The Federal Reserve under no circumstances allows the expansion of the federal government

Governments have no resources. They can only consume as long as they have taxable access to private sector production.

If you said the above to the libertarian Cato Institute, the libertarian Mises Institute, the conservative American Enterprise and Hoover Institutions, and even the increasingly populist Heritage Foundation, the public and scholars at all five think tanks would nod in agreement.

This is why it is strange that these same centers of right-wing thinking have created an “out” policy for themselves. The Federal Reserve has become of some kind other in which absolute truths do not apply.

According to right-wing economists, the Fed and other central banks enable the growth of government. They do no such thing. Governments have no resources, period.

To pretend that a creation of government could enable the development of the same government is not merely shockingly obtuse on the face of it. It also violates Say’s Law, among other things, for assuming that consumer power can be created out of thin air. All consumption precedes production, and since governments produce nothing (another particular round of applause to Cato, Mises, AEI, Hoover, and Heritage), the innocent wonder if the Fed gets its spending power from Pluto?

In response to the above, Miseans will quote Austrian School legend Guido Hulsmann and his famous rant about how “…fiat money allows the government to make unlimited loans because fiat money by definition can be produced without limit.” Hulsmann was wrong.

He implied that money is wealth. No, the actual money circulating between producers, lenders and borrowers is one result of wealth creation. Circulating mediums of exchange are as natural as production, as if an “invisible hand” were putting them into circulation. As Mises himself once rightly observed, “No individual and no nation need ever fear having less money than they need.” Yes, exactly. Money is one resultnever a promoter of economic activity. That’s where the production is, always and everywhere.

Unfortunately, however, it’s not just the Mises Institute that promotes central banking fiction. At the Cato Institute, and in one piece bemoaning the Fed’s alleged role in the rising US national debt, Norbert Michel recently wrote that “one of the reasons governments started creating central banks in the first place was to help them finance their fiscal spending.” Really; How;

How again could a creation of governments that produce nothing finance the spending of the governments that created them? And if so, why by extension other nations led by empowered autocrats (perhaps Vladimir Putin?) don’t have debt similar to that of the US? And please don’t say this is “too much privilege”. As Treasury yields in the 1970s pray to remind the sentient, the US does not borrow other.

Michel would show that the Fed pays interest on bank reserves and the supposed growth of the government by buying bonds with those reserves, but it is not magic or sunspots that explain the reserves that US banks lend to the Fed. Production preceded those bank deposits loaned to the Fed, after which a government (the Fed) can pay interest on reserves based again on the government’s taxable access to the private sector.

In short, there is no way to grow the federal government through interest paid on reserves (the opposite, whereby banks lend the money is also not inflationary contrary to Michel), but governments receive all sustenance from the private sector. The market for what the Fed buys would exist with or without the Fed precisely because the boom in US private sector output, which is taxed too heavily, supports the government debt. The Fed is the proverbial potted plant, not an enabler.

This is because governments once again have no resources. To pretend that the Fed somehow escapes this absolute is not only false, but a non sequitur.