Today’s millennials face tremendous economic challenges. Their unemployment rate is higher than the national average, yet lousy job prospects tell only part of the story.
The declining purchasing power of the dollar is just as troubling. The money earned today will be worth less — potentially far less — tomorrow. Since 1967, the value of a dollar has declined by 85 percent to $0.143 cents. What does that mean?
Suppose you earned $1 in 1967, used it as a bookmark and rediscovered it today. When earned, that dollar could have purchased 3 gallons of gas or a gallon of milk. Good luck finding those prices today. Yes, you would be paid more today for the same work in 1967, but why should work performed yesterday — represented by that dollar — be devalued just because of the passage of time? And why should $1 earned in 2014 be worth less in 2015 or 2024?
Congress established the Federal Reserve a century ago. Part of the Fed’s responsibility is to maintain stable prices through monetary policy. To achieve this goal, the Fed sets a target for short-term interest rates and maintains this target by adding or removing reserves, normally through the purchase or sale of Treasury bills, notes and bonds. These reserves flow into the economy through financial institutions making loans. Growth of the reserves is fine when it keeps pace with economic growth. However, when reserves grow too fast, a general inflation in the prices of all goods and services usually occurs, and the dollar is cheapened.
Sometimes, as in 1920s and last decade, the inflationary effects of an overly loose monetary policy are concentrated in assets and are not fully captured by measures such as the consumer price index (CPI). When this occurs, monetary policy inflates asset price bubbles, like the housing bubble, that eventually collapse and trigger financial panics.
Since 2008, the Fed has tripled the size of its balance sheet through its asset purchases known as Quantitative Easing. These reserves are the fuel for future price inflation. So far, inflation has been subdued due to one-time factors such as individuals paying off debt (deleveraging); financial institutions wanting to hold more reserves; and the reluctance of credit-worthy borrowers to seek new loans. This will not last forever. When it changes — and it could change quickly — will the Fed be able to adequately quell a rapid rise in inflation? That is a multi-trillion dollar question.
The financial panic in 2008 has caused many Americans to pay greater attention to monetary policy. Serious discussions on the topic are now common place on Main Streets across America. We should not experiment with our economy. America’s hard-working families are not lab rats.
When a rule — whether some form of a gold standard or the Taylor rule during the Great Moderation (1982-2000) — has guided the Fed, monetary policy has helped to create durable economic prosperity and low inflation. When the Fed has abandoned rules in favor of a discretionary, interventionist monetary policy, our economy has suffered more frequent and deeper recessions, as well higher inflation.
It is time to return to a rules-based monetary policy, as embodied in my Sound Dollar Act (H.R.1174). For young professionals, few things are of greater importance to their economic future.
