Traditionally, although major monetary policy decisions in the U.S. have generally been made by the Federal Reserve without consumer input, allowing people to weigh in on the process could be a good idea, according to Kevin DeMeritt, founder and chairman of Los Angeles-based gold
and precious metals firm Lear Capital.
The Federal Reserve’s monetary policy goals are to encourage maximum employment, price stability and reasonable long-term interest rates.
In some cases, however, in achieving those outcomes, economic challenges can arise. In the currently high inflation climate, for instance, Federal Reserve officials have repeatedly warned some discomfort will likely be necessary as rates are raised to try to bring the inflation level down.
In October, speaking at a U.S. Hispanic Chamber of Commerce convention in Phoenix, Federal Reserve Bank of New York President John Williams said he expected the unemployment rate to rise from 3.7%, its level at the time, to roughly 4.5% in 2023.
In 1980, as the Fed attempted to lower inflation, which had reached more than 14%, the economy was pulled into a 16-month recession, and unemployment in the U.S. increased.
Such outcomes may be necessary at times; Kevin DeMeritt, though, suggests allowing at least elected politicians to contribute to the decision-making that precedes them could be beneficial.
“Before they start raising interest rates, let the Fed come out and say, ‘Look, guys, we’re going to raise interest rates. Let’s have some sort of vote on this,’” the Lear Capital head says. “I’m not saying everybody gets to vote, but at least the people that voted you in maybe have a say — rather than just the central bank raising interest rates.”
More clarity, DeMeritt notes, would be helpful. The Fed could, for instance, state the probability of crashing a current economic bubble is extremely high if interest rates were raised, but if they weren’t, the chances of inflation or hyperinflation occurring could be significant — and then try to determine which outcome consumers would rather live with.
“Let people decide,” Kevin DeMeritt says. “Maybe they’d say, ‘I’d rather have inflation than a crash in some other type of market,’” he says. “If nothing else, at least explain the ramifications that come from what the central banks are doing, rather than saying, ‘Hey, this inflation is probably going to peak fairly soon.’ Is the economy going to slow down? Is the stock market going to get worse? People have [money]in different places because they’re at different points in their life; it would be nice to have some [explanation].”
Could Consumers Also Offer a Helpful Take on Money Creation?
For similar reasons, factoring consumer input into some of the government’s currency production practices might be advantageous, according to Kevin DeMeritt.
While U.S. currency was once backed by gold and silver, bills haven’t been able to be redeemed for gold since 1934 — or silver since the 1960s, according to the board of governors of the Federal Reserve System.
In the 1960s, the international monetary and primarily fixed currency convertibility structure that the U.S. and more than 40 other nations had agreed on in 1944, the Bretton Woods system, began collapsing. The Smithsonian Agreement, a similar arrangement established in 1971, also faltered; before long, most global currencies had transitioned to a monetary standard based on paper redemption, instead of precious metals.
Today, there’s a notable discrepancy between gold and paper currency values, according to Kevin DeMeritt.
“[Previously], we had to back a printed paper dollar with gold,” the Lear Capital founder explains. “We don’t do that anymore. The value of gold in the early 1900s was $20; and if you had a $20 bill at that particular time, it’s worth 97% less — but yet that $20 in gold is worth $1,700 today.”
The central bank’s ability to essentially produce money at will affects paper currency and gold’s value in different ways, DeMeritt says.
“Now central banks print as much money as they want, [with]every dollar you print, the money that’s already out there becomes worth less and less,” Kevin DeMeritt says. “But we can only mine so much gold per year; that controls the supply — and if you add an increase in demand from paper money onto the physical gold supply, usually you’re going to find prices go up. It’s economics 101. So paper money is probably going to continue to fall, [as]it has for hundreds of years now, and the price of gold is probably going to continue to increase.”
Even inflation hasn’t weakened gold. During that 1980 inflation high, gold prices also reached a record level, according to Lear Capital data.
The U.S. isn’t the only nation that prints currency at will, according to DeMeritt.
“It’s not uniquely American,” he says. “Europe has printed up a tremendous amount of debt, and their economy can’t grow. The Japanese have printed up tremendous amounts of debt. They’re worried about deflation; they’ve been trying to create inflation — they’ve been printing up this money to try as hard as they possibly can, and it just won’t work.”
Problems can arise, DeMeritt says, when governments add more debt in an attempt to get out of debt. They are just inflating the old debt away as opposed to paying it down.
“[It] does not increase the economy; it makes things worse,” he says. “It’s just like [if I’m]in debt, if I add on more debt, I’m going to be better off for a little bit with the extra money— but I’m not going to be better off long-term, and pretty soon I can’t go to the bank and get any more loans. Europe’s economy is slowing down. Japan’s economy [is]. Our economy will soon I believe.”
The recent stock market volatility, for instance, can be partially attributed to currency practices, according to DeMeritt. and the Lear Capital founder says altering them could potentially result in notable economic changes — a scenario consumers might, if asked, support.
“The money printing that happened in the year 2000 caused a speculative bubble in real estate in 2008[EB1],” Kevin DeMeritt says. “And then [the government printed]another $22 trillion since then. We were $8 trillion in debt in 2008; [we now have]almost triple the amount of money and debt. When you print that much money, it’s going to go somewhere, and once something starts getting momentum, like the stock market or the real estate market, it just continually goes up and up, and you get the debt increasing in those markets at incredibly high levels and then the Fed starts raising interest rates and the bubble bursts. The government [is]creating these bubbles by printing money out of thin air. If they would be more fiscally responsible, the economy [would]be a little bit more stable; our currency is definitely going to be a lot more stable.”
[EB1]This is reworded slightly from:
The bubble in 2008 was because of money printing that happened in the year 2000 that caused a speculative bubble in real estate.