Monday, June 18, 2012

Reading the wrong signals...

...and interpreting them in the wrong fashion.

The following excerpt comes from an "economist" with a book (yes, he forsees "DOOM" in 2013) out and who also helps to run a money management fund.  He benefits from vivid predictions and media exposure.  Probity, accuracy, and intellectual vigor are simply not incentivized behavior.

My comments are in italics.

"Maybe you believe it too. But, let me ask you a question: If having the Fed buy massive amounts of government bonds with printed money, doesn’t create inflation, why don’t we do more of it?

The QE described here is an asset swap with two assets yielding zero (cash) or near zero (treasuries) returns.  This is not "money printing".  And asking a rhetorical question does not prove the opposite of the (unstated) conclusion.  The Fed has its own decision function and self-imposed limitations on its operations.

There are few economist who wouldn't agree that if we eliminated all taxes tomorrow — including corporate and Social Security taxes — while maintaining all federal government spending, that we would boost the economy right out of the current slump and into a period of enormous growth. 


All we have to do is borrow that money instead of taxing it. How do we borrow it? By selling bonds to the Federal Reserve. It’s exactly what we did in the past with QE1 and QE2. With the Fed buying the bonds, it won’t stress the bond markets. They just buy whatever it takes to fund the government each year. No more. No less. 

If you "loan money" to yourself, is that "borrowing"?

Since the deflationists strongly assert that massive Federal Reserve purchases of government bonds (as they have done in the past few years with QE 1 and QE2) won’t create inflation, then what’s the downside? It seems like all upside to me. I don’t like paying taxes and I don’t know many individuals or corporations that do. I also know that getting rid of all taxes will be an enormous boost to the economy. 

Abrogating taxation in an economic upswing or in a period of GDP growth is incredibly inflationary, but please note the distinction between monetary and fiscal policy here.

But we all know in our gut this if a fraud. We all know such money printing will create inflation. There really is no such thing as money from heaven and having the Fed buy our government bonds with printed money is NOT money from heaven. It is the fuel for inflation. 

If it was money creation, it would probably be inflationary in periods of high and increasing GDP growth.  However, the entire planet is mired in a debt-deflation cycle (with very, very few exceptions).  This is not simply giving every citizen $20,000 to spend fresh from the printing press, or using "printed money" to purchase real assets.  Its an asset swap.

Inflation doesn’t start immediately, but that doesn’t mean it doesn’t happen. 

Inflation doesn’t start at a high level, but that mean it won’t get higher. 

The converse and obverse of these statements are equally meaningless.

That’s where we are today — we are far enough along that inflation has started, but it has not gotten to a high level yet. Ask anybody who’s been in an inflationary environment and they will tell you that low inflation is no protection from higher inflation. Low inflation is simply the beginning of high inflation when you are printing massive amounts of money."

Whatever.  The academic literature regarding historic inflation is fairly clear:  low inflation begats low inflation which is punctuated periodically by confluences of bad actors and bad events.  Once again, and asset swap should not be considered "printing massive amounts of money".  The distinction is crucial to understanding the impotence of current monetary policy.

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