The Fed: The Gang That Can’t Print Straight

by Doug French

The speculation about whether the new Fed Chair will be either Janet Yellen or Larry Summers has the financial press all atwitter.  The stakes are very high we’re told. The Fed’s influence is greater than ever. Whomever controls the Fed controls the economy and our future. Nonsense.

The central bank believes if it creates a certain amount of money and holds interest rates the right distance from the ground, the automatic result will be increased employment and prosperity. The press drinks the Fed’s delusional Kool-aid, hanging on every word the Chairman utters.

The fact is, the Fed can’t even manage to get its money printed correctly, let alone create employment.

For instance, the soon to be departing Chairman has had a good five years to slay the deflation dragon breathing fire in his head and fix the problems created by the financial crisis with monetary wizardry.  He has held the Fed Funds rate at just above zero all this time, and has grown the Fed’s balance sheet to $3.6 trillion (on August 14th) from $915 million at the end of 2007.

The result? Last month 144.2 million people were employed according to the Bureau of Labor Statistics. In September of 2008 when Lehman Brothers filed for bankruptcy and the entire financial world looked to be circling the drain, the number of people employed was 146.2 million.

The population has grown, the Fed’s balance has grown, and since December 16, 2008 the Fed Funds rate has been held at 0.00 to 0.25, yet fewer people are working and more people depend on Uncle Sam to buy their groceries. The latest data from the Department of Agriculture has 47.6 million people on food stamps. In 2008, five short years ago, the average number of people on food stamps for that year was 28.2 million.

It’s not like this is all new. The Fed has had plenty of practice. It’s been in business for 100 years. The central bank is largest employer of PhD economists in the country. In 2009, Ryan Grim wrote in the Huffington Post, “The Federal Reserve’s Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more.”

Despite all of this brain power, Chairman Bernanke commented at the Jackson Hole conference in 2012, “We are learning by doing.”  The Chairman’s admission led Jim Grant of Grant’s Interest Rate Observer to tell CNBC’s Maria Bartiromo, “We, Maria, are lab rats in the financial markets of the world.”

Mr. Bernanke and all academic economists surely loved Maria’s reply. “It’s a science project.”

But Maria and the economics fraternity are wrong. In his 1974 Nobel Prize acceptance speech, entitled “The Pretense of Knowledge,” F.A. Hayek explained monetary and fiscal policies are the product of what he called the “scientistic attitude,” which is in fact unscientific in that it “involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”

Later in the speech Hayek puts his finger on the problem. “Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.”

A single human, or group of humans, no matter how many degrees they hold can guide the economy with any certainty by pushing or pulling monetary levers with government force. What they can do when they do initiate this force they screw things up. After all, these guys can’t even manage to get money printed correctly.

The Fed’s monopoly money printing contractor, the Bureau of Engraving and Printing (BEP), looks to be the gang that can’t print straight.

It is indeed ironic a government attempting desperately to stimulate its economy can’t seem to print its highest margin product.  The Bureau says the cost of producing a note in 2012 was 8.7 cents.  So you would think this Department of Treasury operation would be very keen to produce as many $100 bills as it could run through the printer.

The government’s new high tech, newfangled C-Note was supposed to appear in early 2011. However, in the summer of 2010 the Bureau’s quality controllers noticed bills were rolling off the presses with blank slivers of white. Creases were being formed in the paper while being squeezed through the presses. There was also a second flaw known as “crows feet” which appeared near the 3-D security ribbon.

As a result, there are $110 billion worth of, what the Treasury refers to as, NexGen $100 notes, collecting dust somewhere while the Treasury figures out what they want to do with the cash.

The latest is that one of the Bureau’s printers has spoiled another batch by “mashing.” If too much ink is applied to the paper during printing the artwork lines do not come out as clear and crisp as desired.  While not all the bills are defective, it will be labor intensive to sort out the bad bills from the good.

Bureau director Larry Felix sent out a memo to his employees last month indicating that recent batches of bills produced by the Washington D.C. plant contained “clearly unacceptable” bills along with passable ones.  We now know not all of the “clearly unacceptable” bills coming out of D.C. originate on Capitol Hill.

The Federal Reserve has refused delivery of the 30 million C-notes, demanding its money back, and will not accept any more notes from the D.C. facility.  Another $30 billion worth of bills is waiting for inspection. Lewis has called upon the Bureau’s Fort Worth plant to pick up the slack.

“There are dire consequences involved here because BEP sells Federal Reserve notes to the Board to finance our entire operation,” he wrote in the memo. “If the BEP does not meet the order, the BEP does not get paid.”  The Bureau has until October 8th to fill this year’s cash order and deliver the new $100 bill.

In the physical money world it’s all about the Benjamins. About 77 percent of all cash in circulation since 1990 has been in $100 bills. In 1990, that percentage was only 52 percent. The majority (65 percent) of $100 bills circulate outside the U.S..

Besides being inept, central bankers actually don’t control a large percentage of the money supply. Cato Institute fellow and John Hopkins economic professor Steve Hanke explains that the Fed’s contribution to the money supply, what he calls ‘state money’ is only 15 percent of the total money supply. The other 85 percent is ‘bank money’ that is created by private banks.

Yes, the Fed has opened its floodgates, and state money has gone from 6.5 percent of the money supply to 15 percent, but, as Hanke says, “It’s still small potatoes relative to bank money.”

Still licking their wounds from the financial crash, bankers and their regulators are keeping their powder dry and are not eager to lend. With anti-banker sentiment still pervasive, this will not change anytime soon.

Time Person of the Year Ben Bernanke and whomever succeeds him will continue to delude themselves that they control economic outcomes by controlling money.  In reality they don’t even control the money, either the printed version or the digital.

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Douglas E. French is Senior Editor at Laissez Faire Club. He received his master’s degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He served as president of the Mises Institute (2009-2012). He is the author of multiple books on economics.

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