The Federal Reserve should be abolished

R1-Punishes Innocent People The problem with assuming that the Fed altering interest rates to either encourage or discourage spending is punishing innocent people is to look at what happens if they were to do nothing. I already showed that the Fed only significantly increases interest rates to prevent bubbles from becoming larger than they already potentially are (which there are numerous historical examples of how bubbles can be dangerous). As for lowering them, if no is spending the economy is in trouble and unemployment rates will then in result increase. Also, although they were perhaps too low throughout most of the 2000s, they were usually only dropped when the economy was not acting to its potential such as during the early 1990s and the 2008 recessions.The Fed cannot be critiqued for hypothetical situations that will never happen on a scale large enough for Pro’s arguments to hold any weight. However, its track record and abilities prove its necessity for a stable economy, which is needed for innocent and responsible people to thrive in. R2-Rewards Irresponsibility One problem with the argument is that, to cite Pro’s example from the 1st round of lowering interest rates to save failing businesses, is that interest rate cuts don’t just apply to companies recording less profits. Also, Pro’s argument is based off a false premise that if a company’s profits are down, they must be an irresponsible company. There are several other factors that can lead to a decrease in profits. For example, if oil becomes really cheap, oil companies will make less in profits. This can be seen recently from the drop in the price of oil and how companies like Exxonmobil and Chevron have seen their stocks drop. (1, 2) Therefore, the Fed is not rewarding irresponsibility by lowering interest rates to prevent further economic downturn. Also, Pro’s 2nd hypothetical had no consistency and made it hard to rebut. He first says people aren’t saving their money in banks, but then says that interest rates are lowered to discourage people from saving money in banks, and then finally criticizes fractional reserve banking. Although he does say QE is done to encourage people to spend. However, QE has only been done by the Fed during the Great Recession when the economy desperately needed spending.C1-Interest Rates Pro did not directly address interest rates last round. His only response to this and the two topics I just rebutted was a rhetorical question which cannot be classified as an argument. R3-Distorts Markets Pro’s wrong saying that one’s savings need to be kept in dollars. Savings don’t need to be kept in banks, they can be kept in stocks, bonds, commodities, etc. Also, Pro says that businesses must accept dollars. However, that’s irrelevant to the topic and his source suggests otherwise. Pro then also shows (like I did) that gold is not any safer than the Dollar, which I only brought up because he seemed to be pro gold standard in the 1st round. However, he says a dollar should have the same purchasing power over time. Purchasing power is an irrelevant statistic, as wages go up and savings accounts collect interest. As already shown, with increasing wages, the average American could afford a lot more butter per year than in 1990 compared to 1950. Pro doesn’t deny this (except for calling the State Department questionable, with no substance), but says it could be attributed to supply and demand. Perhaps, but the average American could purchase 4746 dozen eggs a year in 1950 compared to 19189 dozen in 1990, 71 bicycles in 1950 compared to 225 in 1990, and 49 electrical washing machines in 1950 compared to 69 in 1990. (3) Overall, wages have gone up faster than inflation has occurred. Another reason purchasing power is irrelevant, is that most people put their money in banks which pay interest. Using a simplified version of the Fisher Equation: Where “i” is the nominal interest rate (set by the Fed), “r” is the real interest rate, and “π” is the inflation rate. (4) As long as the Fed’s nominal interest rate is greater than the inflation rate, the real interest rate should not lag behind inflation. Recently, due to the Great Recession, the nominal interest rate has been really low, but during the mid 1990s, the inflation rate hovered between 2 & 3% (5), but interest rates were often higher than the inflation rate. This would mean there was a real interest rate, greater than the rate of inflation. So, therefore once interest rates are raised again (which they are expected to soon), savings accounts should be much closer to the rate of inflation. Overall then, any scares about inflation being theft would be baseless. C2-Inflation vs. Deflation Delayed purchases: Many people do wait for products, such as a computer goods to decrease in price. Also, the Christmas example definitely proves my point. People expect a product will be cheaper later, so they don’t purchase it right away, even due to their “desire to have it now”. This can be seen on a large scale during the Lost Decade. As known, Japan recorded little GDP growth in the 1990s and sometimes negative growth, GDP being represented by the equation: (6) This was with the Japanese government rapidly increasing spending (7) However, Japan had already reached a nominal interest rate of near 0% and prices were dropping and people still weren’t spending. Along with debt increasing in value on Japanese companies, Japan faced stagnant economic growth and increasing unemployment. Debt repayment: I don’t want to get too much into taxation, but I was simply making a point that the average person would suffer more from the US having its debt increase in value. I already showed that things that almost every American will purchase, a university, college, or other form of education, a house, a car, etc. and will most likely have to take debt to make this possible. Yet, Pro considers these to be people who “piled up large debts to please their overlords”. Pro also ignores that most start up businesses will require a loan to function. Not to mention, many companies may increase their debt in order to invest more into their business (and therefore the economy) and have this come back to hurt them during deflation. Pro also shows how innovation causes deflation, but then creates a new equilibrium. However, this still ignores the necessity of accumulating debt and the fact deflation on a mass scale is not caused by innovations. Macroeconomists aren’t worried every time they see the price of their TV go down, but when prices as a whole go down and the Dollar deflates, there is a problem. As for criticism of central banking through statements such as “central banks setting any interest rates causes a market failure” and “markets can control both, [money supply and interest rates] better than a small group of political elites with an agenda” are not elaborated or explained at all, and therefore are meaningless statements. C3-Bank Supervision & Regulation Fractional reserve banking would exist without the Fed. It is a good policy, but even if it wasn’t it would exist without the Fed. I won’t deny that inflation caused many banking panics in the Free Banking Era, but it was due to the fact that there wasn’t a centralized bank to prevent a ridiculous amount of different currencies to be printed. However, Pro asserts that since extreme fractional reserve banking and inflation existed during economic crisis, that means the Fed doing it is bad. However, the dollar itself is backed by supply and demand (just like “widgets” are). People accept its value based on the strength of a country’s economy. Also, having to lock a currency’s value based on some widget, is potentially dangerous. I’ve already shown many examples of when money needs to be injected or pulled out of the economy, but there are other times a lot of money is needed. For example, when the British needed a lot of money for World War I they had to go off the gold standard to support it. Of course, returning to the gold standard caused deflation and the UK suffered deflation throughout the 1920s. (8)P4-Macroeconomics is PseudosciencePro provided noo real argument here.Sources: 1-http://www.marketwatch.com... 2-http://www.marketwatch.com... 3-http://usa.usembassy.de... 4-http://en.wikipedia.org... 5-http://www.usinflationcalculator.com... 6-http://people.cedarville.edu... 7-http://bilbo.economicoutlook.net... 8-http://www.economicshelp.org...