In today’s Wall Street Journal, Clare Connaghan, Nicole Hong, and Ira Iosebashvili of Dow Jones assert the resurgence of the dollar, citing “newfound strength” in corporate profits and crediting the Federal Reserve with “jump-starting the economy.”
The notion of American economic strength is perverse at best. While corporate bottom lines are indeed growing, increased private sector profits are largely due to widespread publicly subsidized corporate welfare. Moreover, the policies of the Federal Reserve keep the money supply in a constant state of expansion and succeeded in stripping the dollar of more than 95% of its value over the past century. Recent rounds of quantitative easing are the latest examples of further expanding the money supply with no real economic benefit other than satisfying short sided hucksters while leaving markets heavily distorted.
Even though the economy and dollar may appear to be relatively strong on an international stage, the aforementioned policies are mathematically unsustainable. The American people cannot be expected to further prop up the private sector while their dollars are perpetually inflated by a central bank. Although detractors point to the bond markets as evidence of inflation remaining low, hyperinflation is not an event you can mark on your calendar. One day there will simply be no further appetite for American debt.
Relying on legislative bodies and central banks to “plan” the economy turn individuals into chess pieces moved at the whims of those in positions of authority. Order will only emerge spontaneously out of individual actions in pursuit of rational self-interests. As Adam Smith famously wrote in The Theory of Moral Sentiments (1759), “society must be at all times in the highest degree of disorder.”
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I have a feature column called “Current Economics” in the new quarterly magazine, Middle Tennessee Home & Garden. What does one have to do with the other? Well, the mag is geared towards luxury home owners that have a buck or two in the bank and want to protect their net worth against unsustainable debt and worthless paper money.
Hope you enjoy.
On Monday, Federal Reserve Chairman Ben Bernanke received this letter from the top four congressional Republicans expressing concern over further expansions of the money supply to combat the recession:
It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.
For readers who aren’t up on central banker lingo, let me briefly review what “quantitative easing” means. Ordinarily, central banks conduct monetary policy as follows. If they want to pump more money into the economy, they buy short-term government bonds, a process that pushes down short-term interest rates. Conversely, if they want to take money out of the economy, they sell short-term bonds, pushing up interest rates. This is usually described as “lowering interest rates” and “raising interest rates,” respectively, because the policy is usually described in terms of a target interest rate. But what the Fed actually does is buying and selling treasury bonds with short-term maturity dates.
For technical reasons I don’t fully understand, this process, known as “conventional monetary policy,” becomes ineffective when interest rates get close to zero. The Fed can keep buying bonds, but the new money doesn’t make it into the economy. So “quantitative easing” is a way for the Federal Reserve to continue injecting money into the economy after short-term interest rates have fallen to 0 percent. It works like this: the Fed buys long-term treasury bonds (which currently have a higher interest rate) rather than short-term ones. The reason it’s called “quantitative easing” is because the policy is described not based on the target short-term interest rate (which is already zero) but based on the quantity of money the Fed will spend. In the last round of quantitative easing, the Fed spent $600 billion.
The big question today is if the Fed will announce a third round of quantitative easing (known as QE3) and if so, how much money are they going to waste this time?
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Here is a letter to the USA Today:
Ensuring the survival of the euro, Mr. Kelemen and Mr. Jones offer a remedy that will abdicate more power to central planners at the European Commission by “strengthening eurozone governance” (Why the EU, and the euro, will survive, 8-30-11).
Unfortunately, the irony is that the inception of the euro put European nations on this very collision course currently playing out across the continent. While free trade amongst Europeans is beneficial, creating a single currency forces a symbiotic relationship between countries. The failure of one nation (Greece, for instance) consequently drags on the economies of those that are thriving, like Germany.
Moreover, a lack of currency competition between sovereign states creates bubbles in the marketplace. With one centralized currency, the signs of a failing economy in a few isolated nations will go relatively unnoticed until a tipping point has already passed. Strong economies like Germany can carry the weight for the entire European Union and the euro, but when a crisis emerges, those same economies of strength are now obliged to bail out the weaker ones.
If the suggested prescription for the European Union is more lending and borrowing, the consequences will be softer money floating around and a devaluation of the euro – hence inflation. Nations that built strong economies are now subject to the collateral damage stemming from irresponsible policies of a few bad apples – all due to currency interdependence.
Craig D. Schlesinger
*co-authored with Craig D. Schlesinger
Attempts to reinforce the certainty of John Maynard Keynes’ economic theories and characterize his critics as illiterate shows a disheartening lack of knowledge while besmirching his greatest intellectual rival and critic: the lesser-known Austrian economist Friedrich A. Hayek. Hardly an illiterate, Hayek won the 1974 Nobel Prize in Economic Sciences and authored the best-selling book, The Road to Serfdom, in addition to other influential works on economics, law, and political philosophy. While we encourage Keynesians to read up on Hayek, we know they wont, so here’s a free lesson…
His differences with Keynes stem from the inevitable knowledge problem suffered by those tapped to centrally plan the economy. No matter the brilliance of technocratic planners, vital knowledge is dispersed throughout millions of market actors, which cannot possibly be attained through central planning committees. Hayek asserted, “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”
The two further disagreed about the state in which markets exist. Keynes believed market economies were entities to be managed and controlled. However, Hayek argued markets exist in an organic state, where individuals come together spontaneously, acting on “the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess,” as reflected in a freely moving price system. Prices then serve as the proper indicator of supply and demand signaling to consumers the true costs of goods and services. Market competition serves as the mechanism for accurate coordination of such a pricing system.
Hayek’s counter to Keynesian stimulus further damages the conventional wisdom of economic thought. Claiming that if natural occurrences like adjustments in partiality or technological change alter prices, market actors would in turn be forced to reestablish the mechanisms in which they organize with others in the marketplace. As the price of goods change, re-organization will occur spontaneously rather than artificially. On the other hand, monetary disturbances (i.e. Keynesian stimulus and the flooding of markets with money by central banks) distort signals by creating unsustainable inflation. As a result, central banks cannot continually ‘ease’ markets with printed money, which in turn perpetuates the boom-bust business cycle. These artificial interventions expanding the money supply are a major driver of America’s financial predicament.
As it currently stands, world economic policies continue to move in Hayek’s direction. Since the fall of the Soviet Union, the vast majority of its former satellite states moved from centrally planned economies to free-market systems – creating prosperity previously unseen. Even China, one of the last stalwarts of socialist-style economic planning, significantly opened its markets and realized massive increases in economic growth and wealth as a result. As societies progress, Keynesian economics continually prove ineffective when compared to the spontaneous order of free markets.
Here is a letter to the St. Petersburg Times:
The case for “a massive stimulus” is extremely flawed (Think big on economy, August 11). We’ve tried this same approach in perpetuity, hoping for different results. The rationale put forth echoes assertions like, ‘the other stimulus wasn’t large enough.’ It didn’t work for Herbert Hoover or FDR, nor has it worked for George W. Bush and President Obama.
Recklessly printing money coupled with “serious tax hikes” will not increase economic output, or create jobs. Accelerating the rate of growth of inflation is the only outcome of major stimulus.
The mechanism for creating jobs and increasing economic growth is to provide a level playing field, with certainty in the marketplace. If the federal government truly desires to tackle our economic woes, it can start by eliminating the income tax on individuals and corporations, and replacing it with a consumption tax.
This simple measure will instantaneously create jobs and increase the rate of growth of investment and savings without eliminating the social safety net for those truly in need.
Craig D. Schlesinger
Here is a letter to the Chicago Tribune:
Suggesting the members of the Federal Reserve are the only “grown-ups” in the room providing “leadership in the storm” is rich with irony (The Fed didn’t blink, August 10). Granted, the Fed’s job is difficult; however, central economic planning is always difficult since it hasn’t worked throughout our nation’s history.
Inflation is not a “distant threat” – it is a perpetual threat. Since the passage of the Federal Reserve Act in 1913, the money supply has been in an almost constant state of expansion. The value of the dollar suffered as a result, losing nearly 90% of its value. The recent rounds of quantitative easing further expand the money supply while achieving no economic benefit as markets continue to slump and growth remains anemic.
Furthermore, the policy of bailout economics is as far from responsible as it gets. Creating trillions of dollars out of thin air to prop up failed institutions is antithetical to free market capitalism by interfering in the natural boom-bust business cycle, eschewing the necessary market self-correction. We are currently experiencing the repercussions – while banks are doing great, the federal government is teetering and the American people bear the burden.
Regardless of any “pressure” on the Fed to take action in the wake of the debt deal, S&P downgrade, and subsequent market reactions, their previous behavior led us down this road. Reckless money printing and manipulation of interest rates will not bring about “maximum employment and stable prices.” Only market demand can determine wages, prices, interest rates, and the like – not the Federal Open Market Committee.
Craig D. Schlesinger