“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
– Murray Rothbard
I keep trying to find the wisdom in the manipulation of money and credit, but I am having lots of trouble.
From Ludwig von Mises, “Lower Interest Rates by Law,” Mises On the Manipulation of Money and Credit [my comments in brackets]:
Once the government stops increasing the quantity of dollars artificially or even slows down the rate of artificial increase in the quantity of dollars, producers supplying goods and services to the spenders of newly created unearned dollars lose a large number of their customers. They must layoff men and women and there is a recession or depression–until production is adjusted to supplying only those with earned or save dollars to spend.
Under present policies, the government is continually faced with deciding whether to inflate artificially the quantity of spendable dollars or permit market forces to readjust the economy. [They always now choose the former then say they had “no choice.”] If free and unhampered market forces are permitted to emerge, free-market prices, wage rates and interest rates will quickly redirect the economy toward a more efficient satisfaction of all those who contribute toward production. Those who had spent newly created dollars will have to curb their spending or earn the dollars they spend. The available supplies of workers in capital goods will be quickly redirected toward producing solely for those spending dollars they have earned or saved in the service of their fellow man. [Real wealth…in other words…]
In short, when Federal Reserve officials lower interest rates artificially, they send a part of the economy [Financial Economy] off on a spree at the expense of the nation’s workers and savers [The Real Economy i.e. hedge fund managers get richer while Joe Sixpack gets poorer.] The spree can only be continued by an ever-increasing inflation of the quantity of spendable dollars. [Read…QE1….QE2…QE3…]
If we want to end that inflation and all its undesirable consequences [huge financial market bubbles that do have a more powerful negative impact on the downside], we must permit the free market to determine interest rates as borrowers compete for the real savings made available by those willing to reduce the potential spending temporarily for a price, commonly called interest. [Rates at which savers are willing to take to have their savings used instead of mandated artificially low rates.] Only freely determine interest rates, without any artificial manipulation or control of the quantity of dollars, will eliminate the inflation problem from our economy [which I think is embedded in financial assets].
I keep questioning whether Fed Chairman Bernanke has crafted a brilliant strategy or if yesterday’s announcement of free money for major institutions for as far as the eye can see represents total desperation in the hallowed halls of the Fed. I think you know what side of this argument I am leaning toward.
First, I think the Fed follows, not leads, the market in terms of policy. And secondly, I think Ludwig von Mises was a bit smarter than Ben Bernanke.
There are other alternative thoughts, for example:
Ben is secretly President Obama’s re-election campaign chairman
Ben privately operates a hedge fund and/or has lots of friends who do
Ben actually believes it is more important to juice financial assets than worry about the real economy
Ben believes the same policy that seems to have done little for the real economy (QE1 and QE2) will now create some positive feedback loop from the financial to the real economy now that banks are somewhat “healed”
Ben likes the outcome of Japan’s Zero Interest Rate Policy (ZIRP) which only led to about 20-years of deflation
Ben thinks pushing up the value of the euro will help the Eurozone so European banks can swap fewer euros for more dollars to cover dollar funding needs, forgetting we have seen this movie before and it is called ‘massive reserve accumulation’ instead of ‘lending’
Ben thinks a lower dollar will help exports despite the fact there is not much demand out there anyway, in a world of deleveraging and below-capacity growth
Ben doesn’t believe there are any limits to monetary expansion
Ben doesn’t worry that the theory of low rates forcing consumption is total hogwash in the real world; especially as the demographics of those living off their interest payments rises along with real economy fear.
Ben knows the economy will get no help from the Federal government so why not just admit it
Ben believes in Hail Mary passes
And we end with Mr. von Mises, “Any interference with free market interest rates must upset the economy and produce results that all honest and intelligent people consider undesirable.”
Are we getting closer to those monetary expansion limits which intelligent people can recognize? I don’t know. I keep thinking yes but being proved wrong. Uhggg …