Two Cheers for Vivek Ramaswamy's Commentary on the Fed
The 2024 presidential primaries have never been in much doubt, but Vivek Ramaswamy emerged from his presidential campaign poised for the future. In part, Ramaswamy distinguished himself with his criticism of the Federal Reserve. For most of the election cycle, scarcely a word has been said about the Fed by other 2024 presidential candidates. It is therefore worth reviewing what Ramaswamy had to say about monetary policy during his campaign.
As Jonathan Newman noted, Ramaswamy’s principal proposal was a stable price level for the dollar. Ramaswamy promoted this idea throughout his campaign, but our focus will be an article by Ramaswamy in the Wall Street Journal that presents his case in greater detail. Ramaswamy writes:
Beginning in the late 1990s, the Fed’s scope drifted to include “smoothing out” business cycles. This was a mistake, since business cycles serve a healthy function by transferring the assets and employees of poorly run companies to more capable management. Even worse, the Fed’s actions often exacerbated business cycles by creating transitions that create boom-bust-bailout cycles instead.
It is more accurate to say that once the business cycle is set in motion by credit expansion, the recession is a necessary correction, but it is preferable to refrain from credit expansion to begin with. Ramaswamy seems to grasp that any additional government intervention to prevent or delay the liquidation of malinvestments from the preceding boom will only aggravate and perpetuate the depression. Crucially, however, Ramaswamy’s stabilization policy would cause, not prevent, such an inflationary boom.
The natural tendency of the unhampered market economy is toward capital accumulation and increased productivity. Consequently, prices tend to fall, making monetary inflation necessary in order to achieve a stable price level. The effect of monetary inflation to offset the increase in productivity and to stabilize the price level is still to push interest rates below the rate that would have prevailed on the market and distort the structure of production.
A popular fallacy at the heart of this doctrine asserts that such inflation is justified because falling prices decrease profitable investment opportunities, but profits don’t depend on the general price level. Lower prices due to increased productivity are also reflected in lower prices for factors of production, and entrepreneurs profit from the differential between the selling price of a good and its cost of production.
Although really intending to show that a stable price level is conducive to prosperity, Ramaswamy provides powerful ammunition against the theory of a stable price level by citing the 1920s as a historical example:
During the only stable dollar eras of the last century, annual GDP growth averaged 4.9% in 1922–29, 4% in 1948–71, and 3.7% in 1983–2000. The volatile dollar from 2000 to 2022 saw average growth of a paltry 1.9%. Had the dollar remained stable since 2000, with an enduring 3.7% growth, the economy would be nearly 50% greater than it is today, and we would have avoided multiple financial crises along the way.
To demonstrate that the 1920s was an unsustainable inflationary boom that led to the stock market crash, we will review the...(READ THIS FULL ARTICLE HERE).