The Myth of Fed Independence—and How to Actually Stop the Inflation Machine

The Myth of Fed Independence—and How to Actually Stop the Inflation Machine

Under the Fed’s superintendency of the nation’s currency after it opened its doors for business in 1914, the purchasing power of the dollar has declined by 97%.

That’s surely a screaming failure by every pre-1980s notion of the role of the central bank because in those halcyon times maintaining the integrity of the currency ranked high above all other considerations.

As it happened, after the 1920 recession had purged the inflationary breakout caused by printing press financing of the US entry into WWI, the Fed did actually deliver on something close to it original sound money remit.

Notwithstanding the 26 years of boom, bust and war after 1920, the consumer’s dollar had the same purchasing power in October 1946 as it had in June 1920.

And, no, price stability was not purchased at the expense of jobs and growth, as the Fed’s fanboys want you to believe. In fact, the nation’s GNP of $75 billion in 1919 had risen to nearly $190 billion by 1947, representing a 3.5% per annum growth rate during a quarter century period when the US price level had not risen at all on a net basis.

Likewise, US employment grew from 40.8 million to 57.8 million during this 26 year period, representing a 1.5% per annum gain. Again, that is more than double the 0.61% per annum employment growth average over Q4 2007 and Q4 2025. And the latter anemic rate occurred when activist labor market stimulation was in full force under Bernanke, Yellen and Powell.

So the notion that the Fed must be constantly in the business of jiggling interest rates and financial market conditions in a delicate dance between keeping inflation low and growth and job creation high is just a lot of self-serving nonsense.

If you look at a longer-term history than is permitted by today’s extreme recency bias, it is more than evident that America’s capitalist economy needs no help from the central bank whatsoever to generate robust growth and wealth production.

But what the central bank does do—consistently and egregiously—is to err on the side of too much fiat credit production and therefore too much inflation over time. After all, how much more proof do you need than the 97% depreciation of the dollar’s purchasing power since 1913?

In this context, Paul Volcker’s last stand for sound money provides yet another in-the-flesh demonstration that pre-Greenspan central banking was mainly about price stability even if it failed to achieve it—not the latter day Keynesian obsessions with growth and employment stimulation.

For want of doubt, here is the path of the CPI on a Y/Y basis from the day Volcker was sworn-in to the moment he was unceremoniously relieved of his Chairmanship by the White House pols. The latter bamboozled the hard-money, gold-standard supporting Ronald Reagan during his final year in office into replacing Volcker with the disastrous "wealth effects" regime of Alan Greenspan.

As it happened, Volcker inherited an inflationary dumpster fire from his two predecessors, the hapless golf cart manufacturer, Bill Miller, and the rubbery-spinned academic, Arthur Burns.

At its peak shortly after Paul Volcker arrived at the Fed in 1979, the Y/Y CPI increase reached 14.4%. Yet by stint of an unwavering application of the brakes to the Fed’s printing presses, the CPI rate of increase had fallen to 2.5% by Q3 1983 and remained in that zone until he was drummed out of the job in August 1987.

Volcker’s Victory Over Inflation, August 1979 to August 1987

Again, Volcker’s feat did not mean that the main street economy took it in the chin, either. Real economic growth (real final sales of domestic product) averaged just under 3.0% during Volcker term notwithstanding the deep recession of 1982-1983—nearly double the 1.8% real growth rate since the Fed’s printing presses were set wide-open after 2007 under Bernanke, Yellen and Powell.

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The "Greater Depression" Playbook: Are You Ready?

isn’t calling for a mild recession or a soft landing. He’s warning that decades of debt-financed policy and monetary intervention are pushing the system toward a full reset—one that could hit bonds, equities, and currencies in the same cycle.

He calls it "The Greater Depression." And he explains what it means for investors who understand the real lesson of Fed history: when the money is managed, markets get distorted—and the biggest gains go to those positioned early for asymmetric upside.

If your capital is still trapped in the same crowded trades and the same policy crosshairs, you’re betting on the status quo to hold.

 lays out what he sees coming—and where he’s putting money n

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So the truth is, the main street economy doesn’t need a monetary nanny in the Eccles Building to ensure that the process of investment, growth, employment and wealth creation moves along at an optimal pace. In fact, it needs no help or fiddling with interest rates by the Fed at all.

And that get us to the current raging debate about the "independence" of the Fed, which is truly a case of the pot calling the kettle black. To wit, even one of the more sensible Fed heads, Austan Goolsbee, recently was on CNBC gravely warning that the Donald’s attack on the independence of the Fed must not stand because it will lead to even more inflation.

Really?

The Fed’s 100-year track record unequivocally proves that it is the very essence of an infernal inflation machine. And we are not calling up the ghosts of too much ancient history to make the point, either. Just since the real Keynesian bad guys—Greenspan, Bernanke, Yellen and Powell—took the helm, the Fed has reduced the June 1987 dollar’s purchasing power to just 35 cents!

Purchasing Power Of The Consumer’s Dollar Indexed To June 1987

Accordingly, the anti-inflation case for so-called Fed independence is flat-out bogus. That’s because the real cause of the Fed’s miserable inflation performance is its own expansive interpretation of the so-called "dual mandate".

In fact, it has used the dual mandate excuse to justify what amounts to monetary central planning based on a Keynesian model of the macro-economy that is fundamentally invalid. That is to say, there is no such thing as either an objective "full-employment" rate of unemployment or a "natural rate of interest" or an optimum 2% rate of inflation, as measured by the shortest-inflation ruler available (the PCE deflator less food and energy).

These are all arbitrary constructs invented by central bankers to justify their wholesale falsification of interest rates and all the other financial asset prices which flow from the credit market yield curves. At the worst of it, you get Greenspan’s "wealth effects" doctrine—the wholly bogus notion that if you inflate financial assets and housing prices sufficiently, people will feel richer and therefore spend more.

That is surely the basest kind of Keynesian demand-side crackpottery. To the contrary, the truth is that growth, jobs, capital investment, housing construction and all the other dimensions of the Main Street economy arise from the supply-side, which can take care of itself without any tinkering at all by the central bank.

Accordingly, the Fed would only need to define "stable prices" under its so-called dual mandate as a zero rise in the price level over time and the "maximum employment" mandate would take care of itself.

After all, Keynesian "full employment" is just a metaphor, not a measureable, quantifiable value. It is meant to describe an economy that is hitting on all cylinders based on the human, capital, technological and entrepreneurial resources available at any point in time. Obviously, however, all of these variables are heavily influenced by the regulatory, tax and fiscal impositions of the state upon the free market, and also by exogenous variables like demographics and social values, custom and arrangements of the human community at any given time and place.

Since all of these factors are in constant flux, there is flat-out no way to quantify full-employment. It is an ever shape-shifting condition that needs to be allowed to find its own manifestation on a free market that is as minimally impacted by state intervention as possible.

So the very worst idea to come down the pike during the past century was that the interactive effect of all of these economic and social variables could be comprehended, quantified and optimized via the primitive tools of repressing interest rates, inflating asset values and "stimulating" the macro-economy with endless increases in the levels of debt and leverage.

But debt that flows from the printing presses of the central bank, rather than from savings out of income already produced, does not create new, sustainable output and wealth; it only burdens future output and income with its service cost.

Accordingly, abolishing the Fed’s so-called "independence" is the essence of restoring capitalist prosperity in America. But it must be done in the right way, and replacing 12 apparatchiks on the FOMC with the occupant of the Oval Office—whether one as smart as Jimmy Carter, or as honest and economically literate as Ronald Reagan or as ill-educated and unhinged as Donald Trump—is the very wrong way.

The right way is to abolish the FOMC and the Federal Reserve Board; forbid the remaining 12 regional reserve banks from buying, borrowing or hypothecating Federal government debt; and also from buying or selling tradable securities.

Instead, the remaining regional Federal Reserve banks’ only job would be the one delegated to them by the Fed’s authors in 1913. That is, providing back-up liquidity to the banking system by re-discounting commercial loans already made on the basis of sound collateral and market rates of interest.

Under such a "bankers’ bank" regime, there would be no inflation, no massive speculation in the financial markets and no cheap debt for politicians to spend the nation into bankruptcy, as is now most surely the case.

So in some kind of blind squirrel manner, the Donald has found an acorn by attacking the Fed’s independence. If he can severely wound the monster that would be a start back down the road to sustainable prosperity—albeit in pursuit of a replacement regime that is the very last thing the Donald likely has in mind.

Editor’s Note: Inflation isn’t a "bug" in the system—it’s the system.

When you empower a central bank to falsify interest rates, monetize government debt, and chase a made-up "optimal" outcome with unlimited fiat credit, you don’t get stability. You get a slow-motion transfer of purchasing power, recurring asset bubbles, and an ever-larger state financed by monetary tricks that would never survive a true market test.

Which brings us to the only practical question that matters: what do you do with that knowledge?

Once a country normalizes monetary manipulation, the consequences don’t stay confined to CPI charts and asset bubbles. When the bill comes due, policymakers look for levers—and those levers increasingly reach into taxes, regulations, capital rules, and the freedom to move money.

That’s why today it’s not enough to "diversify" by owning a few more tickers. You need to think in terms of jurisdictional risk—and consider placing a portion of your wealth where it’s treated best, and where the rules are less likely to change overnight.