Ron Paul's Foray Into Monetary Education
Paul
argued that given the fact that the Fed had simply created the money to
buy the bonds from thin air, no-one would be hurt by this selective
default. Moreover, he reckoned that this would likely neuter the Fed and
make it less likely to manipulate the money supply in the future – if
it could no longer rely on the treasury honoring its debt, there would
be no point in buying more of it. He also considered the Fed's 'exit'
talk to be spurious: the inflation of the money supply its bond buying
had inaugurated would likely never be reversed anyway (we agree on this
point).
Of
course the proposal was not really meant to be taken serious: rather,
it was meant to highlight the absurdities of the modern-day monetary
system. Paul himself pointed out in subsequent interviews that the
proposal would naturally never be adopted. In short, it was essentially
an educational foray on his part - he wanted to encourage people to think.
Ron Paul has always been an exception among politicians – he regarded
educating people about monetary policy matters as part of his remit.
We
live in an age where a pure credit money is used – a fiat money, that
has been created by stripping money substitutes of their backing by
money proper and imposing 'legal tender' laws. This means that certain
conventions have to be followed by the official engines of inflation,
the central banks, if they want to be successful in their vain (and
dangerous) endeavor to create what they term a 'stable money' (in
reality, 'stability' is held to be an arbitrarily chosen decline in
money's purchasing power of 2% per year. This neither represents
'stability', nor is it even possible to realize such a plan. The
purchasing power of money certainly exists, but it cannot be measured).
These
conventions need to be adhered to in order to hold 'inflation
expectations' in check. As long as a critical mass of individual actors
in the economy remains convinced that the central bank is indeed capable
of guaranteeing a fairly 'stable value of money', it is unlikely that
they will react to inflationary policy by trying to quickly get rid of
their cash balances in the expectation that its purchasing power will
rapidly decline. As a rule, it takes a long time for people to abandon
this misguided faith, but when they finally do, we often get to observe
a discontinuous, sudden change in the money relation.
Anyway,
it is one thing for Ron Paul to employ the idea of canceling the Fed's
bond holdings as a means of educating people, it is quite another when
modern day mainstream economic observers and even policymakers begin to
discuss the possibility in earnest.
The Financial Times Latches on to the Topic
Sometimes the bien-pensants
that regularly supply us with their plans to rescue the economy come up
with strikingly bizarre ideas. The Financial Times is a well-known
staging area for armchair monetary quackery, led by its chief economics
commentator Martin Wolf, whose in our opinion absurd notions we have occasionally addressed in the past.
At least Mr. Wolf is fairly straightforward – instead of hiding behind
technocratic babble and euphemisms, he gives his articles titles that
tell one right away where he is coming from (consider for example: “Why it is right for central banks to keep printing”). What might be considered the 'piece de resistance' in this context has recently been covered in the pages of the FT in an article by Gavyn Davies entitled: “Will central banks cancel government debt?”.
The
article discusses the very proposal Ron Paul has more or less made in
jest (and as a means to educate people) as a policy step that is
receiving serious consideration. To his credit, Mr. Davies informs us
that he is actually not supportive of the idea. He merely reports that
it is an option that a number of people have begun to earnestly debate
and lays out the effects as he sees them (we differ with him on a number
of points regarding 'QE as it is currently practiced', see below).
In
a way, we would actually not necessarily be entirely inimical to the
idea, for similar reasons Ron Paul had in mind: it would no doubt speed
up the inevitable demise of the fiat money system. Although we fear
that the current fiat money system would then simply be replaced by
another one, this is still the only reasonable chance we see for the
conditions that could enable a return to a sound market-based monetary
system to come about. It should be clear that today's political class
and the banking cartels led by the central banks would never consider
the adoption of a sound market-based money voluntarily. Too many
'free lunches' would be at stake for those profiting from the system.
An enormous shift in economic and political power would result.
Governments would have to shrink dramatically and central economic
planners and their myriad advisers and intellectual handmaidens would
all be out of a job. Banks would find credit expansion more risky and
difficult. In short, from the point of view of today's bureaucratic and
intellectual elites, the idea of voluntarily adopting a sound
market-based money is ruled out completely. To them it is undoubtedly
the most toxic subject imaginable.
This
is also why the system as such is very rarely questioned in the
mainstream press or by mainstream economists. It is a topic that is not
even up for debate – everybody proceeds as though it were perfectly
normal that money and interest rates are subject to central planning.
The only debates revolve around how to 'improve on the plan', not on
whether it might actually be better to abandon the plan altogether. If a
mainstream economist were to suggest that central banks and fiat money
should be abolished, it would be akin to farting in church.
So
in this sense, Davies' article may be regarded as one of those 'how the
inflationary policy might be improved' missives (even though he is
personally not in favor of the proposal). It calmly discusses the
possibility that central banks might indeed agree to cancel the
government debt they hold in order to 'ease fiscal pressures' and
'boost the economy'. We will look at a few excerpts from the article in
below and add our comments.
Should Central Banks Cancel Government Debt?
The article begins as follows:
“As the IMF meetings close in Tokyo this weekend, it is obvious that governments are struggling to find the correct balance between controlling public debt, which now exceeds 110 per cent of GDP for the advanced economies, and boosting the rate of economic growth. The former objective requires more budgetary tightening, while the latter requires the opposite. Is there any way around this?”
We
already have a problem with the very first paragraph. Davies asserts
what we regard as a misguided premise: namely that 'loose fiscal policy'
(read: deficit spending) is required to create economic growth.
The government does not possess resources of its own – every cent it spends must be taken from the private sector in one way or another.
The government can not add one iota of new wealth to the economy – it
can only dispose of already existing wealth by taking it from the
private sector. It matters not if this is done by means of taxation or
borrowing – the latter method is merely a means of deferring the former
(we will discuss inflation further below).
In
order to believe that this will create 'economic growth', one has to
believe that government bureaucrats are better at allocating scarce
resources than the private sector. This seems an absurd proposition to
us. Since government bureaucrats are not driven by the profit motive in
their allocation decisions, they have no means of ascertaining the
opportunity costs of their actions. They are faced with a somewhat
milder form of the socialist calculation problem – 'milder' only because
they can observe prices in the market economy and are thus not entirely
groping in the dark. The only sense in which government spending can be
said to add to 'growth' is the fact that it is treated as a positive
contributor to GDP. However, this merely reveals that GDP is a very
flawed measure of wealth creation.
Davies continues:
“One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE). After all, the government and the central bank are both firmly within the public sector, so a consolidated public sector balance sheet would net this debt out entirely.This option has always been viewed as extremely dangerous on inflationary grounds, and has never been publicly discussed by senior central bankers, as far as I am aware.”
There
is a good reason why no central banker has entertained the idea yet, at
least not publicly. The manner in which the banking system is organized
today is inter alia designed to obfuscate the realities of the monetary system. It is important to realize that fiat money is indeed 'backed' by absolutely nothing. In a fiat money system, the bank notes issued by the central bank literally are standard money. Banknotes once were money substitutes, this
is to say they represented a claim to gold held in reserve by the
issuing bank. Their use as money was merely a matter of convenience –
but it was clear that the bearers of such notes could actually redeem
them at any time for what was then considered money proper, i.e., gold
or silver. In essence, such banknotes were simply warehouse claims on
deposited money. Fiat money by contrast consists of bank notes that
have been stripped of this feature: they are irredeemable. Their
'moneyness' has been established by fiat, this is to say, what
renders them the sole legal means of final payment for goods on the
market and the 'discharge of debt, both public and private' are legal
tender laws.
The
'backing' in the form of assets held by the central bank is in this
sense a fiction: no-one can go to the central bank and demand that it
redeem its banknotes for a portion of the assets it holds. However, from
the central bank's point of view, it is important to uphold the vague
idea that 'something stands behind' the money it issues. Moreover, it
uses the assets it holds as the main tools to conduct monetary policy,
i.e., to manipulate interest rates and the size of the money stock. The
much-touted 'credibility' of central banks today rests crucially on the
idea that they can and will take back the money supply inflation
engendered by 'quantitative easing' at any time, 'if necessary' – i.e.,
if the purchasing power of money begins to decline at an accelerated
rate that violates the tenets of the 'stability' policy. The danger that
this could happen is very real, considering the expansion in central
bank credit in recent years and the vast monetary inflation that has
taken place since the end of the great asset mania of the 1990's (to be
sure, a lot of money supply inflation has occurred earlier as well – but
it has accelerated enormously since the year 2000). As an example,
consider US money supply data:
The
broad US money supply measure TMS-2 since the year 2000. (Chart via
Michael Pollaro – for an in-depth explanation of the money supply
measure TMS-2, visit his definitions and references page, where all the required information can be conveniently found in one place) – click chart for better resolution.
It
is worth noting that the broad US money supply TMS-2 has increased by
more than 200% since January of 2000 (from approximately $2.9 trillion
to $8.8 trillion today). Prior to the crisis of 2008, the main driver of
the money supply expansion was the commercial banking system, which in
the course of expanding credit to the private sector created a lot of
deposit money from thin air via the fractional reserve banking
multiplier. The Fed was only passively aiding and abetting the process,
supplying new bank reserves as needed and keeping the federal funds rate
artificially low by means of open market operations.
Since
2008 the role of the Fed has become more active: the policy of
'quantitative easing' has created a lot of new deposit money directly
through the acquisition of assets from non-banks, while vastly
increasing the excess reserves of banks (for details on this process,
readers may want to take a look at two previous articles: “Quantitative Easing Explained” and “The Difference Between Money and Credit”).
The latter are not considered part of the money supply as long as they
remain deposited with the Fed – but they can of course be used as the
basis to create more credit and with it, additional fiduciary media in
the form of new deposit money. The extent to which banks may want to use
their excess reserves for this purpose will largely depend on their
assessment of future economic conditions and their own financial health,
as well as credit demand. The interest rate paid by the Fed on excess
reserves is also an important determining factor.
A
chart of Federal Reserve credit outstanding: since 2008, the central
bank has become the active driving force behind money supply inflation – click chart for better resolution.
Obviously,
from the central bank's point of view there is a not inconsiderable
risk that the extremely large money supply expansion over the past 13
years could lead to a sudden loss of faith in the future purchasing
power of money (it is no coincidence that Ben Bernanke repeatedly dwells
on the subject of 'inflation expectations'). Presumably there is a
threshold at which the ongoing increase in the money supply will no
longer be sufficiently counterbalanced by the increase in the demand for
money that has undoubtedly taken place in recent years. To be sure,
there is no way for us to measure the demand for money. We can
only infer that it must have increased from the fact that economic
uncertainty has been uncommonly high since the 2008 crisis and from the
fact that the the monetary inflation has not yet resulted in a large
increase in consumer goods prices. However, keep in mind that we can
also not ascertain how much lower consumer goods prices would
have been absent the inflationary policy; and it is clear that many
prices in the economy have indeed risen sharply, chiefly stocks, bonds
and commodities. In other words, the absence of large consumer goods
price increases is not evidence of the absence of inflationary effects.
If
central banks were indeed to simply cancel the government debt they
hold, economic actors would likely rapidly lose their faith that
central banks have 'inflation under control'. Here is Davies explaining
why:
“Why is this such a radical idea? No one in the private sector would lose out from the cancellation of these bonds, which have already been purchased at market prices by the central bank in exchange for cash. The loser, however, would be the central bank itself, which would instantly wipe out its capital base if such a course were followed. The crucial question is whether this matters and, if so, how.In order to understand this, we need to ask ourselves why governments finance their deficits through the issuance of bonds in the first place, rather than just asking the central bank to print money, which would not add to public debt. Ultimately, the answer is the fear of inflation. When it runs a budget deficit, the government injects demand into the economy. By selling bonds to cover the deficit, it absorbs private savings, leaving less to be used to finance private investment. Another way of looking at this is that it raises interest rates by selling the bonds. Furthermore the private sector recognizes that the bonds will one day need to be redeemed, so the expected burden of taxation in the future rises. This reduces private expenditure today. Let us call this combination of factors the “restraining effect” of bond sales.All of this is changed if the government does not sell bonds to finance the budget deficit, but asks the central bank to print money instead. In that case, there is no absorption of private savings, no tendency for interest rates to rise, and no expected burden of future taxation. The restraining effect does not apply. Obviously, for any given budget deficit, this is likely to be much more expansionary (and potentially inflationary) than bond finance.”
However,
the central banks have indeed 'printed' the money to buy government
bonds and other assets in their 'QE' operations. Obviously this does not involve the 'restraining factor' of government bond sales to the public as discussed by Davies above. The question is really whether the so far hypothetical 'exit' from these operations will ever take place.
It should be noted here that by buying bonds in the secondary market rather than directly from the government, the inflationary potential of these central bank purchases is mitigated somewhat (for an explanation of this point see the above mentioned article on the mechanics of QE).
Here
is what Davies has to say to the 'exit' question and why he thinks the
'restraining effect' of conventional deficit financing still applies:
“This is not, however, what has happened so far under QE. Fiscal policy, in theory at least, is set separately by the government, and the budget deficit is covered by selling bonds. The central bank then comes along and buys some of these bonds, in order to reduce long-term interest rates. It views this, purely and simply, as an unconventional arm of monetary policy. The bonds are explicitly intended to be parked only temporarily at the central bank, and they will be sold back into the private sector when monetary policy needs to be tightened. Therefore, in the long term, the amount of government debt held by the public is not reduced by QE, and all of the restraining effects of the bond sales in the long run will still occur. The government’s long-run fiscal arithmetic is not impacted.”
(emphasis added)
However, as we have already mentioned above: what makes everyone so sure that these bonds are only 'temporarily parked at the central bank'?
Both the ECB and the Fed have frequently talked about how easy it will
be for them to exit the vast positions they have amassed under their
unconventional policies (the ECB's policies have thus far been technically
slightly different from the Fed's, but have involved just as big an
increase in central bank credit). In practice, they have not only not
'exited' thus far, they have massively expanded their balance sheets
further and have promised to engage in even further rounds of monetary
pumping going forward. The 'exit' talk is just that: talk.
The vast increase in ECB credit (chart via Michael Pollaro) – click chart for better resolution.
Moreover, the money
supply expansion e.g. the Fed has engendered is very real. It would
certainly not make any sense to assert that it has had no economic
effects, regardless of Davies' hopeful and probably erroneous
expectation that “in the long run the amount of government debt held by the public is not reduced by QE”.
Does anyone seriously expect the Fed to actively deflate the money supply at some point in the future? Conceivably the Fed may attempt to reduce excess bank reserves, if the commercial banks started extending inflationary credit again at a sufficient pace to keep the money supply expansion going.
However,
we know from the Bank of Japan's attempt to do just that in 2006 that
such balance sheet contractions enacted by the central bank don't tend
to last very long these days. When the BoJ reduced Japan's monetary base
by 25% almost overnight in 2006, it inadvertently issued a death
sentence for numerous bubbles abroad, as the yen was used as a major
funding currency for 'carry trades'. One of the bubbles it probably
helped to deflate was the US housing bubble (to be sure, US and euro
area money supply growth had also decelerated into the low double digits
by 2006, so there was a marked reduction in the pace of monetary
pumping everywhere). Almost needless to say, the BoJ has pumped its
balance sheet back up again following the 2008 crisis.
In
addition to denying that there are any significant economic effects
stemming from 'QE' type debt monetization (why should there be no
economic effects? If that were true, why would central banks engage in
'QE' at all?), Davies falls prey to another error. This is actually an
argument frequently forwarded by the chartalists as well (or proponents
of 'MMT' as it is called today) – he denies that there is a fundamental
difference between money and credit instruments:
“Note that QE under these conditions does not directly affect the wealth or expected income of the private sector. From the private sector’s viewpoint, all that happens is they hold more liquid assets (especially commercial bank deposits at the central bank), and fewer illiquid assets (ie government bonds). Because this is just an temporary asset swap, it may impact the level of bond yields, but otherwise its economic effects may be rather limited.”
(emphasis added)
Money
is not merely a somewhat 'more liquid asset' than a bond. Money is the
medium of exchange, the means of final payment for all goods and
services on the market. It makes a big difference if the public suddenly
holds more money instead of holding the bonds the central bank has
acquired. A bondholder must first sell his bonds to someone else in the
private sector before he can spend the money invested in them. This
means though that the buyer now holds a credit instrument instead of
money that he can spend (respectively allocate to other investments or
his cash balance). There are in fact a great many economic effects – it
seems to us that they are not exactly 'limited' in scope at all. We
already mentioned the distortion in relative prices that is the
inevitable result of the inflationary policy. In fact, it is impossible
for the price system as a whole not to be entirely revolutionized by an
expansion in the money supply. It is a good bet that nearly every price in the economy is different from what it would have been in the absence of the money supply increase.
Below
is a chart that we have already shown on previous occasions that
documents one of the major economic effects that this price distortion
furthers (admittedly it affords us only a very rough glimpse of what is a
very complex process):
The ratio of spending on business equipment versus non-durable consumer goods production. The
most recent vast increase in this ratio since 2009 denotes that factors
of production have been increasingly drawn toward the higher order
stages of the production structure to the detriment of the lower order
stages – a typical phenomenon of an inflationary boom. It
is also unsustainable: many of the business activities and investments
that have been inaugurated due to the monetary expansion will turn out
to be unprofitable or will lack the resources to be finished. The ratio
will eventually turn down again when these errors are revealed and the
next bust ensues – click chart for better resolution.
Davies
appears to assume that because the public is supposedly expecting 'QE'
to be reversed at some indefinite point in the future, the additional
money the central banks have created from thin air will simply be
'hoarded' and thus remain 'idle' and fail to affect prices and the
economy. This may be true to some extent for commercial banks that are
depositing their excess reserves with the Fed and have been very careful
(but not as careful as one might think) about increasing their
inflationary lending since the crisis (even so, the amount of uncovered
money substitutes created by private banks in the US has increased by
14.9% over the past year, which indicates that the banks are no longer
shy about once again expanding credit). Obviously though, everyone will
allocate additional money income according to their subjective
preferences, and it would be quite strange if all those on the receiving
end of the Fed's largesse simply decided to hold on to their larger
cash balances and not allocate some of the money to consumption and
investment (of course this does not alter the truism that all money in
the economy is always held by someone. The question that is
relevant to our deliberations is whether the demand for money has
increased to the same extent as its supply). In fact, there are
numerous indications (inter alia the developments depicted in the chart above) that show that this has not been the case.
Davies further:
“Now consider what would happen if the bonds held by the central bank were canceled, instead of being one day sold back into the private sector. Under this approach, the long-run restraining effect of bond sales would also be canceled, so there should be an immediate stimulatory effect on nominal demand in the economy. If done without amending the path for the budget deficit itself, this would increase the expansionary effects of past deficits on nominal demand, and would also reduce the outstanding burden of public debt associated with such deficits.”
It would be better to say that there would be an immediate additional
'stimulative effect', as money would likely become a 'hot potato' under
these circumstances. A crack-up boom would become a near certainty.
Furthermore, governments would definitely use this opportunity to
increase their spending (we don't think an alternative path is worth
considering; their deficit spending record to date speaks for itself).
Davies then leaves us with an ominous sounding warning:
“Furthermore, the effects would be increased even more if, instead of just canceling past debt, the central bank were to co-operate with the government, agreeing to directly finance an increase in the budget deficit by printing money. We would then be genuinely in the world of “helicopter money”, with no pretense of separation between fiscal and monetary policy.Outside of wartime, developed economies have not been normally been willing to contemplate any such actions. The potential inflationary consequences, which are in fact signaled by the elimination of central bank capital which this strategy involves, have always been considered too dangerous to unleash.For me, that remains the case. But others are more worried about deflation than inflation. This genie might soon be leaving the bottle.”
A few more comments are in order here. First of all, neither the Fed nor the ECB or the BoJ can simply “agree to directly finance an increase in the budget deficit by printing money”
(it might be different in the UK, we are not certain on this point).
This would actually require a change in the law. However, there is
nothing that keeps these central banks from expanding their purchases of
existing government debt in the secondary markets (except for the BoJ,
which is required by law not to hold JGB's in an amount exceeding
currency in circulation; however, the BoJ these days buys all sorts of
assets, not only JGB's). As to the 'inflationary consequences', we
reiterate that it is erroneous to assume that no inflationary
consequences have already been set into motion. They clearly have and we
have grave doubts that the planners will ever find it opportune to
reverse them – as that would involve the kind of economic pain their
policies are seeking to forestall (actually, they seem to think that it
can be averted forever, which is erroneous as well).
Rather,
in the event that the proposed course is followed – a cancellation of
the bonds currently held by central banks that would clearly cement the
money supply increase to date and a pledge to monetize future government
deficits as well – we should not merely begin to worry about
'inflation' in the sense of a somewhat more vigorous decline in money's
purchasing power than has been observed hitherto. Rather we should then
worry about hyperinflation – the complete breakdown of the monetary
system (for readers interested in our thoughts on hyperinflation, here
is a past article on the topic).
We are not sure whether Davies' assessment that the 'genie might soon leave the bottle'
is correct – but it is not totally inconceivable. Imagine for instance
that CLSA's well-known bearish analyst Russell Napier turns out to be
correct and a major 'deflation scare' develops in the near future (according to this interview,
Napier still expects the S&P 500 index to eventually fall to a mere
400 points). How would governments and central banks react to such a
development? It is certainly true that e.g. Ben Bernanke's biggest worry
is deflation, not inflation. According to his own words he is
firmly convinced that the Fed will always be in a position to get an
unduly fast increase in prices under control with ease. He is far more
concerned that 'deflation might become entrenched' (see his 2002 speech)
unless it is countered in a timely and forceful fashion (never mind
that there hasn't been any noteworthy monetary deflation since 1932).
How
would the Fed top what it is already doing, namely 'QE without a time
limit'? Surely a decline in asset prices on the order envisaged by
Napier (even a smaller one as it were) would give the authorities plenty
of reason to panic. The hue and cry for even more extraordinary
measures than have been implemented to date would become deafening. The
Fed would certainly not be averse to priming the pump even more (unless
the markets balk and send interest rates much higher – that would make
the decision a great deal more problematic) – after all, we already know
that it does not believe that its own actions have actually contributed
to the economy's weakness.
However,
this is precisely what has happened. This can not only be shown by
means of correct economic theorizing. The empirical evidence to date
appears to confirm what theory tells us to expect: the Fed's incessant
monetary pumping has weakened the economy structurally, by inducing
massive capital malinvestment, capital consumption and a weakening of
the pool of real funding. Perhaps someone should ask Ben Bernanke at his
next press conference why a more than 200% expansion of the money
supply since the year 2000 has yet to produce a sustainable economic
recovery (we obviously do not regard the phantom prosperity of the
housing bubble era as having represented a 'sustainable recovery').
Could it not be that the policy is simply totally misguided? This is
what would occur to us, but it has yet to occur to the Fed chairman
and most of his colleagues, not to mention a great many 'leading lights'
in the economics profession.
As
an aside, Davies' benign assessment of 'QE' may be based on the
experience in the UK, where the BoE's asset purchases have failed to
ignite further money supply growth, in spite of a vast increase in its
balance sheet (the BoE now holds 25% of all outstanding gilts).
Apparently private sector deleveraging has trumped the attempt to create
inflation in the UK, with banks unwilling to lend and putative
borrowers unwilling to borrow. The BoE may therefore also be more easily
persuaded to step up its interventions.
UK
money supply aggregates – stagnating since 2009 in spite of the BoE
having bought 25% of all gilts outstanding – click chart for better
resolution.
Lastly, we leave you with a pertinent quote by Ludwig von Mises as to what to expect when the 'genie is leaving the bottle' as Davies has put it (the quote is from Human Action, ch. XVII):
“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796 and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last forever.”
(emphasis added)
And this dear readers is why all the smug assertions by our modern-day central planners that they 'have things under control' and the debate over whether they should be engaging in even more extreme inflationary monetary experimentation are so dangerous. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially. It is however not enough to consider only the superficial picture in economics. As Bastiat said (in 'That Which is Seen and That Which is not Seen'): “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon; to be acquainted with it is to embrace in thought and in forethought the whole compass of effects.”
Charts by: Michael Pollaro, St. Louis Fed
No comments:
Post a Comment