1. To continue the discussion of Mr Blinder’s article defending QE2 from it’s critics, he goes on about how wonderful it is to have inflation, if it’s within reason. About 2% is a really good amount of inflation to have every year, he thinks.
This is the official line taken by all the govt mouthpieces. The bete noir is deflation, and inflation is a good thing, at least in small portions. The great Henry Hazlitt did a great job demolishing this nonsense in a free, short readable, informative book [can you tell I like it?], The Inflation Crisis, and How to Resolve It. So we’ll move on.
2. Mr Blinder’s explains that is the perfect right of the Fed to do as it wishes, the rest of the world be damned:
[His words in italics, my comments in normal font]:
…it is commonly assumed that expansionary monetary policy depreciates the currency. That’s why some foreign governments, especially the more mercantilist ones, are apoplectic. What’s down for us is up for them.
Mercantilist? Germany is mercantilist, hey? At any rate this is just irrelevant name calling on his part. If they are right they are right, right?
But calling QE2 “currency manipulation” is a grotesque abuse of language. After all, the U.S. dollar is a floating currency. Many factors, including but certainly not limited to monetary policy, influence the exchange rate, which changes every minute. But the Fed will not intervene to push the dollar down. If the dollar should rise instead of falling, c’est la vie.
Let me get this straight. Since monetary policy is only one of many factors that influence the exchange rate, then it is a grotesque abuse of language to say manipulating monetary policy is manipulating the exchange rate.
OK. So it is a grotesque abuse of language to say that stealing the signals from a baseball team is “cheating”. After all, many thing influence the outcome of a baseball game. Or that taking steroids is “cheating” in any sport. After all, many things influence the outcome of a game.
I guess the author is an economist, not an English professor. So he may be forgiven for his curious definition of “grotesque abuse of language”.
More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn’t even consult with its own government.
Oh, I see. The US is a sovereign nation. And the Fed does not consult the elected officals of that sovereign nation, but does what it pleases. How sovereign are we, then, when a handful of unelected bankers make major policy decisions for us, whether we like it or not?
Also, let’s assume for the moment that the Fed has the “right” to do what it wants. But the USA does not live on a desert island. There is a whole wide world out there which we trade with, or more precisely, which we owe trillions of dollars to. And whose products fill our shelves. We need them. It is the mark of the wise man to listen to his friends before taking steps that will harm them, lest they stop being his friends.
3. Mr Blinder’s next argument is that we can’t have inflation and unemployment together. So accusing the Fed of creating both at the same time is a mistake:
Finally, there’s that old hobgoblin: consistency. Critics tell us that QE2 won’t give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?
Actually, the two usually go hand in hand. Zimbabwe has rampant inflation, and its economy did not get much of a boost. Same with Weimar Germany. And Argentina. And Nixon’s USA.
How does it work? Very simple. The govt always prints money to give to itself and its friends. They thus impoverish most of the private sector, and take away resouces and squander them on themselves, and cause prices to skyrocket. All of it explained nicely in Mr Hazlitt’s book linked to above.
If buying Treasurys [sic] is a weak policy tool, a view with which I have some sympathy, then it shouldn’t be very inflationary.
Before the Fed can buy Treasuries, it needs money in its wallet to pay for the Treasuries. They fill their wallet by printing money [as Mr. Blinder admits explicitly in the article], then they use the money to buy Treasuries.
The inflation comes from the money printing. Giving the money to the govt [buying Treasuries] is a weak policy tool. Well, actually it is a powerful tool of destruction, sucking money out of the private sector ot be wasted by the govt, as explained in our first post on this subject .
There is no magic link between growth of the central bank’s balance sheet and inflation.
No, it’s not magic. It is the law of supply and demand. The greater the supply of paper money, the less it is worth [=inflation].
4. Mr Blinder then exhorts us not to blame the Fed, because it does not operate in a vacuum. It’s everybody else’s fault, he tells us.
People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don’t, we will get neither faster growth nor higher inflation, just more idle bank reserves.
Oh. I get it. If you print the money, but stuff it under your mattress, it’s OK. And that’s exactly what’s going to happen. The govt is going to get all the newly printed money from selling those T bills and will never, ever, ever spend it. And if it does spend it, don’t blame the Fed.
It’s like saying there is no magic link between a meth lab and drug use. People have to take actions–like injecting the drug, snorting the drug, and smoking the drug–to connect the two. If they don’t we will get neither meth addicts nor criminals, just more idle piles of meth lying there useless.
There you have it. Mr Blinder presented a defense of QE2. We have seen its intellectual honesty and perspicacity. And he’s a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, and a former vice chairman of the Federal Reserve.
Makes you wonder about our educational, financial, and govt institutions.