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Wealth Creation, the Fed’s new mandate

In The Federal Reserve under attack like never before, I noted that when I started in the silver bullion business in 1973 few people knew what the Federal Reserve was and what it did.  That was not always the case.

Before the Fed was instituted in 1913, the United States had had two central banks, and both were controversial.  The First Bank of the United States had a charter of twenty years and went out of business in 1811 when the Senate failed renew the charter by one vote.

Banking interests were successful in establishing the Second Bank of the United States in 1816, but it also had a twenty-year charter that was not renewed either, primarily because of opposition from President Andrew Jackson.

Actually, the debate about establishing a third central bank (the Fed) in the US was heated as Americans in those days were more aware of what central banking was all about than they are today.  However, the banking interests carried the day by lying about the purposes of the Fed.

The long title of the Federal Reserve act calls for “an elastic currency” and bank supervision, both of which were supposed to protect against bank failures.  In reality, the elastic currency was a means whereby politically-connected banks could continue risky ventures and be bailed out by Fed money printing, exactly what we saw in 2008.

In 1977, the Federal Reserve Act was amended and now has what is commonly called a “dual mandate” of “maximum employment and stable prices.”  The amendment also called for “moderate long-term interest rates.”  The Fed has failed at all three mandates.

Since the Fed’s inception, the US has suffered some 18 recessions in addition to the Great Depression.  Many economists assert that Fed actions, i.e., interest rate manipulations and money printing, caused the Great Depression and those 18 recessions.  So much for the Fed providing a financial climate for maximum employment.

As for the stable prices fairy tale, prices have risen most years since 1913, because the dollar — due to Fed money creation — has lost 95% to 98% of its value.

“Moderate long-term interest rates?”  In 1980, the prime rate hit 21%.  In 2006, the Fed deemed near zero the appropriate interest rate, but that resulted in the housing boom that crashed and helped bring on the 2008 World Financial Crisis, which–not ironically–resulted in the Fed creating some $4 trillion to “resolve the crisis.”

Now, James Grant, Editor and Founder of Grant’s Interest Rate Observer, and Richard Sylla, a NYU professor, assert that the Fed has another mandate: the job of propping up the stock market.  This falls under a spreading belief that “wealth creation” via higher stock prices will make Americans view the future in a better light and return to more consumption.  Consumer consumption, according to Establishment economists, accounts for 70% of US GDP.

Richard Russell, in his Dow Theory Letters, has written about Bernanke’s effort to push stocks higher, as has Forbes columnist Robert Lenzner, who titled one piece You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009.

In 2013, stocks posted record gains, with the Dow Jones Industrials climbing 26.5%, the S&P 500 29.5%, the NASDAQ 38.3% and the Dow Transportation Index 38%.

In the short run, it  looks like the Fed knows what it’s doing.  But, it’s a game of musical chairs, with everyone trying to figure out when to exit stocks.  When stock prices start falling, there may be no chair in which to sit, and the Fed will have failed at still another mandate.  When that happens, you be certain that the Fed will resort to what it knows best: money creation.

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