What the Fed is not Doing

The last time we applied reaganomics, the Fed raised the interest rate to record levels to control inflationary risk presented by record budget deficits (insufficient treasury income, like we have now). Predictably, but completely contrary to what proponents of reaganomics forecasted, we had both inflation and unemployment--stagflation--like we have now.

This time, however, being unaccommodative is exactly what the Fed is not doing.

Since doing the same stupid thing over and over again is the mark of insanity, Bernanke is more accommodative. While he could not prevent the reapplicaton of reaganomics, he could accommodate it.

Quantitative easing at near-zero interest rates is intended to turn accumulated wealth into capital. It is intended to cause a distribution, but capital is instead being used to accumulate even more wealth, which increases the probability that wealth will be "redistributed" in the form of public debt ($14 trillion and counting at this point).

When the upper class increases its slice of the pie over increasing the size of the pie, debt increases over GDP. The debt is not causing reduction of GDP, so it is fundamentally irrational to think we can reaganomically cause GDP by reducing debt.

Accommodating the debt is exactly what the Fed is not doing, and that is essentially what its chairman said today at Jackson Hole.

Bernanke knows very well that reaganomics is a foolish reiteration of a failed--disconfirmed--hypothesis. (Remember, when something is disconfirmed you throw it out, you don't keep it as a matter of principle, and if you do, you are either really impaired or really powerful.) Bernanke has tried his level best to deconsolidate the risk but has been defeated by the irrational tendencies of over-accumulated power (what a free market would quickly dispatch; and that the problem persists indicates the extent of the missing value, accounting for the accumulated risk the Fed has the authority to independently manage--see the article, "The Bureaucratic Model of Power and Political-Economy").

Causing the problem to be solved is what the Fed is not doing. What the Fed is doing, however, will provide definitive signs of recovery going forward.