The Federal Reserve Board of Governors released a statement concerning the Federal Open Market Committee (FOMC) meeting this week.
The press release contained various projections regarding economic growth and unemployment.
During the past year, I have described the historical prognostications of the Federal Reserve Board (FRB) as inaccurate and overly optimistic.
The following describes their recent projections for 2012, 2013, and 2014, respectively:
Economic Growth Rate: 2.7 percent, 3.2 percent, and 4.0 percent
Unemployment Rate (minimum): 8.2 percent, 7.4 percent, 6.7 percent
According to the Bureau for Labor Statistics (BLS), the unemployment rate is 8.5 percent. Nearly 2 ½ years ago, I suggested the rate may be 10 percent at the time of the next election.
It would be if the BLS included 2.5 million unemployed US citizens interested in working, who have not actively searched in the prior 4 weeks. The rate would be 15 percent if the underemployed were included and higher if first time job seekers that can’t find work were counted.
The same methodology can be inferred with the recent FRB projections, reflecting higher real unemployment rates than suggested.
The dual policy objective of the Federal Reserve Bank to control inflation and unemployment has been severely misplaced for more than 33 years. It began with the Humphrey-Hawkins Full Employment Act, signed by President Jimmy Carter on Oct. 27, 1978.
The Fed has relatively little influence on employment.
The Fed has the ability to control only one parameter: the money supply.
They can affect the money supply by utilizing the following tools:
1. Interest rates
a. Discount rate: the interest rate paid by financial institutions to borrow funds from the FRB.
b. Federal Funds rate: the interest rate financial institutions pay to borrow funds from other financial institutions.
2. Purchase and sale of financial assets such as US Treasury securities, asset backed securities, and currencies from the public
3. Liquidity credit lines to financial institutions through loans and guarantees
4. Reserve requirements for financial institutions
Therefore, the FRB can increase the money supply by:
1. Lowering interest rates (a lower borrowing cost increases the quantity of borrowed funds demanded and supplies)
2. Purchasing financial assets from the public
3. Providing more credit to financial institutions
4. Reducing reserve requirements of financial institutions (so they can lend more of their funds)
However, the quantity of money does not correlate well with a productive work force.
In fact, it tends to enable a less productive work force over the long term, since it does not focus adequately on monetary velocity: the quantity of monetary transactions per unit of currency over a period of time.
Income generation is more dependent on the velocity of money, not the supply of money.
Innovative, entrepreneurial activity tends to produce high value products demanded by society over a long period of time. This increases the level of economic transactions. The same dollar provides multiple incomes with successive transactions.
A long term, sustainable, quality labor force is achieved with the following:
1. Principled value system that rewards learning, insight, and wisdom
2. Practical and applied education system that reinforces learning, insight, and wisdom.
3. A strong, practical work ethic that applies knowledge in an effective and efficient manner to benefit the individual and society
4. A stable and certain monetary base backed by real asset reserves, such as gold
The objective of the Fed needs to be a stable money supply. This will enable a more certain environment for a productive work force to germinate.
Real asset reserves such as gold offer a stable medium of exchange due to the following attributes:
1. Minimal manipulation due to the real cost of production: $500 - $1,000 per ounce, not a click of the computer mouse
2. Purchase power parity (PPP) due to equivalent commodity cost structures: a given quantity of gold can purchase the same quantity of a commodity over time
3. Physical gold reserves represent the physical monetary base (approximately 6 percent of the global money supply)
4. Durability (not destroyed): the gold supply is continuously recycled into various forms such as jewelry, industry, and bar stock
5. Gold supply growth reflects productive economic growth (optimal resource allocation, including labor, capital, and raw materials)
Gold continues to appreciate in price.
This month, the price of gold rose nearly $200 per ounce to $1,700, a 13 percent gain or 280 percent per annum. The price decline from $1,900 reflected profit realization and short term liquidations to meet asset redemptions.
The January rise occurred despite the recent strength in US equities and the US dollar. This reflects the growing inherent value of gold as an exchange medium, not merely a negatively correlated hedge against other asset classes.
U.S. equities have risen due to a commitment by the Fed to maintain low interest rates (near 0 percent) for the next three years. The U.S. dollar is stronger despite low interest rates due to sever global uncertainties. These scenarios remain rather tenuous and short term relative to the long term growth potential for gold.
The policy objective of the Fed:
A stable money supply backed by real asset reserves such as gold.
Adhering to this policy will permit a more productive society that includes more employment and income along with a better quality of life.
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