The Fed’s Cloud of Unknowing

Aside from not existing, an “ideal” central bank requires the ability to hold trust over a long period of time. The problem with the current central bank is that it changes strategies every few months depending on outside political pressures or what it thinks will smooth a period of volatility. This pattern means that all fiat currency has an inherent risk of fluctuations in real purchasing power, and no example to the contrary has been successfully undertaken. A state of inflation would be sub-optimal, but predictable inflation would be far preferable to our current state of inflation rate volatility through time. Discretion and waning trust have resulted in inflation which makes it difficult for both private individuals and businesses to make contracts in the future. The inherent instability of fiat currency makes a cloud of unknowing surround all future transactions. With margins of error in the dozens of percentage points for inflation predictions for the next 15 years, it is impossible for people to agree on a fair price. Considering that the main goal of money is to allow transactions to take place and value to be stored, this rampant neglect of the future is not sustainable.

While any seasoned SchiffGold reader should know that fiat money is inherently unpredictable, it bears emphasizing that even in times of overall governmental stability unlike our own, fiat currency is constantly fluctuating in value. All money will necessarily be a victim when the government that supports it loses trust, or is revolted against. However, the daily operation of central banks in stable times still allows for an insidious slow shift of value. Inflation targeting would work much better if it was held consistently, but the central bank acts as though they don’t need to undo their mistakes in the past. If one year saw 17% inflation, rather than trying to undo that inflation and make the monetary growth rate over time stable, the best they can do is go back to seeking 2%, which does nothing more than slow down the underlying decline. Political tensions can also have a huge effect on any currency, and those are completely unpredictable as they are inherently human.

While many contracts are still signed and deals are made into the future, the real instability of the dollar is both holding back many potential transactions, as well as making any of those previously made deals less objectively fair. While assuming some inflation, most people in 2020 who signed a deal where they would receive money in 2025 would be slightly shocked at the deal now if it were to be translated back into 2020 dollars. There is no information that could help people more efficiently make deals into the future if the currency used to make the deal is inherently unpredictable. People are right to hold back from engaging in commerce where they have so little certainty. While mortgages and other long-term contracts often have inflation adjustments, the time spent calculating and creating those contracts based on dollar risk is simply wasted time. A stable currency would mean that even the most ordinary people could confidently make decisions through time without having to do complicated mathematics and risk calculations.

In this environment where long-term decisions are hampered, it even makes sense that people are so oriented towards short term gain. With the future of the United States more tenuous than we would like to imagine, and the US dollar’s value having a wide range of outcomes in the near future, people’s agnosticism towards the future is almost commendable. They are simply doing good science, by only making decisions on what they can be certain of. People don’t know that there’s a better alternative where monetary stability would narrow the informational divide, so they accept this nonchalant attitude toward the future. Even a luxury of the Great Depression, great wads of folded dollar bills to hold wealth, would be inaccessible to the everyman today. The dollar actually depreciated following the Great Depression, yet the Fed added monetary uncertainty on top of the economic instability of the COVID-19 crisis. It is intuitive that a currency remains stable, and intuition must be made into a reality for the sake of everyone who seeks prosperity. The only person that ambiguity serves is the government, and their ever-changing aims. Monetary stability is beneficial for everyone, no matter their relative wealth. The government is the only beneficiary of the withholding of future information. To stop thwarting future enterprise and creating a crisis of trust, the Fed must make its future plans transparent and consistent.