The Road to Ruin
by Pater Tenebrarum
Most stories about central
banking and central bankers in the mainstream financial press follow a certain
pattern. For instance, the idea that these central planning institutions may
not only be superfluous but may be downright harmful is considered utterly
beyond the pale of debate. The only topics falling within 'allowed' discourse
are discussions about various plans (should there more money printing?
More forward guidance? Bla, bla, bla…), while the literal impossibility of
central planning is simply ignored.
In the US, the economics
profession has been thoroughly bought off by the Fed to boot (for details, see this article), so not a peep of
fundamental critique will ever emanate from it, with proponents of the Austrian
school representing the lone exception to this rule.
As the age of unanchored pure
fiat money has progressed, central bankers, instead of being tarred and
feathered and run out of town for the ever greater boom-bust cycles, the
growing inequality, and the stagnation of real incomes their policies have
produced, have increasingly begun to be hailed as the equivalent of superheroes
in the media propagating the statist quo.
Once they were thought of as
gray bureaucrats, whose main job it was to 'take away the punch bowl just as
the party gets going', as former Fed chairman William McChesney Martin put
it. However, once the system had been set on a course of unfettered growth in
credit and fiduciary media following Nixon's gold default (the 'temporary'
suspension of the dollar's gold convertibility that has become permanent without
an announcement to that effect), it soon became impractical and
impolitic for them to 'take away the punch bowl'.
Even Paul Volcker, whose job
it was to rescue and preserve the fiat money system, implemented a tight policy
for only about two years as measured by developments in the true money supply.
Once those two years had passed, money supply growth received its biggest
year-on-year goosing of the entire post WW2 era – yes, under the 'tough' Mr.
Volcker. However, the medicine of high interest rates he had prescribed for a
while, did succeed in rooting out malinvested capital and as a
result, the economy was on a fairly sound footing at the time. Unfortunately,
on account of credit expansion starting to run wild thereafter, this situation
didn't last long.
US money TMS-2, with quarterly
and annual change rates, showing the brief tightening by the Volcker Fed and
the subsequent record annual increase in the money supply, which at one point
surged by 45% in a single year, with quarterly annualized change rates peaking
at 165%! - click to enlarge.
Since Alan Geenspan's post
1987 crash intervention, the main job of central banks seems to be to spike the
punchbowl at every opportunity, which has paved the way for a credit expansion
of truly historic proportions. As a result, the fractionally reserved banking
system is continually dithering on the edge of an abyss, and ever greater
expansions of money and credit have come to be perceived as the only 'solution'
to crises. It is testament to the moral and intellectual bankruptcy of the
centrally planned fiat money system that this has become its sole perspective.
Although there are differences
between various individual central bankers – there is no doubt a vast gulf
between e.g. William McChesney Martin and Ben Bernanke – it needs to be
kept in mind that it is the institution as such that is the problem.
Economists, regardless of which school they belong to, will almost to a man
assert that price fixing is a bad idea, but will fall silent when it is pointed
out to them that this is precisely what the Fed is doing. Somehow, money is
held to be an exception.
Since most economists in the
mainstream are hopeless empiricists, it required the collapse of the Soviet
Union to convince a number of them that central planning of the economy really
doesn't work. Until shortly prior to the moment when the utter bankruptcy of
the communist system was revealed for all to see, a great many Western
economists remained convinced it would one day overtake capitalism and were
musing not about whether, but how much socialism we should adopt. Many of these
worthies continued to infest academe and policy-making circles as though
nothing had happened after their deluded worldview had been so unceremoniously
shattered. Still, the fact that a socialist command economy cannot work – a
fact proven theoretically by Mises in 1920 already – finally was grudgingly
accepted by nearly all of them.
And yet, the majority of
economists to this day pretends that central banks and their activities are
magically exempted from the laws of economics. And yet, it is
simply not possible for a gaggle of bureaucrats to determine what the 'correct'
level of interest rates or the what the 'proper size' of the money supply
should be. The belief that such a system works is just as misguided as it was
to believe that Soviet central planning was superior to a free market economy.
Regardless of the acumen and intentions of the bureaucrats entrusted with
central banking, the result can only be economic distortions and outcomes that
are vastly inferior to market-determined ones.
Genuflecting Before the New
Chief Central Planner
The bizarre adulation of
central bankers in the mainstream media has reached fresh heights of absurdity
following the nomination of Ms. Yellen to the post of Fed chairperson. We
have e.g. Ambrose Evans-Pritchard gushing “Rejoice: the Yellen Fed will print money forever to
create jobs”. Reading through his screed one may be excused for mistaking it for satire
at first glance – but he actually means it. We quote:
“The Fed will be looser for longer. The FOMC will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way. No Fed chief in history has been better qualified.”
(emphasis added)
Yes, there really is not even
a pause for breath between the highlighted non-sequitur at the
end the end of the above paragraph and the rest. Acting without regard to “asset
bubbles and collateral damage along the way” is considered the hallmark of
the 'best qualified' Fed chief by AEP.
After acquainting us with her
rather boring sounding career as a life-long bureaucrat who has evidently not
the foggiest idea what it means to run a business or otherwise be active in the
part of the economy that produces the wealth she is about to help
squander, AEP concludes that:
“You could hardly find a safer pair of hands.”
Whatever that is suppose to
mean. Her “lodestar”, we learn, is NAIRU:
“When the rate is above NAIRU, she is a dove: when below, she is a hawk.”
Apparently the 1970s never
happened. This invocation of NAIRU is like a grunt from the grave. We advise
readers to take a look at the aptly named paper “The Death of the Phillips Curve” (pdf) by William Niskanen,
which begins as follows:
“There is no evidence of a Phillips curve showing a tradeoff between unemployment and inflation. The function for estimating the non-accelerating inflation rate of unemployment (NAIRU) has been incorrectly formulated. Indeed, the unemployment rate is a positive function of the inflation rate with a lag of a year or two.”
(emphasis in original)
And of course, in the face of
the US true broad money supply having inflated by 230% since 2000 and almost
82% since 2008, AEP confides his personal conviction that:
“The greater danger is still deflation.”
In some parallel universe
perhaps.
At the end of his article,
there is a brief flicker of hope that the man may not have gone completely off
the rails just yet when he notes:
“We are surely past the point where we can keep using QE to pump up asset prices.”
Right, although one is tempted
to ask: who the hell is 'we'? But anyway, it turns out AEP wants
even more crazy interventionism, not less. The man is evidently a statist through
and through:
“My view is that emergency stimulus should henceforth be deployed only to inject money directly into the veins of the economy as an adjunct to the US Treasury, by fiscal dominance, as deemed necessary.
That would take an intellectual revolution. Is Janet Yellen game for such incendiary ideas? Perhaps.”
Well, if that's the
'solution', why not go a decisive step further and hop-skip directly to a
full-scale command economy? As we have pointed out before, command economies
never have unemployment problems – everybody gets to pretend they're working.
Frankly, we find AEP's incessant screeching for more money from thin air
and more Staterather revolting by now.
Mrs. Yellen's preoccupation
with employment is also discussed in this portrait at Bloomberg (we urge readers to
watch the video at the beginning of the article showing excerpts from her
speeches).
It inter alia contains
this paragraph:
“[...] Yellen may be less worried than some of her fellow FOMC participants about the cost of further expanding the Fed’s $3.75 trillion balance sheet. In a March speech, she listed four potential risks a rising balance sheet might entail: It could impair market functioning, create difficulty in removing stimulus, lead to balance-sheet losses when assets are sold, and pose risks to financial stability, such as inflating asset bubbles or driving investors into high-yield investments of lower credit quality. She dismissed all of them.”
(emphasis added)
Essentially, Mrs. Yellen's
outlook appears very similar to that of Narayana “Havenstein” Kocherlakota,
which werecently discussed in detail.
The entire approach is putting
the cart before the horse. Employment does not magically create economic
growth. It is the other way around: economic growth creates employment.
Genuine, sustainable economic
growth can however not be achieved by money printing, deficit spending or any
other interventionist measures undertaken by the government. All that can be
achieved by these 'to hell with the risks' interventions in the economy are
temporary sugar highs like the Nasdaq bubble or the housing bubble. They
certainly 'feel good', even while capital and wealth are squandered and
consumed, but they are invariably followed by profound and ever bigger crises
when the errors of these artificial booms are discovered.
We have come across yet
another exercise in Yellen adulation at Bloomberg, written by Mr. Justin
Wolfers, an economist whom we haven't heard about before, but who is evidently
not averse to interventionism and probably thought the nomination offered a
good opportunity to suck up to power a bit (maybe he writes out of a genuine
conviction that loose monetary policy 'works', but one should never lose sight
of the fact that the Fed liberally showers grants on its favored apologists in
the economics profession). Mr. Wolfers' article is entitled “Why I'm Very Happy About Janet Yellen”. The only thing one is left
wondering about at the end of his paean is why he hasn't yet proposed her to be
considered for sainthood.
At one point he remarks that:
“The unemployed should rejoice that they have a powerful advocate willing to battle the hard-money types willing to consign them to the economic scrap heap.”
There is an excellent
commentary on Mr. Wolfers' article at the Daily Bell, where the above sentence has
inspired the following imagery:
“One can actually imagine a French romantic painting along these lines: Indigent and ragged US citizens stretch out their arms, pleading as the authorities clatter by on big, armored horses, their gilded capes flapping in the breeze.”
Whether Mr. Wolfers realizes
it or not, had the 'hard money advocates' been listened to when it mattered
(there were plenty of opportunities throughout history), we would not be in the
mess we are in. Never mind that such hard money advocates are rare as hen's
teeth in both academe and the corridors of power nowadays, so the 'danger' of
them getting a hearing is vanishingly small anyway.
At one point Mr. Wolfers even
asserts that now that Ms. Yellen is Fed chief, he is “reassured that the
future of my daughter is in good hands”. This strikes us as a slightly
premature conclusion, to put it mildly.
By the way, we don't doubt
that Mrs. Yellen is sincere and actually believes what she professes to believe
– in other words, she is seriously deluded. By all accounts, she seems to be a
nice person though. So we have a nice and 'humble' person leading an
institution that is clearly a danger to civilization. What a relief! Meanwhile,
all the gushing praise for her academic work on labor markets seems a tad
exaggerated to us. She and her husband wrote a 'famous paper' that basically
concludes that workers tend to be happier when they get paid more rather than
less. Well, duh.
Apparently she has yet to hear
about Henry Ford, who decided to raise the pay of his workers because he
figured it would make them more productive. Almost needless to say, we think
such studies are a complete waste of time. In an unhampered market economy
there would be no involuntary unemployment and the remuneration of workers
would reflect their productivity. Entrepreneurs are not stupid with regard to
the feedback loops involved (as Mr. Ford showed), and labor is a scarce
resource employers must compete for. In a free unhampered market economy there
would really be nothing to write papers about in this context – all that
needed to be said on the topic has been said long ago already. Of course
Mrs. Yellen clearly does not believe in the power of an
unhampered market economy to provide employment for all who want to be
employed. From the Bloomberg portrait:
“Yellen, 67, voices confidence in the ability of monetary policy to stabilize output and boost employment when capitalism fails, a view she shaped under the late Nobel laureate James Tobinat Yale University in New Haven, Connecticut, where she obtained her Ph.D.”
Color us unsurprised that she
studied under a Keynesian economist who had the dubious distinction of having a
tax named after him (a tax misguided EU governments now want to introduce in
spite of its well-documented history of wreaking untold harm).
The fact that the swill about
capitalism 'failing' and the alleged need to deploy the helping hand of the
printing press to 'correct' such 'failures' are part of her core beliefs is in
the end all one really needs to know.
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