Federal Reserve Just a Myth?

We have blogged MANY times about how the Federal Reserve works.  It is, quite simply, a confidence game.  They print paper and put numbers like $1, 5, 10, 20 and 100...an we all believe them...as long as we have confidence that something good is underneath holding up the entire foundation.

The SERIOUS problems come when something happens to erode that confidence.  Remember, in the past 100 years, since the Federal Reserve was put in place, they have eroded (debased) the value of the U.S. dollar by over 95%.

Anyone who bought a Snickers bar 50 years ago knows they could have bought it for $.05....today that same bar is $1.29 and that INCLUDED the fact that sugar, corn syrup, chocolate, etc...that goes into it is MUCH cheaper today than it was back then.

Please remember before you start reading this article...there has NEVER been a paper currency that survives forever.  At some point in time EVERY SINGLE ONE OF THEM has gone to zero value...which is really what paper is worth.  And yes, some day, maybe soon...the U.S. dollar will be worth absolutely nothing except to be used to start your fire.

Myths govern modern central banking. Like many myths, they contain an element of truth that has been distorted by exaggeration and misapplication. This year marks the 100th anniversary of the U.S. Federal Reserve System—an appropriate time for some long-overdue myth-busting.

The first myth is that central banks are intrinsically necessary for market economies. History and theory belie this.

The Federal Reserve was not founded until 1913, and it had no monetary role. The U.S. operated under a gold standard and had no need for a central bank to control the money supply. A gold, or any commodity, standard places a natural limitation on money creation, which is the resource cost of extracting the commodity. It is only with fiat (paper) money that central banks are necessary to control the money supply.

The second myth is that central banks are needed as a lender of last resort—that is, to supply liquidity in times of financial stress when short-term lending freezes up. The Federal Reserve's lending in the aftermath of Lehman's collapse in 2008 is the new textbook example of this function. But this argument has the causality exactly backwards.

A third myth is that of central-bank independence. In the U.S., the Federal Reserve is viewed as having gained independence as the result of the Accord of 1951 with the U.S. Treasury. After the accord, the Fed was no longer required to maintain the prices of government bonds and thus fix interest rates. That requirement, born of the fiscal needs of World War II, hindered the Fed from fighting inflation by preventing it from raising interest rates during the Korean War.

The lesson from this history is what I call "central banking without romance," after a famous article by the late Nobel prizewinning economist James M. Buchanan, "Politics Without Romance." A central bank is necessary as long as an economy is wedded to a fiat currency. And it may at times behave independently—but not in the face of large-scale budget deficits, as we have today.

Pursuit of price stability is the one goal that nearly everyone agrees is a central bank responsibility. Yet it is the one on which the Fed and other central banks have failed miserably. Since the Fed's founding in 1913, consumer prices have increased by a factor of 23 times. If the U.S. can extricate itself from fiscal deficits, price stability would be an attainable goal for central banks. Otherwise, central banking is nothing but mythology.

Mr. O'Driscoll is senior fellow at the Cato Institute, and was formerly vice president at the Federal Reserve Bank of Dallas.

Here;  http://online.wsj.com/article/SB10001424127887323468604578252443925155434.html?mod=googlenews_wsj

What?  Did an ex VP of the Federal Reserve just say under what circumstances that central banking would be nothing by mythology?

Yep!  He did! 

And of course the Federal Reserve IS our central bank and it IS currently doing the things that make it the definition of mythology.

This whole thing IS GOING TO EXPLODE people...we just don't know when.

One thing we do know is that it WILL NOT EXPLODE until God's perfect timing says so.