What’s the Fed Got to Do with Me?
There are two obscure issues heading for debate in Congress this week. The Senate will debate S. 3412, a bill to “provide tax relief to middle-class families.”
How is that obscure? Well, whenever they debate bills like this, you can’t tell whether you’re going to get the tax relief or somebody else is. And is it worth it to get money back given the huge amount of government debt? Who the heck knows. There’s no cost/savings estimate for S. 3412 yet, so what can we tell you?
But the really obscure issue getting a vote in the House this week is the Fed. That’s the Federal Reserve, our nation’s money manager.
H.R. 459 is the Federal Reserve Transparency Act. It would make the Fed just a little less obscure. And that’s important, because the Fed probably plays a bigger part in your life than you probably realize. It tries to manage how much money is in circulation. In doing so, it manages how much your money is worth.
Let’s flesh that out a little. Start by thinking about how much money you have. Now think about what it’s worth.
Aren’t those the same thing?
No they’re not.
To illustrate, let’s use a favorite subject around here: Beer.
Assume a pitcher of beer costs $10. That means that people selling beer feel they would be better off with your $10 because of the things they can do with that money, such as buying pizza.
Now let’s say the Fed doubles the amount of money in circulation. Suddenly, dollars aren’t as scarce as they were before. Ten dollars is no longer such a good deal for the beer sellers because they know that they can’t get the pizza they used to get with that money.
You’ve just experienced inflation. You have the same amount of money, but if the overall amount of money has gone up, the value of your money drops relative to the things you like to buy. You’re poorer, buddy. And thirstier.
Some people think that all inflation is bad, but other people think there should be a little bit of inflation all the time. A little bit. Not a lot, and nothing like that doubling of the money supply we talked about in our beer example.
In the last few years, the Fed has gotten very active in trying to manage the economy. They’ve bought a lot of stuff using money they created just for the purpose. That’s right: they created money out of thin air. Lots of it. Now, they say they’re doing that responsibly, and they’re doing everything they can to get us through these uncertain economic times. Other people say that’s a worldwide lie.
You can get a sense of the Fed’s very unusual behavior in the chart at the top of this post. It’s from a post on Econbrowser.com dating back to December 2008. But it has some good background on the Fed.
Do we understand all that goes on with the Fed? Can’t say that we do. We track bills in Congress around here, not the strange world of monetary policy.
But it’s not very comfortable to have the value of what’s in our wallets managed by this organization we don’t understand, so we have an inclination to like the Federal Reserve Transparency Act. It just might help us—literally—follow the money!