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PeakTrader:

The Fed reduces income inequality by smoothing-out business cycles, to maintain sustainable growth, and keeping the country near full employment, ceteris paribus.

Of course, some people believe faster growth won’t be inflationary. However, they don’t know what they’re talking about. Once inflation begins to accelerate, much more tightening will be needed. resulting in even slower growth.

We need fewer disastrous and better economic policies from politicians, e.g. earned income tax credits, progressive tax rates, fewer regressive taxes, better regulations, and the minimum wage.

And, I’ve already explained. the Fed just giving away money to lower income households will cause the collapse of the financial system and another severe recession.

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Dannyb2b says: “Monetary policy can help but it needs to be more effective. Buying assets has too weak an effect on growth.”

Monetary policy has a powerful effect on growth. You’re ignoring the history of the Fed and confusing negative economic factors outside of the Fed’s control with monetary policy.

I stated before, lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.

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Dannyb2b, you continue to ignore my statements and cling to an impractical and economically disastrous belief.

Also, I may add, income inequality can be reduced substantially, if the Fed, rather than politicians, controlled fiscal policy and other significant economic policies out of Washington, which have had too many undesirable effects.

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Here are some charts of a multiplier effect:

http://www.npr.org/blogs/krulwich/2013/01/16/169511949/a-mysterious-patch-of-light-shows-up-in-the-north-dakota-dark

Also, I cited many positive and negative factors on growth, including headwinds, domestically and globally. The Fed is a powerful positive factor on growth, which is supported mathematically and empirically.

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Dannyb2b, I already responded to your statements and you saw them, because you repeated your same statements again nevertheless.

The Fed creates or destroys money by exchanging one asset for another at market rates.

Low income people have too few assets to exchange for money to increase the money supply enough to generate growth, and the Fed couldn’t sell those assets to drain enough money out of the economy when needed.

If the Fed gave money away, money would be worthless. You cannot create unlimited assets with no liabilities. Even when cutting taxes, the government has to borrow, including from the future, and run budget deficits.

And, Fed policy is reaching its targets through a multiplier effect.

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Vernon says: “The bigger question is can capitalism even work in such a system? I think not as all wealth will flow to a very, very few which we see happening now and will see happening increasingly in the future.”

You’re ignoring the real economy. and if capitalism is allowed to expand, the real goods market will also expand.

I’ve seen immigrants in the U.S., from poor countries, who can barely speak english, with little education, and through hard work, buy a house, drive an almost new car or truck, own an iPhone and a computer, able to eat out at Applebee’s, etc., and their living standards can improve faster with better economic policies from politicians.

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Dannyb2b, so, you believe there weren’t any Fed easing and tightening cycles?

If money was free, it would have no value.

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If money was free, demand would shift to another medium of exchange.

And, giving away free money wouldn’t make monetary policy more efficient, it would make it ineffective.

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Dannyb2b, there are so many false assumptions and implications in your statement, I don’t know where to start. So, I’ll just state what I stated before:

When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice.

It’s not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What’s important is maintaining sustainable growth (of goods & services), which is optimal growth.

Many shocks take place, e.g. Y2K (when the money supply spiked higher and then lower around 2000), 9-11, an oil shock (or commodities in general, e.g. gold, copper, and steel), minor technology shocks in the ’80s and ’90s, and the quick and massive “Creative-Destruction” process in the early ’00s.

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Vernon, perhaps, a thousand years ago, someone said:

All this innovation and technology in farming will soon put everyone out of a job and there won’t be any “middle class” left

And, if we can get foreigners to produce our goods, then why waste our time?

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What pessimism.

Maybe, you should see a Charlie Chaplin movie for an idea how Americans lived a hundred years ago:

https://www.youtube.com/watch?v=OY3ZrMJfgWM

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Dannyb2b, small changes in the monetary base, including the rate of change or growth to maintain price stability, or the inflation target, has a large effect on the money supply.

The Fed has been very effective smoothing-out business cycles, resulting in faster (and compounded) economic growth (of course, other factors also contributed to faster growth, including fiscal policy and the establishment of the minimum wage).

Average annual per capita real GDP growth:

1913-2012: 2.04% (after Fed)
1813-1912: 1.38% (before Fed)

List of recessions in the United States – Wikipedia

Recessions in the Industrial Revolution – 1871-1914

Period – Percent Decline of Business Activity

1873-79 – 33.6%
1882-85 – 32.8%
1887-88 – 14.6%
1890-91 – 22.1%
1893-94 – 37.3%
1895-97 – 25.2%
1899-00 – 15.5%
1902-04 – 16.2%
1907-08 – 29.2%
1910-12 – 14.7%
1913-14 – 25.9%

Recessions in the Information Revolution – 1982-2007

Period – Percent of Contraction

1990-91 – 1.4%
2001 – 0.3%

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The Fed reduces income inequality by smoothing-out business cycles, to maintain sustainable growth, which is optimal growth.

Without the Fed, actual output would be much farther away from potential output and the country would be below or beyond full employment.

Without the Fed, there would be economic boom/bust cycles, which are inefficient both in the boom and bust phases, because of periods of strain and slack.

When more Americans are unemployed and underemployed, there is greater income inequality.

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Also, I may add, the ultimate goal of the Fed is to improve living standards for the masses as steeply as possible through sustainable growth in the long-run.

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Without the Fed, growth and employment would be farther away from optimaI, or suboptimal to a greater extent.

I stated before:

The Fed has been very effective smoothing-out business cycles, resulting in faster (and compounded) economic growth (of course, other factors also contributed to faster growth, including fiscal policy and the establishment of the minimum wage).

Average annual per capita real GDP growth:

1913-2012: 2.04% (after Fed)
1813-1912: 1.38% (before Fed)

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Edward, I’m for bringing up the poor, not bringing down the rich.

And, it should be noted, more employment means more tax revenue and less spending on the unemployed to help the really needy.

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Dannyb2b, it’s not a zero sum game. Everyone benefits from more output and employment, directly or indirectly.

I’ve explained to you more than once before, the Fed just giving away money to poor people would not only destroy the dollar and cause demand for another currency or gold, it would make U.S. monetary policy ineffective (in creating and destroying money to smooth-out business cycles) and cause a deep depression, that would be very difficult to get out of.

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