"Janet Yellen … constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise—-to magically expand beyond what the free market would generate on its own steam.
In a fit of professorial arrogance, Bernanke even had the gall to call this the helicopter money process. His contention was that the rubes on main street would happily scoop up the falling bills and coins and soon “spend” the economy into a fit of expansion. In other words, according to Bernanke the essential ingredient in economic life is money demand, which is a gift of the state’s central banking branch, rather than production, savings, innovation and enterprise, which arise on the free market in consequences of millions of workers and businesses pursuing their own ends.
Indeed, under Keynesian dogma the latter can be taken for granted; the supply of labor, enterprise and output is automatic and endless until an ethereal quantity called potential GDP is fully realized. To achieve the latter requires that the state dispense exactly the right level of money demand so that the rubes on main street will not stubbornly remain poorer than they need be. This unhappy estate happens, of course, owing to their inexorable propensity to withhold the production and enterprise of which they are capable (i.e. keep plants idle and labor unemployed).
Stated differently, under Yellen’s primitive bathtub economics there is no possibility of inflation unless the central bank mistakenly over-dispenses money demand to the point where actual GDP and the job count overflows potential GDP and the full-employment of labor. Needless to say, we can trust the experts in the Eccles Building to stay on the safe side of this potential GDP divide—-an invisible boundary which can only be seen and calibrated by economics PhDs.
Once upon a time the world knew better. The pre-Keynesian rule was that when central banks hit the “buy” key they always and everywhere create monetary inflation. Ordinarily that resulted in the inflation of credit, which, in turn, caused prices to rise—whether of commodities, services, wages, real estate or financial assets like stocks and bonds.
[And] the problem with monetary inflation—a process that has taken the Fed’s balance sheet from $200 billion when Greenspan took office to nearly $4.4 trillion today—is that its deformations, distortions and malinvestments are cumulative. Worse still, owing to the “recency bias” of players in the Fed’s financial casino, increasingly outlandish pricing errors are taken for granted. They are viewed as part of the bubble landscape, rather than as a screaming indictment of the monetary inflations’ insidious results.”
David Stockman, "California Housing and the Bubble at Hand"
So if you want to know why there are exceedingly dark clouds gathering on the economic horizon just consider some of their [Federal Reserve officials’] answers and the reasoning behind them. Until recently, a majority of our monetary plumbers in the Eccles Building believed that the ideal long-term Federal funds rate was around 4% in a “well balanced” macro economy where inflation is about 2% and unemployment is about “low” around 5.5%.
Of course, every one of these three magic numbers are perfectly arbitrary, academic and silly. Due to the structural failures of the US economy owing to decades of destructive Washington policies, the “unemployment rate” today is not remotely comparable to what was being measured in the 1950s and 1960s when today’s Keynesian theology with respect to the Phillips Curve, Okun’s Law and full-employment policy was being formulated.
Today there are 102 million adults not holding jobs, for example, but only 43 million of these are retired on OASI (social security) and just 11 million are counted as officially unemployed. At the same time, there are upwards of 40 million part-time job holders, which self-evidently represent additional unutilized potential labor hours. So there are upwards of 100 million adults in America who represent a massive but latent labor supply that makes a mockery of the silly “U-3″ unemployment ratio that the Eccles Building theologians insist on counting down to the decimal points.
Stated differently, the BLS recently revealed that the private business sector of the US economy generated 194 billion labor hours in 2013—the exact same number as way back in 1998 and notwithstanding the massive growth of the adult population in the interim. Indeed, as recently as 2000, there were only 75 million adults (16-years and over) not holding jobs. Yet of the 27 million gain since then, only 7 million entered the OASI rolls. This means that during a 14 years period in which there was no growth of aggregate labor hours in the business economy, 20 million more adults ended up in the safety net, in mom and dad’s basement or on the streets.
These realities are not a mystery, and they do reflect a dangerous fiscal and social policy breakdown. But they are also thumping proof that monetary policy has exactly nothing to do with employment conditions and job creation. During the last 15 years, the Fed engaged in massive and nearly continuous Keynesian stimulus maneuvers, expanding it balance sheet 8X from $500 billion to $4.3 trillion. Yet millions of employable adults and billions of available labor hours have been flushed out of the private economy, while measured hours worked have been absolutely frozen.
The excuse that counting decimal points on the head of the U-3 unemployment rate may sound medieval but that Humphrey-Hawkins makes them do it is just palaver. The so-called dual mandate and minimum unemployment target is just a vague statutory aspiration; there is no quantitative target in the law and the current U-3 version of the endless alternative ways to measure the “unemployment rate” did not even exist when the statute was passed in the late 1970s.
Accordingly, when Bernanke previously, and Yellen now, appear before the Congress or press and piously intone about their full employment “mandate” being a license for perpetual money printing they are simply indulging in a self-serving lie.
The same foibles pertain to the 2% inflation target. Its not in the law; and until the last two decades, price stability was thought to mean an average of zero inflation over time. Certainly William McChesney Martin and most of the first generation of modern Fed policy-makers believed that. Even today, Paul Volcker properly asks why is 2% inflation forever so virtuous when it means that the purchasing power of the dollar will be cut in half every 30 years. …
If there is any truth to the socialist caricature of capitalism — an economic system that exploits the poor to the benefit of the rich — then this caricature holds true for a capitalist system strangulated by inflation. The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens. And because it shields the political and economic establishment of the country from the competition emanating from the rest of society, inflation puts a brake on social mobility. The rich stay rich (longer) and the poor stay poor (longer) than they would in a free society.
— Jörg Guido Hülsmann, “How Inflation Helps Keep the Rich Up and the Poor Down”
We are confused: on one hand the Fed is injecting hundreds of billions of liquidity into the market, boosting the S&P to all time highs and making the rich richer (Piketty taking Excel lessons from Rogoff notwithstanding) while the economy remains stagnant because, according to the BLS, inflation is too low, and as everyone knows the biggest lament of the impoverished middle class is that “the value of my dollar isn’t being destroyed fast enough for me to feel confident about the future.” On the other hand, the very same Federal Reserve Bank (of Chicago), just announced that as a result of “prices continuing to increase between 3% and 33%” (!), beginning May 27 it is hiking the prices in its cafeteria. So, clearly prices are rising at a 33% clip due to, how does the IMF put it, lowflation, right? Oh, and harsh weather.
What the individual American… has to realize is that the policy of inflation… makes it impossible for him to organize his working, earning, spending, and saving in such a way that he could provide for the future of his family. This is why inflationary policy is the most radical revolutionary institution in the world.
In circumstances where wages cannot be legally reduced, as is the case for unionized or minimum wage workers, layoffs are often the employer’s only option for keeping costs in line with revenue. However, inflation allows employers to do an end run around these obstacles. In an inflationary environment, rising prices compensate for falling sales. The added revenue allows employers to hold nominal wage costs steady, even when the raw amount of goods or services they sell declines. When inflation rages, higher skilled workers will often demand, and receive, pay raises. But low-skilled workers, who lack such leverage, are usually left holding the bag.
In other words, politicians can impose a high minimum wage to pander to voters, but then count on inflation to lower real labor costs, thereby limiting the unemployment that would otherwise result. So what the government openly gives with one hand, it secretly takes away with the other. Workers vote for politicians who promise higher wages, but those same politicians also create the inflation that negates the real value of the increase. But while government takes the credit for the former, it never assumes responsibility for the latter. The same analysis applies to labor unions. Based upon political protection offered by friendly officials, unions can secure unrealistic pay hikes for their members. But the same governments then work to reduce the real value of those increases to keep their employers in business.
A free, competitive market economy is always rewarding successful entrepreneurs with profits for having made new, better and less expensive goods to earn consumer business. Thus, the normal trend in a free, competitive market is a world of gently falling prices as innovative businessmen bring improved and less expensive goods to consumers.
A truly free market economy, therefore, is one that tends to have the “good deflation,” and we should look forward to it, if only government intervention and central banking would get out of the way.
In 1979, when the minimum wage was $2.90, a hard-working student with a minimum-wage job could earn enough in one day (8.44 hours) to pay for one academic credit hour. If a standard course load for one semester consisted of maybe 12 credit hours, the semester’s tuition could be covered by just over two weeks of full-time minimum wage work—or a month of part-time work. A summer spent scooping ice cream or flipping burgers could pay for an MSU education. The cost of an MSU credit hour has multiplied since 1979. So has the federal minimum wage. But today, it takes 60 hours of minimum-wage work to pay off a single credit hour, which was priced at $428.75 for the fall semester.
You can thank federal student loans and the Federal Reserve for this.
We keep hearing about the Federal Reserve “tapering” its quantitative easing exercise in money creation. But a tweet from the St. Louis Fed says: “adjusted monetary base rises by more than $65 billion over the past two weeks to $3.963 trillion.” The sum of currency in circulation plus deposits held by banks at the Federal Reserve, this measure of money supply stood at less than $900 billion before the financial crisis. What will happen to prices in the economy once banks start lending this money out to customers?
Did you get that? Our money supply increased from around $900 billion to almost $4 trillion in the last few years. This goes beyond tinkering—it has been and will continue to be hugely disruptive to our economy and standard of living.
The Fed has created more money in the past five years than in the 100 years since its creation. And somehow this isn’t going to cause inflation.
Fed Chair Janet Yellen thinks the US economy is under-performing because we don’t have enough inflation:
“Inflation has continued to run below the committee’s 2 percent objective… the FOMC continues to expect inflation to move gradually back towards its objective….(but)… is mindful that inflation running persistently below its objective could pose risks to economic performance.”
This is not simply another case of “Let them eat iPads” cynicism. Hitting the wholly arbitrary 2% inflation target is sacred doctrine inside the Eccles Cathedral, and Yellen takes her scriptures, along with her money printing, every bit as literally did as the legendary William Jennings Bryan. Indeed, failing the inflation target “from below” amounts to a Cardinal Sin.
So not surprisingly, during the past 168 months running the rate of inflation according to the Fed’s preferred measure called the PCE deflator has come in exactly at a 2.0 CAGR—the annual rate embedded in the 14-year index gain of 31.65% shown in the table [above]. You might think the paint-by-the-numbers Keynesians who run the Fed would be thoroughly satisfied with their inflation targeting performance—even if, as Paul Volcker cogently noted, it does mathematically result in the theft of half of a working man’s savings over his lifetime.
Not exactly. The monetary politburo has been gumming about periodic bouts of too-low inflation and even “deflation” ever since Bernanke arrived in 2002. Yet unless the Fed’s unrelenting pursuit of “mission creep” has led it to the conclusion that its mandate under the wholly elastic and content-free Humphrey-Hawkins Act requires hitting its quantitative targets on an annualized seasonally-maladjusted basis every week, there is not a hint of inflation shortfall during the entire 21st Century to date.
In fact, the table [above] presents the cost-of-living increases that have been endured by that substantial share of the public which has eaten food or consumed fuel sometime during the past 14 years. At best, according to the official CPI—which is apparently good enough for 50 million Social Security recipients— the cost of living has actually risen by 2.4% per year or 39 percent over the period.
And even that’s got some self-evident understatement to it. Fully 25% of the CPI is accounted for by “imputed rents” on owner-occupied homes. This figure is obtained by a BLS survey of approximately 0.0002% of the nation’s 75 million homeowners asking what they would charge to rent their homes to a stranger each month. Needless to say, the tens of millions of households who have struggled with mortgage foreclosures, delinquencies and under-water loans since the housing bust have undoubtedly not been very bullish about their rental market prospects—even as their actual cash expenses for property taxes, utilities and household repair and maintenance expenses have continued to surge.
So when you get by the rent imputations and the ”hedonic adjustments” for cars, toasters, big screen TVs and iPads— the rest of the cost-of-living menu has been downright inflationary. Renters’ costs have risen one-third faster than the Fed’s target; electricity bills rose by double; college tuition is up by 2.3X and ground beef, eggs, movie tickets and health care by three-fold. And, of course, hydrocarbon-based energy is not even in the Fed’s zip code: Gasoline prices have out-run the target by 5X since January 2000 and home heating oil in places like the Northeast by 6X.
In short, the idea of “under-shooting inflation from below” is just ritual incantation. It provides the monetary central planners an excuse to keep the printing presses running red hot, but the true aim is not hard to see. After a 30 year rolling national LBO that has taken credit market debt outstanding to $59 trillion and to an off-the-charts leverage ratio of 3.5X national income, the American economy is saddled with $30 trillion of incremental household, business, financial and public debt compared to its historically sound leverage ratio of 1.5X GDP.
We are at peak debt. Household, business and government balance sheets are tapped-out. The problem is not too little CPI inflation, but the unavoidability of a pay-back era of sustained debt deflation. Yet the entire purpose of the Fed’s money printing regime—ZIRP, QE and all the rest—-is to force more debt into an economy that is already saturated. And as I have demonstrated elsewhere, the end result is that the Fed’s massive liquidity injections do not flow into the busted and exhausted Main Street credit channel, but only into the “Wall Street Bubble Channel” where they fund endless carry trades, speculations and eventually rip-roaring bubbles.
Nor has the picture changed since the 2008 financial crisis—that is, there exists no newly threatening deflationary bias, as shown [above]. Officially measured inflation continues to oscillate in a narrow band around 2% like it has since the late 1990s. The idea of missing the inflation target from below is just central bank jabberwocky—-a lie that actually harms the vast portion of Main Street America where incomes have lagged behind actual inflation for most of the 21st Century.
In order for people to put themselves to work, what do they need? They need to have wants to fulfill and they have to have a good idea of what these wants are. Check. This condition exists all the time. People need time, resources and know-how of how to produce goods. Check. People have these all the time. In an exchange economy, it helps to have money, especially a money whose supply doesn’t alter in a volatile way, for that causes changes in prices that can disrupt the productive activities of those producing, transporting, selling, and buying the goods. Before there were central banks throughout the world, gold and silver performed that function and prices were stable.
My point: Inflation is not a precondition or a lever to produce strong labor markets. All it takes is human wants and capabilities combined with a stable money. We do not need a FED buying mortgages or any other financial assets. We do not need a FED bailing out the institutions whose policies [led] them to failure.
The central bank cannot be an employer of last resort. In order for a production cycle to be complete, the work that was done to produce the goods has to be compensated and paid to those workers who then take the goods off the market and consume them. The goods must be wanted by those buying them, and they must be capable of buying them. They cannot indefinitely increase their debts so as to be able to buy what is produced.
When the FED buys securities, it disrupts this cycle in several ways. It alters asset prices, so that they provide false signals to everyone. This alters what is produced, moving it away from what people would otherwise be producing and buying. Debts are created that otherwise either would not exist or would be held by a different set of persons. This enables transactions based on a higher level of debt in the economy, but this is unsustainable. Uncertainty rises. Financial institutions are incentivized to make loans of lower credit quality. This endangers them and eventually leads to a recession, depression or crash.
We do not need a central bank. We do not need a FED.
I write today to express my concerns about United States dollar bills. The exchange of dollar bills, including high denomination bills, is currently unregulated and has allowed users to participate in illicit activity, while also being highly subject to forgery, theft, and loss. For the reasons outlined below, I urge regulators to take immediate and appropriate action to limit the use of dollar bills.
By way of background, a physical dollar bill is a printed version of a dollar note issued by the Federal Reserve and backed by the ephemeral “full faith and credit” of the United States. Dollar bills have gained notoriety in relation to illegal transactions; suitcases full of dollars used for illegal transactions were recently featured in popular movies such as American Hustle and Dallas Buyers Club, as well as the gangster classic, Scarface, among others. Dollar bills are present in nearly all major drug busts in the United States and many abroad. According to the U.S. Department of Justice study, “Crime in the United States,” more than $1 billion in cash was stolen in 2012, of which less than 3% was recovered. The United States’ Dollar was present by the truck load in Saddam Hussein’s compound, by the carload when Noriega was arrested for drug trafficking, and by the suitcase full in the Watergate case.
Unlike digital currencies, which are carbon neutral allowing us to breathe cleaner air, each dollar bill is manufactured from virgin materials like cotton and linen, which go through extensive treatment and processing. Last year, the Federal Reserve had to destroy $3 billion worth of $100 bills after a “printing error.” Certainly this cannot be the greenest currency.
Printed pieces of paper can fit in a person’s pocket and can be given to another person without any government oversight. Dollar bills are not only a store of value but also a method for transferring that value. This also means that dollar bills allow for anonymous and irreversible transactions.
The very features of dollar bills, such as anonymous transactions, have created ubiquitous uses from drug purchases, to hit men, to prostitutes, as dollar bills are attractive to criminals who are able to disguise their actions from law enforcement. Due to the dollar bills’ anonymity, the dollar bill market has been extremely susceptible to forgers, tax fraud, criminal cartels, and armed robbers stealing millions of dollars from their legitimate owners. Anonymity, combined with a dollar bills’ ability to finalize transactions quickly, makes it very difficult, if not impossible, to reverse fraudulent transactions.
Many of our foreign counterparts already understand the wide range of problems that physical currencies can have. Many physical currencies have enormous price fluctuations, and even experience deflation. 20 years ago Brazil had an inflation rate of 6281%. In 4 years (2001 to 2005), the Turkish Lira went from 1,650,000: $1 to 1.29 to $1. In 2009, Zimbabwe discontinued it’s dollar. Before it was eliminated, the Zimbabwe dollar was the least valuable currency in the world and their central bank even issued a $100 trillion dollar banknote. A person would starve on a billion Zimbabwe dollars and it took an entire wheelbarrow full of $100 billion dollars in notes to purchase a loaf of bread.
The clear use of dollar bills for transacting in illegal goods, anonymous transactions, tax fraud, and services or speculative gambling make me wary of their use. Before the United States gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.
— Rep. Jared Polis (D-CO) offers this satirical response to Sen. Joe Manchin’s (D-WV) call to ban bitcoins.
Here’s how it works. The Treasury sells bonds at interest. Some of these bonds are bought by private citizens, governments, or other central banks, and some are bought by the Federal Reserve. The Treasury pays interest on all these bonds, but the Fed sends the payment right back at year end. It’s like a free lunch.
But one of the certainties in economics is that “there ain’t no such thing as a free lunch.” Loosely stated, there is always a cost to an action. So who pays in the case of the Fed’s remittances?
If Congress is making money, you better believe it is coming from the pockets of Americans. The Fed earned the money it remitted back to Congress by buying bonds. The offsetting transaction is issuing money. Since 2008, a period during which the Fed remitted $400 billion back to the Treasury (probably more than it has remitted over its whole 100-year existence), the Fed increased its holdings of U.S. Treasuries from $800 billion to over $2.2 trillion. It paid for these bonds by, effectively, issuing money. …
As the old saying goes, the best way to make money is in the money business. Actually, this is only half true. The best way to make money is to be the institution that grants (and gets the kickback from) the monopoly powers over the nation’s money supply. Over the past ten years the U.S. Treasury has received over a half trillion dollars in distributions remitted back to it from the Federal Reserve.
This fetish for rules-based Fed policy (e.g. inflation targeting) and obsession with the Taylor Rule serve as the rightwing, “free market” response to substantive and populist criticism of the Fed itself. We don’t want to end the Fed, the Kudlows tell us, but we do want to keep it in check and maintain the dollar’s lofty status. It just needs a firm hand. After all, as Mr. Greenspan famously told Ron Paul in 2005, the Fed can essentially mimic a gold standard. But how long has it been since the Fed restrained itself in the face of public and political pressure (think Volcker)? And can central banks truly be constrained by rules at all?
To the degree that the new money does get out into the economy, it will flow in different directions and have different effects. If it reaches the average consumer, it will produce consumer price inflation. This does seem to be happening. Consumer price inflation calculated as it was in the past would be much higher than today’s reported 1%.
If the new money reaches rich people, it will drive up the prices of what rich people buy. We see this today when a single townhouse in Manhattan is listed for over $100 million. If it flows into the stock market, it will raise stock prices. If enough flows in this direction, it will create an asset bubble, which seems to be happening once again today. Asset bubbles are followed by crashes, which in turn bring recession and unemployment.
Wherever the new money flows, it may increase demand in the short run, only to reduce it in the long run. This is because the new money created by the Fed is not just given away. It is made available to banks to lend, which means that it enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much will strangle it.
As consumers, businesses, and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income are instead siphoned off to pay for past mistakes. We end up with a zombie economy, still breathing, but just barely.
Historically we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.
Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending and also underwrites government borrowing and spending. It holds interest rates very low, which for now keeps the debt house of cards from tumbling down.
Will the Fed’s feckless money creation end in inflation or depression? It could go either way, which is potentially confusing. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness, and depression. Or it could lead first to the one and then to the other.
It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970’s. If we measured inflation as we did in the 1970’s, it would be apparent that this already exists today.