End the Fed… And Replace It With What?

Anthony Galli
8 min readMay 7, 2022

We need to end the Fed.

The Federal Reserve makes interest rates artificially low to encourage lending. This is popular in the short term because people can buy more stuff, but it inevitably leads to massive bubbles.

The Fed has a 2% inflation target, but since it completely abandoned the gold standard in 1971 inflation has averaged around 3.9% per year, which may not sound like much, but it’s a cumulative price increase of 600%. And the only reason it isn’t higher, despite a massive increase in the money supply, is because velocity has been decreasing.

Velocity is the “rate at which money is exchanged in an economy.” A low velocity indicates “a general reluctance to spend money.”

Once countries who use the dollar as their reserve currency start to lose faith in the dollar’s ability to retain its value then they’ll spend them on other currencies and commodities. Velocity and inflation will then pick up. Inflation acts as a hidden tax on workers and savers so looking ahead you can expect to see your wages and savings depreciate as inflation starts to converge with the money supply again.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. — Milton Friedman

The Fed is cronyist. It’s a private institution with public power. The big banks sit on its board (revolving door), receive salaries, divide the Fed’s profit among themselves, accumulate interest on government bonds, sell crappy assets to the Fed (quantitative easing), are protected from risk with the Fed acting as a Lender of Last Resort (bailouts), and those who benefit the most from an inflationary currency are those who get to touch the newly printed dollars…

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