last week the House of Representatives passed a bill that would bring about the most sweeping changes to the Federal Reserve since the 1930s. At the heart of the bill is a requirement that the Fed set interest rates according to a quantitative rule.

Like advocates of the gold standard, proponents of the bill blame many of the economyâ€™s ills on the Fed exercising too much discretion...

Legislating a rule doesnâ€™t do away with discretion, but makes it more likely discretion will be exercised only after the rule has failed, perhaps at great economic cost.

In a dynamic economy, rules are inherently at constant risk of obsolescence. Companies and banks routinely adapt their behavior to mitigate or evade regulation. In the 1970s, the Fed targeted the money supply to try and get inflation lower. From 1979 to 1982, interest rates swung wildly as the Fed responded to weekly fluctuations in its chosen money measure. But financial innovation had caused the link between that measure, growth and inflation to break down, and in 1982 the Fed abandoned formal targeting.

Even rules that do achieve economic stability will lead, as the economist Hyman Minsky predicted, to risk-taking and financial innovation that ultimately increases instability.

In trying to adhere to the gold standard, central banks ultimately made things worse. Britainâ€™s return to the pre-First World War price of gold put its economy into depression. France and the U.S., by not allowing gold inflows to expand the money supply, contributed to the global deflationary pressure that produced the Great Depression.

...two possible outcomes. One, the Fed will repeatedly change the rule or deviate from it... ...stick to the rule longer than it should until the economic consequences are intolerable.

Dang --that 300 max thing sure makes it hard to tell the story. It's probably best to click the link and check out the WSJ piece directly. Weird how those guys are now in favor of smaller less centralized gov't while IBD's going in for more control --per older thread: New Law Would Force Fed To Do Its Job, So Why Does Fed Oppose It?. imho the clincher is the House bill itself (complete text of the law that the house passed) 61 pages of expanded bureaucracy, world wide expansion of the Fed's mission, and mindless central command micromanagement.

A very good morning to all on this half day after Thanksgiving --aka Black Friday! Trading should be extremely light which means that whatever prices we come up w/ can easily move the other way on Monday, then again this may be a good day to unload a small chunk and a high price or pick up a great bargain. Yeah, we also know that while gold'n'silver look like 'bargains' at $1,067.10 and $14.20 right now those prices can easily end up being the good old "high-prices-way-back-when" numbers.

Fwiw, the futures heat map (http://www.barchart.com/futures/heatmap) puts both metals and stocks now at +0.40%. No econ reports today, the BEA must be on vacation something...

Some that protects the solvency of the republic

http://www.usdebtclock.org

8. (4) A great debt will require great taxes; great taxes, many taxgatherers and other officers; and all officers are auxiliaries of power.

9. The management of a great funded debt and a extensive system of taxes will afford a plea, not to be neglected, for establishment of a great incorporated bank. the use of such a machine is well understood. If the Constitution, according to its fair meaning, should not authorize it, so much the better. Push it through by a forced meaning and you will get in the bargain an admirable precedent for future misconstructions.

10. â€œDivide and governâ€ is a maxim consecrated by the experience of ages, and should be familiar in its use to every politician

11. As soon as sufficient progress in the intended change shall have been made, and the public mind duly prepared according to the rules already laid down, it will be proper to venture on another and a bolder step toward a removal of the constitutional landmarks.

http://www.constitution.org/cmt/freneau/republic2monarchy.htm

Debates in the House of Representatives on the First Report on Public Credit 18 February 1790
James Jackson (Ga.)

But it is doubted with me whether a permanent funded debt is beneficial or not to any country.

The same effect must be produced that has taken place in other nations; it must either bring on a national bankruptcy or annihilate her existence as an independent empire. Hence I contend, sir, that a funding system, in this country, will be highly dangerous to the welfare of the republic; it may, for a moment, raise our credit and increase the circulation, by multiplying a new species of currency; but it must, in times afterward, settle upon our posterity a burthen which they can neither bear nor relieve themselves from. It will establish a precedent in America that may, and in all probability will, be pursued by the sovereign authority until it brings upon us that ruin which it has never failed to bring, or is inevitably bringing, upon all the nations of the earth who have had the temerity to make the experiment.

http://oll.libertyfund.org/titles/875

“You realize, of course, that the Fed has nothing to do with the debt?....Your argument is with Congress.”

Congress didn’t debate & then authorize to embark on an endless QE that raised the Fed balance sheet to approx. $4.5T and maintains it thru re-purchase at about that level (that’s the endless part.)

And they “need,” per John Williams, to permanently keep it there>>

Fed may need permanently big balance sheet, Williams says
http://in.reuters.com/article/2015/11/21/us-usa-fed-williams-naturalrate-idINKCN0TA0TT20151121
“....using negative interest rates” Ah, just trust them. They’ll stay rich and maybe you’ll survive, too.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.