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Opinion from a Libertarian ViewPoint

Posts Tagged ‘printing money’

The Fed Has Sufficient Tools—to Wreck the Economy | Mises Wire

Posted by M. C. on March 17, 2020

https://mises.org/wire/fed-has-sufficient-tools%E2%80%94-wreck-economy?utm_source=Mises+Institute+Subscriptions&utm_campaign=bafe818a8f-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-bafe818a8f-228343965

In its emergency announcement on Sunday evening, the Fed assured us that it “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.” The Fed put its (fiat) money where its mouth is by announcing a host of programs. It cut its target interest rate by 1 percent to zero and reinstituted quantitative easing, pledging to purchase $700 billion worth of Treasury securities and agency mortgage-backed securities over the coming months. This is in addition to $1.5 trillion in temporary overnight and term repurchase operations that it announced two days ago. Separately, the Fed issued a coordinated announcement with a number of other central banks, including the Bank of England, Bank of Japan, and the ECB that the interest rate on dollar swap arrangements would be cut by 0.25 percent and 84-day maturity swap lines would be added to the current seven-day dollar swap lines. In yet another announcement, the Fed slashed the rate at its discount window by 1.5 percent to 0.25 percent and its reserve requirements for all banks and other depository institutions to 0 percent.

In the wake of these announcements, some commentators questioned whether the Fed has run out of “tools” to deal with the impending recession and recovery. Former Fed vice chair Donald Kohn was ambivalent, writing, “They are not out of tools, but they’ve used the biggest tool they have, the interest rate tool, the one that’s been proven over the years to work the most effectively.” Michael O’Rourke, chief market strategist at JonesTrading, took a dimmer view of the Fed’s predicament, declaring:

They blew it. The Fed panicked and the market is spooked. The S&P 500 registered all time highs less than a month ago and the Fed has expended all its conventional and unconventional tools.

Meanwhile policymakers rushed to reassure markets and the public that the Fed had or would obtain the tools they required to keep a panicked economy on an even keel. Secretary of the Treasury Steven Mnuchin indicated that he would request additional tools for the Fed that it was deprived of by Dodd-Frank legislation: “Certain tools were taken away that I am going to go back to Congress and ask for.” And Fed chairman Powell assured reporters that the Fed still has sufficient tools available to shepherd the economy through the COVID-19 crisis and guide its recovery.

But what are these “tools” that have policymakers, financial practitioners, and commentators so worked up? Renewed quantitative easing, the zero interest rate target, 84-day dollar swap lines, special repo facilities at the New York Fed, zero reserve requirements, etc., are nothing but cunning and arcane techniques for conjuring additional trillions of dollars out of thin air and pumping them into the global economy. Since its inception the Fed has always had one and only one tool for manipulating the economy: printing money. And this tool will never dull or break, and can be used again and again under any and all circumstances short of hyperinflation.

The real question is whether this tool will work to mitigate the economic contraction that will inevitably follow the supply-side shock of the COVID-19 epidemic and the deflation of the equity bubble (possibly followed by deflation in other asset markets). Common sense and basic economic theory tell us that the writing up of digital dollar balances will not alleviate the greater scarcity of concrete goods and services goods caused by shuttered factories and commercial establishments and by the lowered productivity of employees forced to work at home. Furthermore, the Austrian theory of the business cycle as illustrated by recent history does not encourage optimism that the imminent deluge of new dollars will encourage a swift and robust recovery from the impending recession. In fact, from 2010 to 2019, the US money supply (M2) increased by 80 percent, from $8.475 trillion to $15.243 trillion, and yet the US economy experienced a painfully protracted recovery from the post–financial crisis recession, followed by historically slow real output growth during the “boom” period despite the fact that asset market bubbles formed. Quarterly real GDP growth fluctuated between 1 and 3 percent during this period, except for five quarters in which it slightly exceeded 3 percent.

Most important, the announced expansionary policy could not be more ill timed. For it is imperative during a contraction of the economy caused by war, natural disaster, or epidemic that the price system be left free and unhampered to reveal the most valuable uses of productive resources whose quantities have been substantially reduced. Only this policy will facilitate the optimal path to a temporarily smaller economy and ensure that the most pressing demands of consumers are met during a period of greater resource scarcity. Unfortunately, the stated intent of the new Fed policy is precisely to stabilize the economy, that is, to prop up and maintain firms, industries, and productive activity as they were in the status quo ante. But this is clearly impossible given the shrunken supplies of the factors of production. By inundating the economy with money the Fed will not succeed in miraculously expanding these supplies but instead will distort the price structure and promote misallocation, malinvestment, and the waste of productive factors, thereby deepening and lengthening the recession.

 

Be seeing you

Yellen's Self-Serving Assessment: Fed Is "Doing Pretty ...

A Fed “tool”

 

 

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The High Price of a “Free Lunch” | Mises Wire

Posted by M. C. on September 7, 2019

Two of the greatest periods of GDP growth in the US, 1820 to 1850 and 1865 to 1900, had deflations of 50%. Deflation should be hailed instead of being scorned as it is currently by most professional economists and central bankers.

https://mises.org/wire/high-price-free-lunch

One of the Ten Commandments is “thou shalt not steal,” and theft is generally condemned in most religions, yet our religious leaders and followers have essentially turned a blind eye to government theft.

Based on a policy of envy, Bernie Sanders, for example, has bluntly stated he intends to tax the rich to fund his programs, as though the word rich itself justifies theft. The current crop of other democratic candidates is offering a beehive of free programs without any real discussion on how to pay for them.

Three Ways to Pay for the State

Governments can finance these programs in only three ways: (1) direct taxation of its citizens, (2) borrowing money, and/or (3) printing money. Few citizens understand the nefarious effects these methods can have on their own well-being. None of them provide “free” money.

The first and most obvious way to raise money is by direct taxation. When you pay your income tax or sales tax, you are brutally aware of how much money is being taken out of your own pocket. If the government only uses these taxes to fund itself, it would quickly run into serious taxpayer opposition; would we still be in Afghanistan today if the government took your flat-screen TV or cell phone to pay for soldiers half a world away?

The second way to raise money is by government borrowing. When the government borrows, it takes money from people who are trying to save, promising a seemingly riskless asset: a government bond. The government has displaced money that would normally have been used to invest in a new computer or machines or buildings, or even a consumption good as a new car. When the government borrows, there are real sacrifices today, not in some distant never existing future when the debt is repaid. There are real resources that are extracted from the economy in the now and present. This is a good example of what is seen, what is not seen and what should be foreseen. Government borrowing finances government consumption which crowds out investment spending that would normally have created a more prosperous economy.

Government Crowds Out Other Borrowers

Now, government borrowing is normally also constrained. The more the government borrows, the greater the demand for loanable funds and the higher the rate of interest. Here again, taxpayers who are also trying to borrow to buy a car or a house would soon realize that it’s the government borrowing that is crowding them out of the loan market. Of course, there is a point of no return for government debt, when the markets doubt a country’s ability to repay this debt — as Greece discovered in 2010.

Now, the obvious question is, how can the US or any other country run record budget deficits and have rock-bottom interest rates at the same time? The answer is the third way by printing money, or often called “quantitative easing.” This way also impacts the government’s ability to borrow.

A simple example will make this path of funding clearer. Suppose an economy has $10 to purchase 10 pencils. The price of the pencils will be $1 each. If the price increases (inflates) to $2 each while the supply remains constant, there would be 5 pencils that can’t be purchased, but if the cost of the pencils were reduced (deflated) to only 50¢ each, there would be people holding $5 looking to purchase nonexistent pencils. Supply and demand in the marketplace give us a price of $1 per pencil. Now suppose the economy is growing and is now producing 20 pencils. Because there are now more pencils in the supply pipeline, the price of pencils will drop to 50¢, a deflation rate of 50%. Deflation here reflects society pushing back the constraint of scarcity. It cannot eliminate scarcity or all prices would be zero, but this deflation shows an increase in the standard of living for everyone.

Two of the greatest periods of GDP growth in the US, 1820 to 1850 and 1865 to 1900, had deflations of 50%. Deflation should be hailed instead of being scorned as it is currently by most professional economists and central bankers.

Now, returning to our initial example of $10 and 10 pencils. Suppose the government prints another $10 to buy pencils but our supply of pencils has not changed. The money supply has doubled so we now have $20 chasing 10 pencils. The price for each pencil will inflate to $2, and the government will be able to buy 5 pencils by cutting the purchasing power of money in half. In other words, you have been robbed or taxed 5 pencils because your cash can now purchase less than before.

If at the same time the economy is growing, then we would have $20 chasing 20 pencils and the price of pencils would have remained at $1. There is no inflation but the rise in real income, exemplified by the 10 pencils that would normally have gone to the citizenry, has been siphoned off or stolen by the government. To a large degree, this is what has been happening since we moved to a fiat currency system in 1933. The central bank has been keeping the CPI in check but has created massive asset inflation, a massive redistribution of income from the poor to the rich and has been a major contributor to financing ever-growing government expenditures.

As Lord Keynes said,

By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth.

Many in the lower rungs of the economic ladder blame their declining real incomes, and other inequities, on capitalism. They should, instead, be blaming the central bank.

When the government borrows, it increases the demand for loanable funds, and with a fixed supply, interest rates should normally rise. If at the same time the central bank is increasing the supply of loanable funds by printing money to buy government bonds, then interest rates will decline if the increase in supply is greater than the increase in demand. Here, we are basically monetizing the debt. Worldwide, this printing has currently driven interest rates to zero or into negative territory. Using the economy as an excuse, central banks have been monetizing government debt, alleviating any pressure on governments to control their spending.

Continuing from Keynes,

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Many economists are currently predicting we will experience another devastating recession in the US. Will we repeat the errors of the past by trying to fix a credit crisis with more debt? Or will we find a permanent solution by ending central banking, fractional reserve banking, and the government’s ability to borrow and print money? If we do, any future government spending would require an immediate and clear sacrifice on the part of the citizenry: unlike what politicians would have you believe; there is no free lunch.

 

 

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