Establishment Quacks Call For More Money Printing
No matter how often and how thoroughly inflationist doctrines have been refuted by economic theory, or how many times their implementation in practice has resulted in large-scale economic misery, they never seem to lack for support. The main supporters these days are the pro-statism establishment intellectuals which seem to populate both mainstream media and academe in staggering abundance. You might say there's an inflation of inflation-loving intellectuals.
Naturally, their doctrines are as faulty today as they have been since the times when Roman emperors debased their coins, but that doesn't keep them from recommending the same hoary nonsense all over again. Worst of all, their opinions coincide with those of modern-day policymakers, in fact they serve as a fig leaf and provide propaganda support for their policies.
To quote Bob Hoye on the matter:
“We have often noted that policymaking has been a scam that only appears to work when the business and stock market cycles are trending up. And as was heard on the old and dreadful Vancouver Stock Exchange "So long as the stock is going up the public will believe the most absurd stories."
We couldn't have put it more succinctly.
Two of the more prominent statist establishment intellectuals have decided to speak up last week, and we couldn't resist commenting a bit on what they currently say and recommend. Unfortunately these are people who have the ear of the monetary bureaucracy, respectively shill for it at every available opportunity. Someone please send these guys a copy of Ludwig von Mises' 'Theory of Money and Credit' (if possible, the 1981 edition translated by H.E. Batson).
Alan Blinder Thinks Ben Bernanke 'Deserves a Break'
The Wall Street Journal opens its editorial pages to a wide swathe of opinions, and although it is slightly more inclined to give free market supporters a say than certain other publications, it occasionally brings us Alan Blinder, the man who up until 1989 was an admirer of Soviet central planning and nowadays poisons young minds at that hotbed of US Keynesianism, Princeton. The place has brought forth such luminaries as e.g. the current Fed chairman and Paul '' Krugman.
Last week Blinder wrote another of his pro-intervention jeremiads, entitled ''.
We are already offended by the title, because in our opinion he doesn't deserve a break. His policies are economically harmful and since they happen to have failed to produce any tangible results, he should be taken to task (of course opinions differ on the former point, while the latter can hardly be disputed. Admittedly our opinion doesn't matter much, but that doesn't keep us from voicing it).
Blinder begins by listing the many obstacles Ben Bernanke faced on occasion of the last Fed meeting, ranging from being expected to deal with a weak economy with 'little help from fiscal policy expected' (a small consolation from our point of view) to the various political headwinds and the dissension within the Fed (we note it was his bad luck that all three potential dissenters actually have a vote at the FOMC this year).
Blinder then goes on to say:
“So as Chairman Bernanke convened the FOMC on Tuesday morning, Sept. 21, only two things were at stake: the health of the U.S. economy and the independence of the Federal Reserve. Does that seem like enough to worry about?”
That overstates the case somewhat. Neither can the Fed do anything about the economy except make things worse, nor does a letter from a few GOP representatives endanger the 'Fed's independence' much. Politicians are after all always yammering about the Fed, although it is admittedly a new twist that they are worried about too much money printing.
Speaking of twists:
“What did Mr. Bernanke decide to include in the package that will presumably be called QE3? Ignoring both the internal dissent and the clear hostility in the congressional letter (not to mention Texas Gov. Rick Perry's reckless accusations of treason), he went ahead with the "twist" idea.
In fact, the FOMC majority voted for a slightly larger twist program than the markets expected. Between now and June 2012, the Fed will buy $400 billion of Treasury securities with maturities between six and 30 years, and sell an identical amount of shorter-term Treasurys (maturities from three months to three years). Perhaps more important, the Committee decided that its bond purchases should extend all the way out to 30 years, which is longer than most people expected.”
It's not going to be called 'QE3' because it isn't 'QE'. Why it should make any difference at all whether e.g. $300 or $400 billion are 'twisted' or that a lot of 30 year bonds are apparently going to be soaked up remains unexplained. Why should it? If the stock market goes up (see Mr. Hoye's comment above), the 'twist' will be regarded as a 'success'. If it doesn't, it won't.
We can meanwhile think of a few organizations that are none to happy to see the both the supply and the yield of the 30 year treasury bond shrink (insurance companies very prominently among them), but we're sure the supply issue could be helped along by Mr. Geithner.
As an aside – since 'Operation Twist' was announced, the the 10 year note and 30 year bond yield have stopped falling. Admittedly it's early days, but as of today the 10 year yield is higher than it was on the day of the announcement. In fact, it has simply continued to move opposite to the stock market. Should the stock market bounce and this yield not rise concurrently, we will eat our felt hat.
The 10 year note yield – going sideways since 'OT' was announced – will it leave the FOMC twisting in the wind? – click for higher resolution.
Blinder goes on to confirm that he has never met an intervention he didn't like:
“On top of this, the FOMC added a surprising new wrinkle that may prove to be the sleeper in the package. For more than a year now, the Fed has been allowing its portfolio of agency debt (e.g., Fannie Mae and Freddie Mac) and mortgage-backed securities (MBS) to shrink naturally as mortgages are paid off and securities mature. To maintain the size of its balance sheet, the Fed has been reinvesting the proceeds in Treasurys. But starting "now" (the Fed's word), and continuing indefinitely, those proceeds will be reinvested in agency bonds and MBS instead.”
No-one regularly reading this blog can have been too surprised by the 'surprising wrinkle'. As our real estate maven Ramsey Su tirelessly points out, Ben Bernanke and Tim Geithner are the mortgage market these days.
“The objective here is exactly what it was for the first round of quantitative easing, QE1: to reduce spreads between MBS and Treasurys (which had widened a bit), and thereby to help the ailing housing market. The amounts involved will not be large at first, perhaps in the $150 billion to $225 billion per year range. But the idea is, as they say, scalable. A future round of quantitative easing (QE4?) that concentrates on private-sector securities like MBS, rather than on Treasurys, is now imaginable.
Would that mark an improvement over QE2, which was limited to Treasurys? I think so—though, again, no one should expect miracles.”
He's got that right – i.e., that 'no-one should expect miracles'. We would note that if the objective of 'QE1' was to 'help the housing market', then it ranks among the most abysmal failures in the annals of interventionism, and those annals are certainly brimming with failures.
Blinder then adds this zinger:
“When the Fed buys or sells Treasurys it is entering the broadest, deepest and most liquid securities markets on earth. It's not easy to push such markets around without moving vast sums (or convincing markets that you might). But markets for MBS and other private-sector securities are less deep and less liquid—and hence easier to move. They are also more tightly connected to private borrowing and lending decisions—and therefore to growth and jobs.
So this 'sleeper surprise' finds approval because the MBS market is deemed easier to manipulate, which we would call an example of the 'potent directors fallacy'. Agency MBS interest rates remain as tightly correlated with US treasuries as ever, especially now that agency debt has in fact become treasury debt, even though no-one officially admits to the fact. As to the idea that lowering them further will 'create growth and jobs', it will do neither. In fact, judging from the 'growth and jobs' created by iteration one of the Fed's intervention in MBS we would say the effect is probably negative at this point in time. Certainly there is no hope of resurrecting private label mortgage lending when it is impossible to compete with ultra-low GSE interest rates and interest rates offer no credible buffer for the risks lenders are taking on. The banks may be able to fob off some more mortgage-backed securities to the Fed and thereby improve their balance sheets somewhat on the back of society at large (someone has to pay for it), but that is about all that is likely to happen.
Blinder then goes on to admit that he is living in some kind of fantasy-land:
“For these reasons, I was a huge and enthusiastic supporter of QE1, which concentrated on MBS, but only a lukewarm supporter of QE2's Treasury purchases. (It was better than nothing.) Since then, a few scholarly studies have estimated that QE1 was indeed more powerful than QE2.”
A few 'scholarly studies' may well say so, but we bet a few million unemployed and just about everyone involved in the real estate market would vehemently disagree. It's par for the course that Blinder thinks the exercise in futility known as 'QE2' was 'better than nothing'. As we noted above, he evidently never met an intervention he didn't like. And he's already asking for more:
“So any move back toward dealing in MBS, or in other private-sector securities for that matter, is welcome. Indeed, if we indulge ourselves in a bit of blue-sky thinking, we can even imagine the Fed doing QEs in corporate bonds, syndicated loans, consumer receivables and so forth.”
Good grief! In the end nothing that's not nailed down will be safe from the monetizers. That's not 'blue-sky thinking', it's bordering on insanity. Prices for all these items will become devoid of meaning (for a while anyway) if the Fed wades in. Of course that doesn't mean it won't – note that all these options were already mooted by Ben Bernanke back in 2002.
Blinder then continues:
“But what about the Fed's many critics? Mr. Bernanke has apparently decided that he can live with 7-3 votes on the FOMC—which, fortunately, seem not to have undermined market confidence in the Fed. Expect Messrs. Fisher, Kocherlakota and Plosser to dissent again, if policy is eased further: 7-3 is the new normal.”
Really? What happened to the 'Bronx cheer' the markets delivered after the announcement? That seems to have been forgotten between the beginning and the end of the editorial, but let's not quibble. At least confidence in the merry pranksters is still high enough that people accept US dollars in payment.
“Sens. McConnell and Kyl, Speaker Boehner, and House Majority Leader Cantor may or may not continue their ill-advised attempt to bully the Fed. Their party has, after all, already refused to confirm a Nobel-prize-winning economist for the Federal Reserve Board, which has two vacant seats.”
A Nobel prize is a contrary indicator nowadays. Just to name a few recent recipients of the prize: Al Gore, Barack Obama, Paul Krugman….need we continue? In fact, Nobel prize winners should probably be rejected on principle, just to be safe. The economist the Republicans have wisely rejected is another Keynesian interventionist, Peter Diamond. That is precisely why they rejected him (so they said, anyway).
Blinder's editorial concludes with a display of selective memory:
“But maybe they should confer with some past Republicans, including officials of the George W. Bush administration, who understood and respected the value of Federal Reserve independence—not because it was good for the Republican Party, but because it was good for the nation.
Ironically, one of those respectful Republicans was Ben Bernanke, who was then a top adviser to President Bush. I guess those were the good old days.”
Just as he has conveniently forgotten his past advocacy of command economy style central planning (which has really been scrubbed from the record and flushed down the memory hole very efficiently – not even Google is much help in hunting up those old quotes), he forgets that politicians have 'bullied' the Fed ever since there was a Fed. For all its vaunted 'independence' the central bank is a creature of the State after all. We happen to remember that the first Reagan administration spent a lot more effort trying to cajole Paul Volcker into lowering interest rates than the current GOP people have so far spent in trying to persuade Bernanke to stop experimenting already. At least the current crop has a half-way decent objective, whether its motives are pure or not.
Alan Blinder thinks 'Bernanke deserves a break and believes that a second round of MBS purchases by the central bank will achieve what the first round couldn't.
(Photo via charlierose.com)
Next we look at one of the quintessential statist intellectuals of our time, a highly intelligent and utterly misguided man who is the 'chief economics commentator' of the Financial Times and according to his Wikipedia page 'widely considered to be one of the world's most influential writers on economics.'
If true – and we have no reason to doubt it - this unfortunately reflects very badly on the state of the science of economics these days.
Martin Wolf Calls Openly For More Money Printing
Well, at least he's disarmingly honest and not beating around the bush with euphemisms. Readers may recall that Wolf, whom we have criticized in the past, first openly called for 'money printing' in July 2010, in an editorial entitled “Why it is right for central banks to keep printing”.
We mention this earlier erroneous and misguided call for more inflation mainly on account of its timing, as 'more printing' indeed was announced shortly thereafter. As a friend remarked to us en passant last week in connection with Wolf's latest call to man the printing presses (paraphrasing) 'the man is so well connected, I wonder if this is a warning shot of some sort'.
Wolf's latest editorial screed calling for more money from thin air to 'fix' our economic ills is entitled “Time to think the unthinkable and start printing again” (as an aside here, every time we copy/paste excerpts from the FT, it starts blabbering about 'high quality financial journalism requiring investment' – evidently the danger that people might get to read parts of Wolf's editorial for free is too much to bear; please note though that we are big fans of Neil Hume, Joseph Cotteril, et al. who write the – ironically completely free – FT Alphaville blog, which is both informative and displays a sense of humor).
Wolf doesn't hold back. In an effort to stifle all possible criticism from the outset, he comes out guns blazing:
“It is the policy that dare not speak its name: the printing press. The time has come to employ this nuclear option on a grand scale. The alternative is likely to be a lost decade. The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.”
This is truly repugnant nonsense. First of all, it's not as if they had ever stopped printing, is it? It's already happening on a 'grand scale'. We wonder if Wolf realizes that US money TMS-2 has increased by 51% since January of 2008? Yes, you read that right – 51% – a post WW2 record for such a short time span, from $5,300 billion at the beginning of 2008 to $8,003 billion as of the end of August 2011. As far as 'lost decades' go, we have already lost a decade, while once again more money printing and deficit spending has been indulged in during this decade than ever before, and we really mean 'ever'. For the record: since January of 2001, the US true money supply TMS-2 has increased by 165%. This means that more money has been printed in the past decade than in all of US history before.
It would have been 'cruel' not to do that? How about we would have been spared the catastrophe that it has brought about! What 'sane' people should reject, and what is 'morally and intellectually wrong' is precisely what Wolf sotto voce advocates. As far as we are concerned, any 'major economic commentator' who blithely calls for the printing press to be deployed is himself morally and intellectually bankrupt.
Mr. Wolf may not realize it, but apart from the fact that inflationism has been thoroughly debunked by economic theory for a long time, its practical application throughout history has been a string of utter disasters. We already mentioned the demise of the Roman Empire, which was hastened by the arch-inflationist emperor Diocletian, but we need not look that far back. From John Law to the post-revolutionary assembly of France to Germany's Rudolf von Havenstein to to Hungary's Szálasi government to countless Latin American money printers to Zimbabwe's Gideon Gono, history is brimming with examples of governments using the printing press in an attempt to overcome their economic difficulties and bringing about total catastrophe instead.
To be sure, Mr. Wolf isn't going around advocating 'hyperinflation' – neither did any of the esteemed gentlemen mentioned in our little list above. They all, to a man, thought they could indulge in a 'little bit of inflation' to 'give the economy a badly needed shot in the arm' or ease a 'temporary shortfall' in government revenue. The problem is that it never stops with just a 'little bit' of inflation once this course is embarked upon, as the 'shots in the arm' soon prove to be ineffectual and the 'temporary shortfalls' prove to be less temporary than expected.
We can not copy and paste all of Wolf's article here, for fear of running afoul of the FT's copyright policies, but we encourage readers to follow the link provided above. However, we will summarize and excerpt a few more important tidbits. Following his opening shot (which conjures up images of a Borg soldier shouting “resistance is futile!” with a sort of German-sounding accent for effect), he recounts the dangers faced by the UK economy and its housing market (the as of yet partly un-burst bubble that is absolutely certain to go the way of all its predecessors). Allegedly, so Wolf, if no money printing is pursued in 'grand style', then people would lose their jobs or if they are young, never even find their first job. It's news to us that sustainable growth and jobs can be brought into being with the help of the printing press. We wonder why it hasn't worked in Zimbabwe? How come no-one ever printed himself to riches? Could it have something to do with – economics? The fact that money is merely the medium of exchange, allowing for economic calculation and indirect exchange? The fact that money is not synonymous with wealth?
One would normally expect a 'major economic commentator' (one of the most influential in the world to boot) to know a thing or two about these things. As we said at the beginning, this actually says a lot about the cul-de-sac in which the mainstream economics cart has landed (and where it is about to be swallowed by the quicksand of its failings).
Wolf then approvingly quotes the UK MPC's chief inflationism advocate Adam Posen, noting:
“What is to be done? The first task is to abandon what Adam Posen, an outside member of the monetary policy committee, calls “policy defeatism”. As he argued in a new speech: “Throughout modern economic history … every major financial crisis-driven downturn has been followed by premature abandonment – if not reversal – of the . . . stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further stimulus.”
Well, Posen is – not surprisingly- incorrect. There are many who have not abandoned the futile 'stimulus' and money printing in time – we have listed many of them above. They have become the Zimbabwes of this world. Let us look what an economist worth his salt has to say on the topic, namely Ludwig von Mises. As regards the money supply, Mises noted:
“If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.” (in: 'Planning for Freedom')
“No increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” (in: 'The Theory of Money and Credit')
“The entrepreneurs who approach banks for loans are suffering from shortage of capital; it is never shortage of money in the proper sense of the word.” (in: 'The Theory of Money and Credit') [this is a point we have often hammered home in these pages, ed.]
What then does Mises assert is likely to happen if the authorities do not voluntarily stop the printing presses in time? It is a famous dictum from Human Action many readers will probably be aware of:
“The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”
There is little danger today that 'unduly influential voices' will drown out the inflationists of Posen's ilk given the weighty support he still enjoys, but it will happen sooner or later once it becomes ineluctably clear that these policies are making things worse instead of better. We still doubt that it will come to the point where the authorities will suffer the breakdown of the monetary system willingly and knowingly, but it could well happen 'by mistake'.
Wolf then continues by unwrapping the hoary under-consumption theory that has been elegantly refuted by F. A. Hayek in the 1920's in his reply to Foster and Catchings (two fore-runners of Keynes, who incorporated the same theory in his writings). Hayek is by the way one of the few exceptions to the rule with regards to Nobel prizes (in economics specifically). As a duly surprised Murray Rothbard noted when Hayek received the prize: “The Nobel award comes as a surprise on two counts. Not only because all the previous Nobel Prizes in economics have gone to left-liberals and opponents of the free market, but also because they have gone uniformly to economists who have transformed the discipline into a supposed "science" filled with mathematical jargon and unrealistic "models" which are then used to criticize the free-enterprise system and to attempt to plan the economy by the central government.”
Let's return to Wolf though:
“Up pops Spencer Dale, the Bank of England’s chief economist, as if on cue, with arguments that the UK’s sharp productivity slowdown indicates a permanent reduction in potential output and its growth. He also suggests that part of the recent productivity shortfall is due to reduced innovation by financially constrained smaller businesses. He offers no evidence for this theory. The striking fact, as Bill Martin at the Centre for Business Research in Cambridge has noted in an important , is that productivity slowdowns and output declines have occurred across the board. This makes it likely that the poor productivity reflects weak demand. It is vital, then, to sustain demand. With fiscal policy set on kamikaze tightening and conventional monetary policy almost exhausted, that leaves “quantitative easing”. Mr Posen recommends a great deal more of it, starting with “a minimum of £50bn in gilt purchases in secondary markets” though he now boldly recommends something closer to £75bn or £100bn, in light of the dire external environment.”
The problem with this view of the world is that it assumes that production – the sine qua non that must perforce precede consumption – is just lying in wait, ready to spring into action if only there is enough 'demand' – even if said demand results from the deployment of money from thin air! This is in effect no different than calling for burning the furniture to heat one's home. It'll work – for a little while.
Needless to say, the fact that 'Mr. Posen recommends a great deal more' of what hasn't worked and will continue not to work doesn't make it any better. Wolf then makes as thought he were a reincarnation of the above mentioned John Law or any of the other countless monetary charlatans that have brought untold misery upon their fellow humans by proposing:
“Personally, I would favour the “helicopter money”, recommended by that radical economist, Milton Friedman. This would be a quasi-fiscal operation. Central bank money could pass via the government to the public at large. Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.
In current circumstances, a policy of direct financing of government by the central bank should recommend itself to monetarists and Keynesians. The former have to be worried by the fact that UK broad money (M4) shrank by 1.1 per cent in the year to July 2011. The latter would have to be pleased that governments could run still bigger deficits without increasing their debt to the public.”
We can believe the latter point, which is why we refer to both ideologies as 'left fringe' (we have taken this apt this description from an apropos essay by Herman Hoppe on intellectual elites and the State, who rightly points out that it is absurd to think of the Chicago school as the chief proponents of 'free market thought'.) Naturally, Wolf then assures us that 'none of this is inflationary':
“Some will argue that a policy of direct financing by the central bank must be inflationary. This is wrong. No automatic link exists between central bank money and the overall money supply. Above all, the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.”
First of all we would note that if there were really 'no link between central bank money and the overall money supply', then the whole exercise would be utterly futile by Wolf's own parameters. After all, if all that were to happen was a piling up of 'excess reserves' at the central bank, then pray tell, where would the 'additional demand' that he wants to conjure up come from? Besides, we know for a fact that money 'leaks out' in spades, even in the comparatively fairly 'harmless' indirect monetization exercises the Fed has engaged in. The proof as they say, is in the pudding (as mentioned above, US true money supply is up by 51% since the beginning of 2008 and the money sure didn't grow on trees). The idea that the central bank should 'retain the right to call a halt' meanwhile seems to run counter the to his erstwhile assertion that 'stimulus shouldn't be prematurely abandoned' – which one is it? What confuses Wolf is that there is more to the 'money relation' than just 'excess demand' (by which we suppose he means the demand for goods and services), just as there is more to economic activity than just consumption. The supply of and demand for money itself also play a crucial role. Confidence in a fiat money's value can evaporate completely even while the economy lies completely moribund. As a reminder to Mr. Wolf: even while the central bank of Zimbabwe printed money all out (in fact it did precisely what Wolf proposes above, namely finance the government directly), unemployment in the country reached 80%, all its mines were on care and maintenance and industry had come to a complete standstill.
Oh wait, they probably didn't 'stimulate enough'.
Adam Posen, who desperately wants to print the UK back to prosperity.
(Photo via telegraph.co.uk)
The FT's Martin Wolf, who's primary quality is that he doesn't beat around the bush and admits openly that he wants central banks to print. Apparently he thinks they can succeed where all others before them have predictably failed. Some special modern central bank magic perhaps? Who knows?
(Photo via New America Foundation)
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