As an adherent of the Austrian School of Economics, I find the Fed’s emphasis on consumer spending to be an upside down view of how a market economy operates. As I mentioned here, a correct view of the chain of events in a progressing economy is: savings -> investment -> production -> consumption. Thus, the main Austrian School critique of the Fed’s obsession with pursuing a zero interest policy and printing money to spark consumer spending is that the Fed is trying to bypass the necessary chain of events that ultimately results in consumer spending. In other words, the Fed is attempting to achieve a result via the policies cited above without understanding that any resulting boost to consumer spending can only last as long as these policies are pursued with ever increasing vigor, which will eventually result in serious and possibly hyperinflation. The Fed seems unable to understand that true economic progress can only begin with an increase in the pool of real savings that is a necessary starting point to the chain of events cited above.
I have recently been reading through the posts of Patrick Barron, an Austrian School Economics professor. Late last year, he wrote an interesting post titled, “Stable Money Required for Economic Progress“. In this post, he posited a critique of the Fed that I had not seen before: “By driving down long term rates it hopes to entice businessmen to alter the structure of production in favor of longer-term investments. At the same time it is trying to spur consumer spending. These are completely contradictory goals and cannot both be achieved. If the consumer spends more, he saves less. In a free market, this will drive up interest rates to reflect the consumer’s preference for goods in the immediate term rather than in the long term. If the consumer saved more, the additional supply of funds would drive down the interest rate and make longer term capital investment feasible. We cannot have it both ways.”
It is clear that the Fed’s official dual mandate of stable prices (*) and full employment has been impossible to fulfill. Yet our dauntless central planners are not discouraged, instead, they just create new mandates of sparking consumer spending and capital investment. Barron points out that we do not have to wait for failure, an a priori analysis of the policy indicates that it is doomed to failure from its conception. When this failure has become apparent to enough people to cause public relations difficulties for the Fed, I wonder what the resourceful central planners will come up with next.