In an amusing post on “Ron Paul’s Money Illusion”, David Andolfatto calls out the absurdity of claims that the Fed has stolen “95% of the purchasing power” of money since 1913. While it’s true that $1 has only 5% of the real value that it did in 1913, it’s not clear why this should matter to anyone whose savings plan didn’t involve stuffing cash under a mattress for 88 years.
In response, some commenters complain that cash should be a long-term store of value—shouldn’t the government be looking out for the little guy who has no other way to save?
I don’t think that they understand what they’re proposing.
The household sector has almost $50 trillion in financial assets. In contrast, even after multiple rounds of QE the monetary base is only about $2.5 trillion. If any appreciable fraction of household wealth was held in the form of currency, the monetary base would have to be far, far bigger—and the Fed would need to buy assets with all the money it put into the system. What, exactly, would it buy?
There are two main options: either (1) the Fed could plow all the money into Treasuries or (2) it could invest in private debt and equity throughout the economy. It’s hard to imagine two alternatives less consistent with the libertarian principles of Paul’s followers: either the Fed would encourage government spending and indebtedness on a massive scale, or it would permanently extend its scope to making large private sector investments.
The problem, of course, is that real wealth can’t be transferred between generations simply by carrying around green pieces of paper: there needs to be some actual claim on future income streams, whether through investment, debt repayment, or collection of taxes. This requires a financial intermediary*. And that financial intermediary can either be the government or a private bank.
I prefer the latter. Paradoxically enough, many self-declared libertarians seem to disagree.
* Unless, of course, you have a “rational bubble“. But somehow I don’t think that’s what they have in mind.