Examination of the Federal Reserve: Inflation and United States Debt

            The Federal Reserve is the central banking system of the United States. It was created in December, 1913 during what is known as the progressive era. When created, Congress established three main objectives for its monetary policy—maximum employment, stable prices, and moderate long-term interest rates. However, the Federal Reserve’s duties and policies have expanded over the years, including conducting the nations monetary policy and regulating banking institutions. Despite the effort, many; such as Senator Ron Paul, believe that the Federal Reserve System should come to an end. The Federal Reserve System causes more harm to the nation as a whole than the help it gives, and thus should be heavily restructured or ended.

            After a series of financial crises such as the Great Depression, many people called out for a more powerful centralized bank, in order that private banks such as J.P. Morgan would not have to bail out the United States in times of crisis. What was created was a quasi-socialized organization that would regulate monetary policy for the entire nation. The hope was that with this centralized bank, it would be promise that banks would not fail like the way they used to before 1913. The question is whether this is a good thing in a capitalist economy? Ron Paul answers with an objection when he says,

If businesses are not allowed to fail, what guarantee is in place that will give them incentive to succeed with soundness and productivity to the common good? In a capitalist economy, the prospect of failure imposes discipline and consumer service. It is an essential aspect of the competitive marketplace, whereas a promise against failure only entrenches inefficiency and in-competency (End the Fed).

            While likely made with good intentions, it seems that the outcome of the creation of the Federal Reserve System is in actuality, worsening the economic status of the United States. The most common objection toward the Federal Reserve is that it is the primary cause of inflation in the United States. Since the United States is in a monumental amount of debt, the Federal Reserve indirectly pays for U.S. government bonds by printing more and more money. The Federal Reserve purchases these U.S. government bonds and sells them to other entities, making profit. The more the government spends the more interest the government also has to pay. In the fiscal year 2011, the U.S. government paid $454 billion dollars just in interest on this national debt.

            One may ask themselves why the average American citizen doesn’t know a thing about the Federal Reserve. This is primarily a mixture of the boring and complex nature of economic and monetary policy as well as the mass government bureaucracy. When the Freedom of Information Act was implemented and a Bloomberg request was issued for their information, they refused stating that they were, “not a government agency” and therefore not subject to the act. The people running the Federal Reserve are not elected in any way, but are rather appointed. Furthermore, the Federal Reserve has never gone through a true audit since it was created. A proposal to audit the Federal Reserve failed in the House of Representatives 229-198 in 2010.

            In conclusion, the Federal Reserve is detrimental to the economy of the United States because of its vast, unregulated control over nation interest-rates and inflation, as well as the Federal government’s dependence upon the Federal Reserve. If you think about it, the whole concept of the Federal Reserve is weird. Why should the US government have to have a semi-governmental organization buy U.S. government bonds in exchange for currency, which gets devalued in the process? If you look at a dollar bill, you will see at the top the words, “Federal Reserve Note”, it belongs to the Federal Reserve. While this is indeed a bad economic situation, it is not irreversible. The most important thing for the average citizen to do it becomes educated about what is happening. Once done, the more you tell people what is actually happening the more others will become educated and cry out to their representatives for change. 

Works Cited

Anderson, Clay J. "A Half Century of Federal Reserve Policymaking, 1914-1964." 1965: Xiii-198.

Federal Reserve Bank of Philadelphia, 27 Feb. 2002. Web. 01 Dec. 2012.

Paul, Ron. End the Fed. New York: Grand Central Pub., 2009. Print.

Romer, Christina D., and David H. Romer. "Federal Reserve Private Information and the Behavior of  
Interest Rates." The National Bureau of Economic Research. American Economic Review, July    cf    1996. Web. 01 Dec. 2012.

Fiscal Cliff

I bet you've been hearing politicians talk about the so called "fiscal cliff" that is looming ahead in the future. What is the fiscal cliff and what is so bad about it? Well sometimes when a Congress and the president cannot agree on economic policy, they mandate a self imposed future crisis in order to force themselves to work together on unpopular spending and tax policies. If President Obama and the Republican Congress cannot work out a deal, then there will be $500 billion dollars worth of tax increases on all levels of society as well as spending cuts towards major important government establishments and organizations. What the politicians didn't realize was that the measures from the 2011 deal are taking effect at the same time as changes to many other other benefits and economic policies. Many fear that if we go off this cliff, we may go into a double-dip recession.

You make be wondering what exact spending cuts and tax increases this fiscal cliff include. Well all of the Bush-era tax cuts expire as well as the 2-percentage-point cute in payroll taxes that Obama pushed in 2010. For some people that's reducing people's pay by $1,000.00 a year. Many people would have to pay the alternative minimum tax in 2012, raising their taxes even more! There would also be numerous spending increases across the board. Trillions of dollars across domestic policies as well as military spending.


If you have the same question as me you may be asking yourself why can't the Republicans and Democrats agree on anything. Surprisingly, both sides agree that most of the things included in the fiscal cliff are bad and should not happen. However, the thing they disagree on most is the Bush rates on incomes for the top 2% of taxpayers. Obama seems steadfast that he will not extend the Bush-era tax cuts to those top percentage again. One thing is for sure though, that they need to reach some sort of agreement before the new year or else horrible things will happen.

Minimum Wage

I am definitely torn on the issue of minimum wage. On the one had, I love minimum wage because it gives me the opportunity to earn more income, it also seems to me that it could cause unemployment and warm to the economy. It is true that by raising the minimum wage to $10.00, some family do a lot better than just surviving. However, it does seem rational to me that by doing this, employers would have to cut back on their machinery or the number of employees they have, both of which would be detrimental to the economy. That being said, the federal minimum wage does seem to serve some sort of purpose. It seems to me that without the federal minimum wage, employers would pay less money for a large portion of low-skill, high-labor jobs, which if remained unchecked would drive more people into poverty. At this point I think I am simply to ignorant to form a real opinion on this issue, despite my libertarian leanings.

Price Floors

Much like price ceilings, I also am inclining to the view that price floors are also not successful for government to implement. Again, I feel like it is outside the region of government control and thus not an acceptable option even if it was successful. Additionally, the price floors-even if created-would not succeed in way they are intended too. By creating a price which suppliers cannot sell their product for less, the equilibrium price is not met and there is a surplus of the supply, which is not good for people trying to sell their goods, causing further harm to the economy, thus defeating the purpose of the price floor.

Price Ceilings

In my opinion, the government should not impose price ceilings on our current economy. Ideologically  I do not think it is the place of either federal and/or local governments to dictate the price of goods and services. By interfering with the free market, the government is restricting business owners and suppliers ability to create their own profit, by their own means. Additionally, on a practical level I do not even think price ceiling is effective on achieving what it is supposed to be working toward. When the government interferes with the market and creates a price ceiling of a certain good, while the price of the good is much cheaper than it would normally be, the supply ends up becoming too little to sustains how many people demand that product. Furthermore, by creating a price ceiling, illegal trading and black markets appear which defeat the whole purpose of the price ceiling in the first place. The government should not impose price ceilings because it is not the place of the government, and it is not effective.

Suppy

Headlines Assignment

1. Complementary demand: Smuckers sales go down as peanut butter and jelly sales jam!

2. Substitution demand: As Nike manufacturing stumbles, Adidas sales race ahead!

3. Elastic demand: BMW ownership increases as average net worth rises!

4. Inelastic demand: Drivers ignite at the price they must pay for gasoline!

        Inelastic demands are demands in which stay the same, despite changes in pricing. An example of inelastic demand in the United States would be gasoline. Most people need gasoline to run their cars to travel to and from work, the store, schools, etc. Therefore, even if the price of gasoline increases heavily (as it has been relatively recently), the demand for the gas stays about the same. The practical aspect of this concept in every-day life would be peoples “needs” and peoples “wants.” Generally, when a consumer has a certain amount of money, he will buy whatever he/she needs before he/she buys the things they merely want. The average consumer is forced to cut out all of the economical “wants” before they consumer decides to stop buying gasoline. Inelastic products are things like basic necessities such as bread, milk, etc. While elastic products are items such as plasma screen televisions, expensive sports cars, and things that aren’t necessary for everyday life.

Demand Wrap-Up

Demand Finale

One concept of demand I have contemplated in my daily life is the utility of a product. The utility of a product is the usefulness of that product. When thinking about utility, my cellular phone came into mind. When I chose to buy a new phone, I demanded a certain utility out of whatever product I was going to buy. These included; the latest hardware features, (number of processor cores, amount of RAM, storage, multi-touch technology, design and durability, etc) as well as a number of the latest software features (phone calling, text messaging, GPS, games, etc) all at the lowest price possible. I could have bought a Apple iPhone, which is a phone which does most of what I wanted, as well as being a popular phone in American culture, but was in my opinion over priced for the utility offered.  However, I found that there were many more phones were offered by other manufacturer which had more utility, at a lower price. The phone I went with was the Motorolla Droid Razr MAXX, which had all of the utility that I demand, had heavy protection (being made out of kevlar), at a relatively lower price.

Having made this choice, I will continue to demand a certain level of utility in whichever cellular phone I choose to buy later on in life. I believe it makes the most financial, as well as utilitarian sense. Most people who choose to buy whatever the latest iPhone is, and thus the corporation is in full control of how much utility each of the newest iPhones has. Since the only think people demand is the name brand of "iPhone".

 Is popularity and trendiness a utility of a product?

Elasticity and Inelasticity Diagrams

The American Market System

It seems to me that any weaknesses that the American capitalist-based market system has is outweighed by it's ability to hold closer to the principles that this nation is founded on; namely maximizing liberty. While the main problem with these free, market economies is that it is certainly true that not everybody can or will succeed. However, the large majority of the people have equal opportunity to succeed, which is much more fair then other nations and economies throughout history.

Another reason I believe the American capitalist system is more effective than other forms of economic systems is the vast competition it provides in almost all areas of the market. In command or socialist economies there is not much need to compete with anybody else, consumers would have little to no choice in  their economic decisions, and therefore there is not much need to improve various goods and services for the people. Whereas in our system, the large competition that it present drives forward entrepreneurship and improves more technology, medicine, etc. Which in turn makes the vast majority of the population more happy.

When involving services to the public such as health-care, is it morally acceptable to do these things for a profit motive?

Opportunity Cost

December 2011 I was given my first paycheck working at my new job, The Original WOW! Burger, of around $500. Naturally, I had many things that I wanted to spend this money on, things such as food, clothes, gadgets, etc. However, it was also the Christmas season and I had certain obligations to get Christmas presents for my girlfriend Sara and my father. Of course, I spend the money buying a new jacket for my dad and new UGG boots for Sara. Not knowing the economic example I had just made, I had just weighed out my decisions and contemplated the opportunity cost of each of those decisions.

By spending the money on the various Christmas presents, my opportunity cost for making this decision could be a potentially infinite number of things. These could vary for just using the money on food and gas throughout the next couple of weeks to buying other goods I might find appealing. Furthermore, I could have also saved some or all of the money in a savings account in order to start saving money for a later time. Ultimately, I'm glad of the decision I made because It made the people I love happy.

The only question I have when thinking about the economic idea of opportunity cost, is it seems as though when looking back at a decision, since the opportunity cost can in most cases be so many great things, how is it very useful to economists?

Scarcity, yo

If I had to choose a part of my life which I think was most scarce to me, the most prominent one would be my scarcity of time. 

Image Source

Everybody (including me) only has 24 hours in a day and it is up to us how we each choose to spend those 24 hours. In my individual life I have certain responsibilities, such as, my daily schooling, my responsibilities at home, my homework for the next day. Combined with my responsibilities with the girl friend and other friends this leaves me with hardly any time rest in the day. What it comes down to is either choosing between a good night sleep or staying up later in the night in order for me to accomplish other things I want to do in my day. Even that isn't a easy decision because a good night sleep is almost vital to functioning properly the next school day. Everybody, and especially me goes has to decide every day how they are going to live their lives based on the scarcity of time.