Rate hikes and federal spending don't seem related, until we get into the underlying intent of our fiscal leaders.  It's not a pretty sight.  But it is to be expected that a government entity, the Federal Reserve in this case, will naturally seek to prolong its existence and power.  The ugly side is that in order to preserve their power, they must act against the good of the  people for whom they are supposed to work.

As an example, today's inflation was started by Fed actions taken in 2008, when they began printing U.S. dollars and ended up creating $8 trillion in new debt.  There are a few problems with this.  We citizens pay off that debt through increased taxation.  Further, that debt was used to allow government spending on Congress's favorite pork projects.  Finally, all that debt , all those dollars printed, resulted in inflation.  Once again, we citizens are paying for it through high prices.

But it gets better, or worse if you are a non-government citizen.

The Federal Reserve's rapid interest rate hikes caused an inverted yield curve.  This resulted in two problems.  First, "available for sale" bonds in banks declined substantially; many banks took massive losses, depressing capital ratios, and, inevitably, reduced lending.  So not only did the cost of borrowing go up, but banks are not lending as much.  This certainly depresses economic activity.

The second issue is that the inverted yield curve suggests great imbalance in the economy.  The nature of a free-market economy is that it self-corrects, sometimes violently.  Not all yield inversions foretell recessions, but all recessions are preceded by inverted yield curve.  By bludgeoning the private economy with high rates and causing an inverted curve, the Fed has all but guaranteed a recession.

The irony is that today's inflation is not caused by an imbalance in supply and demand (in which case rates would solve it).  Today's inflation was caused by another Fed mistake mentioned earlier: since 2008, the Fed drowned our economy in excess money supply, liquidity, M2, by printed dollars.  Granted, high monetary liquidity stimulated our economy, but there is always a price to be paid, and that price is devaluation of the dollar — inflation.

One has to wonder why the Federal Reserve has stimulated the economy through massive liquidity and simultaneously depresses the economy with high interest rates — totally opposing actions at the same time.

If the Fed and Congress want to reduce inflation, they must drain all excess liquidity from the economy.  And that requires government spending not only to stop, but to decline. 

In order to fulfill their duty and obligation, members of our federal government must act to benefit the citizen, the people for whom they have a sworn duty.  Sadly, that's asking too much of human nature.  And as we've seen for the past 100 years, since comrade President Woodrow Wilson, the nature of a government is to grow.

So the burden of sustaining and passing on our constitutional republic and free economy falls on us.  Through capitalism, we citizens must take control and direct our representatives to do our bidding.  That is the nature of our unique form of limited government.  Citizens must be involved in their government's affairs to keep the bureaucrats honest.  After all, we are asking federal employees to act in the best interest of our entire country, not in their own.  That's asking a lot.

Jay Davidson is founder and CEO of a commercial bank.  He is a student of the Austrian School of Economics and a rabid capitalist.  He believes there is a direct connection between individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.

Image: pasja1000 via Pixabay, Pixabay License.