Has the Federal Reserve Failed?

The Federal Reserve System (commonly called the FED) was implemented in 1913 in an attempt to prevent financial panics. The FED serves as the central bank of the United States, sets interest rates, and issues currency (Federal Reserve Notes) on behalf of the US Treasury Dept. They are deeply involved in monetary policy and do a fair amount of other things not listed above. Contrary to popular belief, the FED is not a government entity. Technically it is a quasi-government entity, but in practice it's a private corporation with its own set of rules and regulations. The inventors of the FED system were among the wealthiest and most powerful bankers and businessmen in the nation at the time and included folks like J. P. Morgan and Rockefeller, and they held a closed-door ten-day meeting at Jekyll Island, GA in 1910.

On paper, the FED is under congressional oversight, however a number of their activities and meetings are not subject to oversight - in fact they're not even required to respond to an individual congressman's inquiries into certain activities. One example of this lack of oversight is the Consumer Financial Protection Bureau. On top of the CFPB, many of the meetings the FED has (particularly with various banks and businesses) are not open to the public, nor are the minutes of the meetings. The FED is made up of twelve regional reserve banks and their Board of Governors (comprised of seven members who serve 14-year non-renewable terms) oversees the entire enterprise.

The original congressional mandates for the FED were: maintaining maximum employment, stable prices, and moderate long-term interest rates. Since then, the FED's powers and responsibilities have grown significantly. According to the FED's website their primary purpose is:

• Conduct the nation's monetary policy in such a way as to provide full employment and stable prices
• Supervise and regulate to ensure the safety and soundness of the nation's financial system
• Maintain stability and contain systemic risks (prevent booms & busts)
• Provide certain financial services to the US government, US financial institutions, and foreign government banks  

So how good of a job has the FED done in its 100 year history? 

Maximum and Stable Employment

One of their stated goals is to provide maximum employment. The following graph shows the US labor participation rate since records began in 1948. This rate is defined as the percentage of people working out of the entire available workforce. This chart comes directly from the Bureau of Labor Statistics. 

(click on any image for a larger view)

As you can see, the LPR has never been stable nor has it been 100%. And since 1999, the rate has fallen continually. As of July 2013, the rate is 63.4%, a rate not seen since 1978. Furthermore, one would expect that once the country came out of the "Great Recession of 2008", the rate should rise.

Here is the rate since 1999. You will notice the large drop in 2008...and the continued drop.

This metric (the LPR) has fallen at a faster rate in the past 5 years than at any other time since the mid-1960s.  

Next, let's look at the overall unemployment rate. There are six ways to measure unemployment. Some focus solely on those actively looking for work, others include everyone who is looking for work, plus those in part-time jobs who would like to be full-time, and those who have given up looking for work. The officially released unemployment figures, called "U3", does not include the number of people who have lost hope and given up looking for work. The current U3 shows a 7.4% unemployment rate. However, the U6 (which includes those who are working part-time because they can't get a full-time job and those who have given up looking) shows a staggering 14%. 

Of course, stability is a part of the FED's mandate. How stable has the unemployment rate been since 1950?

So, has the FED achieved maximum or stable employment levels? FAILED

Stable and Sound Financial System

The boom & bust cycle (periods of rapid economic growth followed by a period of recession or depression) has arguably been less severe since the creation of the FED. That being said, our financial system has been far from stable and sound. Since 1913, there have been 17 recessions and two depressions. These periods resulted in an average GDP contraction of 9.5%. If you remove the two depressions, the avg. contractions were still at 7.16% each. 

This graph shows you the growth (or contraction) of national GDP between 1923 and 2008 (the height of the last big recession).

And this one shows you real GDP growth from 1950 to 2010, also not exactly a "stable" situation. The "Great Moderation" refers to a period of less volatility in the economy.  

Without an adequate increase in production and economic growth, the amount of national (public) debt can severely degrade the viability and soundness of an economy. Since 2001, the national debt has increased 176.6% while the GDP has only risen 64.7%. 

Each month the government pays $30 billion just on interest payments. For 2012, we spent nearly $360 billion...just on interest! That's $1,149 for every person in the country. 

Next comes the stock market. While the Dow Jones Industrial Average is only a portion of our economy it is a good indicator of the general health (or at least, mood) of the economy. If interest rates, inflation, wages, employment etc were all stable and growing at a more healthy rate you would expect a nice smooth incline throughout history. Instead, we see a relatively smooth transition until about 1994. Then we see long periods of rapid growth followed by a bust, with multiple periods of tremendous growth and severe busts dotted throughout. 

Wages are a key indicator of economic health. The growth of wages should be fairly uniform year-over-year and the gap between the various percentiles should also stay somewhat uniform. From 1950 to the mid-70s both wages and the income "gap" had remained stable in their growth. From about 1980 onward, things get interesting. 

And since 2000, median household income has been very erratic with a huge drop since 2009. 

The last series of economic indicators I'll use are the historical prices of two popular commodities, gold and silver.

None of this meets the criteria of stable or sound. FAILED

Dollar Strength and Interest Rates

Since 1913, when Federal Reserve notes were first issued, the value of $1 today is the equivalent of $0.04 in 1913. That is a reduction in value of 96%. 

Here is a chart showing the Consumer Price Index (CPI) from 1913-2006. The CPI measures the changes in pricing of a basket of commodities. Thus, an increase in the CPI equates to an increase in prices for goods & services (and serves as a way to measure the cost of living). Incomes growing at the same rate as the CPI would mean a stable economy. Incomes & CPI growing at a commensurate rate with the changes in the dollar's value should also be expected. 

We do see a relation between the overall CPI and the devaluation of the dollar, but when added to the rest of the economy it does not bode well.

Falling wages, increased prices, and the devaluation of the dollar means that people have to work harder and longer to purchase the same things over time. Wealth is defined not as the amount of currency a person has, but as the amount of goods that currency can purchase. The debasement of the dollar quite literally means that a person who began saving as a teenage worker, when they retire, the money they saved is worth less today than when they saved it - their earnings were in essence stolen. 

The US Dollar Index (USDX) shows the relative strength of the dollar compared to a basket of other currencies (currently six including the Euro, yen, and Pound). A stable and strong money supply is one of the key purposes of the FED.

Looks like a chaotic roller coaster with an overall trend of devaluation. So much for stable.  

The last metric we will look at is the Federal Funds Rate. This sets the interest rates lenders are allowed to use. When the economy is good the FED raises the rate and when the economy contracts the FED lowers the rate to encourage lending and economic growth. The problem is that the FED can't accurately predict market behaviors and often, economic policies actually contribute to the problems they're trying to avoid or fix. A great example of that was the housing crisis.

In the end, looking at the FED's own reasons for its existence and looking at the information provided by the government itself, the necessity and value of the Federal Reserve System must be called into question. The amount of good the FED has brought to the system when compared to all the negatives really equates to a simple grade.

Federal Reserve grade: F

Four Years Under Obama, a Graphic View

In 2008 Obama was elected president by a 10 million vote margin. He came into office promising to not only stop the economic collapse but reverse it, end the wars, lower taxes and energy prices, protect the environment and generally save our nations future. Then, despite having a negative approval rating as well as the vast majority of the people thinking the country was on the wrong track he was re-elected again in 2012 by only 51.1%, with a winning vote margin of less than half that of 2008.

When I looked at every economic metric prior to the 2012 election it looked as though Obama would easily lose, after all in terms of real numbers the country was no better off and in some cases was worse off than in 2008. But, he was elected. I'd like you take a look at these charts which cover everything from gas prices to deficits to military spending to gold prices.

The last 4 years have not been good and there is no reason to expect the next 4 will be better as a result of his policies. If things do recover it will be in spite of his actions, not because of them.

This first chart comes from Real Clear Politics and shows that American's have thought the country was on the wrong track in 2009 and continues to be on the wrong track.

(click images to view larger)

Next, let us look at the U6 unemployment rate. This shows that the U6 rate is 0.2% higher today than it was when Obama took office. Effectively, the unemployment rate hasn't budged and in terms of real numbers the Obama administration has been flat out lying.

Each month hundreds of thousands of people enter the work-force for the first time so even if Obama "saved or added" 4 million "new" jobs in 3 years the unemployment rate would not move and may even rise simply because the level of job creation doesn't even meet population growth.

This next graph comes straight from the Bureau of Labor Statistics. It shows the labor participation rate which is defined as the percentage of eligible workers aged 16 and above who are currently employed. As you can see the percentage of people working has dropped continually.

The next series of graphs will focus on government spending.

Here we have the amount of revenue the government has received each year in the form of income taxes, social security taxes, tariffs, fees and so forth. You'll notice a marked increase between 2010-11 and a continual rise expected through 2017. If you look at the projections you'll see that revenue jumps from $2.4 trillion in 2012 to nearly $4 trillion in 2017. That is among the fastest jump in history over a 5 year period outside of wartime and is based on new taxes from Obama's policies. This comes from the Tax Policy Center. 

This shows the deficit year-over-year. While the amount of deficit each year tends to fall we have still spent between $800 billion to over $1 trillion each and every year more than the government brings in.

It's a well known fact that ALL of the supposed cuts proposed by both parties are not real cuts but rather, cuts in proposed spending increases. When ever Obama talks about cutting spending or saving money he's talking about using a slight-of-hand "fuzzy math" trick. You see, each year the government gets an automatic spending increase based on a number of factors and when people talk about cutting or saving they're talking about having a smaller increase, not a real cut to a spending level lower than the previous year.

The more government spends the less the private sector has and thus the less you have. Taking money from you to spend on failed billion dollar solar programs, trillion dollar wars and even the estimated $1 billion spent solely on Secret Service protection will not save the economy, it hurts it. All of the rhetoric coming from Obama such as "if we cut spending you'll put people out of jobs" is nothing but fear mongering. Yes, some in government or in companies propped up by government (which mean they'll always be a drain) might lose their jobs but businesses will have more money to spend to expand and hire and those government employees will be able to find a private job where they actually do something. When WWII ended people screamed and worried that if the government cut spending millions of people who had been employed for the war would go without work, food or shelter. When the government finally cut spending, all of those government employees found private work and our economy took off faster than in any other time.

Here is a graph showing the amount spent on defense. Obama promised an end to constant warfare and to use that "saved" money to fix the economy and put it back into the hands of everyday people. Obviously, he forgot to keep that promise.

Next we have the debt. Everyone knows we're in debt and the debt is rising. Unfortunately few in Congress want to actually fix it. In 2008 Obama promised to cut the debt by trillions, instead he now claims that even cutting government spending by $85 billion this year (less than 3%) would be devastating.

Once again, you can see the rate of increase is much faster than in the past and between 2008-2013 increases by nearly 80%.

Just as anyone with a credit card must pay interest on their debt so must the government pay interest on the debt.

Each year we spend at least $200 billion on interest payments. That is more than twice the amount the government spends on education each year. If Obama really cared about education he would cut our debt so we could use the savings in interest payments on education. Not that spending more on education increases the actual education or testing scores of children (as I pointed out in a previous post) but it does show you where Obama's priorities are.

The final government related graph comes from the Heritage Foundation and it shows the tax rate as a percentage of GDP from 1975 to 2055. If you look at the mid point of the graph you'll see a huge increase in the tax rate. That time period corresponds to the Obama administration.

I guess Obama wasn't serious when he said he'd cut the overall tax rate, make the tax code simpler and not raise taxes on average Americans. Let's not forget the $80 a month or more you're probably missing each month from taxes you didn't have to pay this time last year.

Now I'd like to focus on general economic factors like the dollar index, precious metal prices and gas prices.

 The US Dollar Index is a way to measure the strength and stability of the dollar. When it drops, the dollar is weaker and when it rises the dollar is stronger. The entire purpose of the Federal Reserve is to provide a stable dollar and stable prices and Obama won the election by promising the strengthen our economy.

Does that look stable to you? Not only is the dollar unstable the Index is actually lower today than in 2009.

Of course there are other factors that lead to higher prices but there's no getting around the simple fact that a weak dollar means higher prices.

Here is a graph showing the national average price of gas. From GasBuddy.com

In Feb. 2009 the price of gas was about $1.90/gal, today it's pushing $4/gal.

This shows the price of silver from 2000 to today.

You can easily see the jump in prices since Obama has been in office. This might be good news to those who invest in precious metals but it's a bad sign for the overall economy.

And finally, the price of gold.

By any measure the last 4 years have not been good. We may be stuck with Obama for the next 4 years but we do have a chance to grab a hold of the Senate and place more people in the House who truly understand that more government is not the answer. This post has been focused on Obama but the truth is these problems have roots in both the Democrat and Republican parties.

Let us make sure that 4 years from now we're not looking back on a country that completely fell off the cliff when we knew beyond any doubt that the only answer is smaller government, free markets and a more constitutional approach to all things domestic and international.

--Jacob Bogle