Trump needs to clean house in all federal agencies, not least of which the Fed (Federal Reserve Board). I would not accuse them of acting illegally, or otherwise not in the interest of the country, but I would state flatly that their performance over the 100+ years of existence has been checkered, at best, and any other description fails to acknowledge the number of times they have acted wrongly to correct the path of the American economy that they have control over. I use the word control loosely.
Having said that, it needs to be emphasized that the various administrations have regularly pushed them around and imposed upon the Fed to not use the Fedâs granted power to control the money supply and interest rates. It has been demonstrated down through the years that the Fed canât do the task assigned without the cooperation of the administration at the moment that Fed action is needed when the administration is spending excess amounts; excess being defined as more than revenues being collected. As such, that amount that exceeds revenue creates inflation in exactly the amount that exceeds revenues as a % of the economy, roughly speaking. If the amount is equal to 10%; then that 10% can be expected to be reflected in a 10% increase in overall inflation in the following 24 to xx months, give or take some months, by a lot or a little. Itâs like a bad dream that comes back when youâre the most vulnerable.
This is not rocket science. It is just barely science at all. Prices of goods and services are a function of the costs of goods and services, and no provider is able to price his products wherever he pleases because other providers would gladly take his customers, and customers know there are other providers, so it is folly to price yourself out of the market; itâs much better to keep prices at a point where you are competitive, keep your competitors honest, and not have your customers shop around. Customers that shop around are subject to being given special incentives to move their business, so providers have lots of incentive to keep prices stable. Donât disturb sleeping dogs.
Every penny of inflation reduces the value of the dollar, again by the same percentage that the % that the amount of inflation dollars is of the total number of dollars in circulation. Because there is such a large number of dollars in circulation, a billion dollars in excess govt spending seems not to matter. It is better thought of as taking a long time to be reflected in the value of the US dollar compared to other currencies because inflationary govt spending occurs in almost every govt. Foreign govts hide their overspending in the same international exchanges that the USA does, so itâs hard to pinpoint who the culprits are (like we didnât know); itâs everyone, everywhere in govts everywhere. So prices go up across the board.
So, where does our Fed come into this? They control interest rates, so to speak, by adjusting the Prime Rate up or down. Thatâs the rate at which banks borrow from the Fed for short-term (overnight) loans. It also is reflected in the interest rate paid by the govt on the bonds they issue, and are already issued by previous administrations. So, guess who leans on the Fed Chair to hold down rates? Could it be the guy who appoints and/or fires the Fed Chair? Hmmmmm⌠Banks are required to maintain some level of liquidity (cash available to cover all transactions that may be required) It is some % of the total amount they have as bank ownerâs funds and depositors funds. Money surplus to those Fed required standards may be loaned and interest earned on it. The exact amount of cash the bank possesses in all categories varies beyond their control each day, but at midnight they are required to borrow any shortfalls in required capital adequacy. They pay the Fed the Prime Rate to borrow from the Fed that amount. The Fed earns revenue that way. All other interest rates are calculated as X plus the Prime Rate. (Or better stated as Y times Prime = X); There being many different bases; home mortgages, or credit cards, or cash advances, etc., all are different)
Your govt borrows money by issuing Bonds at some promised interest rate; the rate reflects the Prime Rate, BUT, is greatly affected by demand for US govt Bonds. When demand is short of the amount issued on a given day the govt has to pay higher interest, or pay lower interest if demand is higher than expected. Your govt also spends the currency that is printed in excess of the currency that is withdrawn (to be destroyed & replaced). According to theory, enough extra currency needs to be printed to keep enough currency in circulation to meet the needs of the country (world). That extra currency is supposed to be equal to the amount of desired inflation; ideally, nominal or equal to the growth of the economy. If so, there would be no inflation. If the surplus printed is more than the growth of the economy, itâs inflationary by that amount. The govt doesnât publish the amount. Itâs a surprise!!
In a perfect world, the govt would only spend revenue it collects in taxes & fees, plus newly printed currency equal to the growth in the economy. (Currency printed to replace old, worn-out currency is null). The inflation rate would be nominal. Unfortunately the people who appropriate spending budgets canât count, or wonât, and the amount above the revenue collected is inflationary by that amount as a % of the economy. They need some guidelines, but there are too great of a majority of Congressmen & Senators that are near lifetime representatives and will never be subject to replacement because they deliver spending to their voters. None of the individual states would limit the terms of their own representatives while other states did not because of the Seniority System that awards committee Chairmanships to members based upon seniority in both houses. That would be suicide for them. It has to be a federal mandate, which would take an Amendment which requires ž of the states to vote in favor of; each of which states having ž of each of individual legislatures voting for adoption. Thatâs a big deal and takes a long time and/or a big push by an overwhelming number of important people already in office. It should be high on Trumpâs agenda of things to start early in his administration, such that recalcitrant members of the House & Senate could be escorted to the door in the midterm by a pro-term-limitation Amendment majority. Thereâs no time like the present to start beating the drums for this, Mr. President-soon-to-be-elect. A clarion call that would be welcomed by most of us, perhaps most of all by Independents.
