Communist America!

By Filipe R. Costa

Originally formed in 1913, the Federal Reserve was meant to protect America’s economy from financial crises. It has failed dramatically in this task.

Not perturbed by their obvious failure, the bureaucrats in charge of the Fed have now discovered how much power they truly wield thanks to their unconventional monetary policies. Politicians appear to have given up on forming serious economic policy, instead choosing to defer to the central bankers and their economic target led initiatives. That these targets have proven excruciatingly painful to hit doesn’t seem to have bothered anyone in charge and now the Fed is forced to make increasingly extravagant calls, in desperate attempts to prove they have had us on the right path all along. After all when something clearly isn’t working, when doesn’t it pay to do more of the same?!

Of course, this backward policy logic can only end badly, but for now we all have no choice but to go along with this charade.

One of the key weaknesses in this new form of government is that the Fed now finds itself responsible for creating jobs. Unelected officials at America’s central bank really have taken over the role that government should be responsible for. Historically the Fed has only ever been responsible for controlling inflation. Their remit was to ensure that conditions were right for sustainable fiscal policies to do their work. The breakdown in this system has profound implications.  

As a supposed “fine-tuner”, the Fed’s direct influence over the US economy should be relatively light. After all, this is not China we are talking about!

To give an idea of just how much influence the Fed now exerts on American domestic economic activity these days we have looked at two measures; total Fed assets as a percentage of GDP (Fed-to-GDP) and total Fed assets as a percentage of government debt (Fed-to-public debt).

Before the Financial Crisis, the Fed-to-GDP ratio was stable at around 6%. This started rising with the introduction of QE1 and now stands at 20%. Over the same period the Fed-to-public debt ratio also rose significantly, meaning the Fed now owns 20% of ALL US Federal debt. Be under no illusions, these are dangerous and unchartered waters in which we sail.

At the current pace of Fed bond purchasing and with nominal GDP growing at 3% (or less), by the end of 2013 the Fed-to-GDP ratio will be 22.75%. Assuming the latest QE is maintained over 2014, this will rise to 27.75%. The Fed-to-public debt ratio is more difficult to calculate as the figure will be reliant on the next debt ceiling debacle and the amount the American government borrows. But whatever the case, it is clear that the non-producing Federal Reserve is far too significant in economic activity to be healthy.

America was built on the principles of the free market. They have now strayed so far from this path as to be almost unrecognizable.