While rioters weaken America at the periphery, the Federal Reserve weakens the nation from its very heart.
The most important prices in the entire economy are the prices of U.S. Treasury bonds, especially long-term bonds. What makes them so special?
Companies make long-term commitments when they plan new factories and the facilities needed to generate future sales. To pay for them, they sell long-term bonds and repay the bonds from those far-off earnings. In deciding whether to build the facilities, companies balance the interest rates they must pay on the bonds against the expected future sales and profits.
The Federal Reserve Bank now plans to force the interest rates on U.S. Treasuries down, indirectly lowering the rates on corporate bonds as well.
When the Fed sets the cost of long-term borrowing too low, companies borrow too much and overbuild those long-term facilities, creating an imbalance that’s likely to cause an economic downturn. The know-it-all Federal Reserve Bank, the cause of numerous economic downturns in the past, is laying the groundwork for another.
Government central planning cannot help but fail. Three hundred million people going about their business affect the prices of the goods and services they use. We’re talking about over a billion transactions a day, including the ones behind the scene, like the payments businesses make to each other and futures prices on commodities. Every price is a signal of supply and demand, and successful central planners would have to know them all. They would also have to know the personality and knowledge of every person, minute details on consumer demand, the production processes of every producers, not to mention, detailed knowledge of all the other persons and economies of the world.
The Fed’s information is infinitesimal in comparison. They’re making intuitive guesses, even though the results of most government policies are counterintuitive.
Central planning doesn’t work. Let’s abolish the Fed and induce the entire federal government to stop trying to improve the economy. All such efforts make it more volatile. The people who suffer the most are the poor.
