Greg Mankiw defends inflating the money supply

If you thought that central banking could get ridiculous, just wait. Greg Mankiw who was the chairman of Bush’s Council of Economic Advisors, wrote the following piece of nonsense in the New York Times:

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

This is effectively proposing that the Fed steals your money. Great policy proposal. Sounds like a bad joke to me.

Sadly, the bad jokes continue:

If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Gee! That sounds like the best way of stimulating the most productive sectors of the economy!

Utterly pathetic.

I have a feeling that Greg Mankiw also has a secret formula for turning lead into gold that he is hiding from the rest of the world.

Hat tip to Michael Shedlock.

The central bank only has one weapon: printing money

Following some more nonsense (0.25% lending rate?) from the Bank of Canada, somebody at The Globe And Mail presents this as new weapons. New weapons? The central bank only has one weapon: the money supply.

The Bank of Canada noted that “comprehensive programs” are now in place that should bring life back to credit markets, although “the challenge now is to ensure their rapid and effective implementation.”

Here we go again: “Canadians need credit! Canadians need credit!” is the government mantra.

I do not believe Canadians need credit. I believe Canadians need money. There is a huge difference between the two. Canadians work and earn their own money. After earning it, Canadians need to be able to keep it. The problem is that the government consistently takes some of their money away. So, as far as I am concerned, this monetary policy is nothing more than a direct subsidy to the lenders above anything else. I find the “Canadians need credit!” mantra to be the height of duplicity coming from a government who systematically takes money from Canadians.

The banks can lend people money at lower and lower and ever lower interest rates all they want. Unfortunately, more credit will never guarantee that these loans will magically create ongoing productivity. Cheap credit will subsidize malinvestment as much as it will subsidize ongoing investment. I think that the predicament we face right now is that the balance between the two has tipped towards malinvestment and too much uncertainty.

More cheap loans will only redistribute purchasing power from the poor (i.e., people who do not qualify for cheap loans or who have to use pay-day advance services, etc.) to people who should otherwise save their money before spending money they do not have.

Mr. Flaherty and Mr. Carney, stop prolonging this recession and let markets adjust to the modern economy — that includes the money markets. If Canadians really need credit as you guys keep saying, let Canadians keep more of their own money and lend it to themselves. That means you guys should be promoting public expenditure and tax cuts. Stop printing money, too.

US auto bailout: malinvestment, the failure of Keynesianism

John Tozzi of Business Week asks a good question:

As Auto Deals Add Up, Will Buyers Bite?
A fast-growing package of incentives is slashing the prices of GM, Ford, and Chrysler vehicles. But wary would-be buyers still may not take the bait

That is all you need to read, though. Do not bother with the rest of the article. His analysis does not really matter. We know what is going to happen. Not enough people want to buy these cars.

We are experiencing a great example in the failure of Keynesian theory. Unfortunately, the tax-payer is paying for this nonsense. Here we have the American government trying to “stimulate” the economy of a particular industry. Yet, every American knows damn well that the industry is failing. The end result of the government’s intervention is a delay of the inevitable and an encouragement of malinvestment. This prolongs the recession.

The government does not even have to intervene. With the hope of gaining corporate welfare, cronies will still seek a bailout. The government just has to hint that it will intervene and this will exacerbate the recession.

I might be wrong. Through some miracle, the American auto makers might avoid bankruptcy. At which point the confused socialist (or the crony capitalist, whatever you want to call him) will point to the success of Keynesian economics. My next question is this: What kept the auto makers from offering these great deals before? The answer is Keynesianism.

The psyche of the auto makers incorporates a sense of entitlement from the government. The auto makers are not the only ones like that. Most industries have their fair share of cronies.

Confusion for G20 Summit is a blessing in disguise

It seems like the crony capitalists leading the G20 Summit are confused too. They are calling for a vague hodge-podge of stimulus spending and regulations. I particularly admire the French Threat to walk out of talks.

“He seems to be grandstanding,” said James Walston, professor of politics at the American University in Rome. “They want regulation, but in one day they’re not going to come up with a solution. They will come up with principles that their finance ministers will then have to work on.”

All of this confusion is a blessing in disguise. Efforts to stimulate the economy is a fool’s game at best and an abuse of power at worst. The best thing that can happen is continued stalling in all of these economic interventions.

This summit will pass. The economic depression will pass. People will look back on this episode and will not be able to associate any of these efforts to stimulate the economy with how the economy pulled out.

In the future, the study of econometrics will be tossed into the bin with alchemy and astrology.

“Print money!” – reads just like communist nationalization

Will Hutton from The Observer says that the Bank Of England should print money, create price inflation, nationalize banks and create “good” banks:

Yet to get to such a hopeful point, the cash injected into the system in the months ahead has to be lent, spent and not hoarded. Here the government has to make three more major moves. It has to create some “good” banks fast which will close the gap left by the flight of foreign banks; it should create a National Infrastructure Bank, a Housing Bank and Knowledge Bank, all of which can raise cheap finance by Bank of England purchases of their debt. Then it has to create some demand for loans.

Maybe Hutton has a secret potion that can cure A.I.D.S., fight world poverty and stop the war too!

Flaherty’s stimulus is a total mistake

Talk about the under-statement of the year! The whole stimulus is a mistake.

Greenspan makes a plea for crony capitalism

Greenspan, “who for decades was regarded as the high priest of laisser-faire capitalism,” now makes an about-face and throws a buoy out to corporate welfare:

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

I do not think that cronyism can get less subtle. Some guy thinks that Greenspan “seems to be changing his views incrementally.”

Of course, Greenspan is never going to assume any blame for inflating the money supply. Here is how he deflects things:

Responding to questions after the speech, Greenspan blamed insufficient regulatory oversight in part for failing to recognize the degree of risk that was accumulating in the banking system.

‘Behind the Curve’

“The regulatory structures, especially internationally, were way behind the curve,” he said.

He is just singing the same old socialist song: any problem is a result of a lack of regulatory oversight blah blah blah. That is what the socialists want to hear. We need more government.

Well, Mr. former-Chairman of the Fed, did those regulatory structures just creep up on us all of a sudden? I think not. Even if a lack of regulatory oversight is the source of the problem, it is still your fault. You should not have been so loose with the money supply. The source of the problem is the printing of money which fuels malinvestment.

This is an astounding economic experiment to witness. Unfortunately, we have to endure it. This must really confuse the socialists. On the one hand, they are getting their state control in the financial market but on the other hand, it is the rich crony elite who are benefiting and not the proletariat. God help us! Are the Americans just making economic policy up as they go along? Throwing money around willy nilly until the only strategy left is to nationalizing the banks! Cui bono?

Have no fear: The economy can rebound without any bailouts!

I am really getting bored of all the socialist nonsense that is coming from both the right and the left. Robert J. Samuelson spews some misleading pessimistic absurdity in his latest Newsweek article:

The Bailout Isn’t a Morality Play
Inept bankers may not deserve help, but that’s not the point. If the financial sector isn’t revived, then the economy will stay depressed.

There really is no point reading any of his article unless you are bored or you want to prove me wrong. The headline is an adequate summary of his opinion and there is nothing in the article that substantiates it.

Money is simply a medium of exchange that also has its own flexible price. Thus, inflating the money supply can only aggravate any economic recovery by creating misleading signals of valuation in the interim of any market adjustment. If there is any hope of the economy rebounding, it will ultimately be due to a market force in spite of monetary inflation. Buyers will have found value in what sellers have to offer. No more and no less. Inflating the money supply will never create value out of thin air.

I can not understand how people can simultaneously believe that the American economy requires money inflation to survive a recession while recognizing flexible prices for money. If we were talking about any other market adjustment, we would simply say: “Prices will adjust to reflect bidding.”

The sad reality is that the money market is not like any other market due to the coercive monopolization of its supply. The money lenders get new money first before it cycles through the economy, increases demand and leads to price inflation. The timing of when you get the money puts you at a bidding advantage.

One more thing: the bailouts are most certainly a morality play. What other justification is there to support them??

Flaherty resurrects Keynesian PR stunts to deal with the economy

When all else fails, pull out the pathetic old Keynesian treatment plan: spend, spend and spend! Build roads and bridges and trains! Dig holes! Fill holes! Re-dig holes! Re-fill holes!

Are politicians ever going to learn? Is the public ever going to learn? The money has to come from somewhere. You have to wonder, if you can spend your way out of a recession, why wait until you are in a recession to spend on these projects?

These infrastructure plans are not meant to pull the economy out of a recession or out of the “economic crisis” as we now call it. We are only told that because, well, to make us feel good and because we want to believe it will work. We just refuse to accept inaction. With enough time, most Western countries pull themselves out of a recession anyway and so the public thinks the “stimulus” at least helped attenuate it — like the public would know the difference.

The only real solution to dealing with a recession is precisely for the government to do nothing. Regardless of what metric you want to use, the bottom line is that a recession is a massive mis-allocation of resources in an economy. Government intervention can only prolong such mal-investments by chosing winners and losers. We are seeing it unfold in the auto sector right before our very eyes. I wonder what mystery of the world must be uncovered to demonstrate that government bureaucrats are capable of determining the proper allocation of resources at a time when everybody else in the economy has failed to determine it themselves.

The sad truth is that the politicians are just pulling out Keynesian tools to placate the public. At best, these “stimulus” packages are bread and circuses. At worst, they are political opportunism to re-distribute wealth.

Bernanke keeps flooding the money market

When the price of the US dollar is approaching zero, the Federal Reserve Chairman, Ben Bernanke reveals a bitter truth about the futility of monetary policy:

The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said yesterday in his speech. While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” he said.

Maybe eventually — after the Fed prolongs the recession and fuels malinvestments — more Americans will wake up to the fact that inflating the money supply is not about stimulating the economy nor about helping the public. It is all about giving new money to the banks first. In Canada, monetary inflation goes unnoticed or without debate.

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