10.01.2008 0

Exiting Inferno

  • On: 10/06/2008 13:38:31
  • In: Monetary Policy
  • Dante and Virgil may be exiting the many levels of Inferno after a long, sad journey through the depths.

    As Americans are paying more at the gas pump and at the grocery store than ever, ALG News has been calling upon politicians to take initiative to add strength to the dollar. Though there have been a few voices crying in the wilderness, it still appeared as if Americans were being continually led down the Road to Perdition. But there may be hope now, even though the sign read on the way in, “Abandon hope all ye who enter here.”

    As the CATO Institute recently noted in an opinion piece for the Washington Post, the Federal Reserve is tasked with two sometimes contradictory missions: checking inflation through price stability, and stimulating economic growth. What Americans are learning today is that too much emphasis in generating short-term economic growth hurts its original mandate of a strong dollar, and which harms the nation’s long-term economic prospects.

    Now, a Wisconsin Congressman, Paul Ryan (R-CD1), wants to put an end to that by restoring the mandate of the nation’s central bank solely to providing a strong currency:

    “[T]he Federal Reserve lowered the fed-funds rate to 2% [last Wednesday], its lowest level since late 2004. In a nod to growing inflation fears, the Fed said ‘it will be necessary to continue to monitor inflation developments carefully.’

    “But if we really want to do something about inflation, Congress should repeal the Humphrey-Hawkins Full Employment Act of 1978, which dangerously diverted the Fed from its most important job: price stability. When the Fed was created in 1913, its principal role was to maintain a sound currency with stable prices. But Humphrey-Hawkins changed the Fed’s mandate, directing it to focus on long-term price stability and short-term economic growth.

    “Unfortunately, in its efforts to accomplish both, the Fed could end up satisfying neither. This would make the next 18 to 24 months even more painful, as the Fed reverses course and sharply raises rates to wring inflation out of the economy. These Fed-induced boom and bust cycles are detrimental to our long-term economic growth and living standards.

    “Because goosing the economy in the short run and maintaining stable prices over the long haul are often at odds, I’m introducing legislation that would rewrite Humphrey Hawkins and give the Fed just one mandate: price stability.”

    To do so, Mr. Ryan is introducing the Price Stability Act of 2008, which would get the Fed out of the business of tinkering with the economy in the short-term. In truth, the free market can take care of economic growth itself without central planning and interventionism. What the Federal Reserve should be primarily concerned with is monetary policy, and not the politics of keeping the economy chugging along.

    While several pundits have been attributing the rise in the costs of commodities to speculators on the future markets, what has been left out of this commentary has been the predictable rise in commodities as a safe investment against the weak dollar. Every time the Fed broadcasts yet another interest rate cut, investors know to buy more commodities. If the Fed’s sole mission was restored to simply strengthening the dollar, those very same speculators that everyone hates now would be betting that the prices of commodities would be dropping on the futures markets.

    The Federal Reserve was established in 1913 to manage the nation’s currency. As ALG News reported to you last week, a weak dollar adds significantly to the cost of doing business, hurts purchasing power, and stagnates economic activity. In the long-term, a strong dollar provides price stability, which keeps the cost of doing business in America to a minimum, maximizes profits, bolsters the purchasing power of regular Americans, and therefore generates economic growth. The latter is the formula for success.

    The legislation will be introduced sometime this week, according to Ryan’s office. Such a controversial piece of legislation looks to be a hard sell, and Congressman Ryan will certainly have a mountain to climb. Many still believe in the alchemy of the Fed’s market interventions, and believe that the Fed’s Board of Governors should be concerned with economic stimulus. This sort of short-term thinking, however, is hurting Main Street Americans across the nation.

    Congressman Ryan is hereby being awarded with ALG’s first annual Testament to Courage Award, for his daring act to challenge Congress to reassert a strong dollar policy which will help all Americans as they go shopping for new clothes, toys, and tools. Inflation is the cruelest tax of all, and it is high time that our nation’s leaders do something about it instead of haplessly ignoring the obvious.

    A strong economy must be predicated upon a strong currency, and it appears that Congressman Ryan has heard that message loud and clear. America may yet find its way to Paradiso.

    ALG CTA:
    Congressman Paul Ryan is going to need all of the help he can get from Congressional leaders to give his legislation a fair hearing and ultimately passage. A strong dollar is not a partisan issue, as rising prices hurt all Americans. In light of that ALG News calls upon journalists throughout the nation to urge their audiences to contact House Minority Leader John Boehner, Speaker of the House Nancy Pelosi, Senate Minority Leader Mitch McConnell, and Senate Majority Leader Harry Reid to tell them that they believe a strong dollar because that will lead to a stronger America.

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