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October 02, 2012

He Makes Money The Old Fashioned Way. He Prints it.

Yesterday, Federal Reserve Chairman Ben Bernanke used a presentation he had been scheduled to give to the Economic Club of Indiana as a platform to make a vigorous defense of his latest plans to engage in quantitative easing via the printing press.

As our readers are well aware, monetary policy and macroeconomics are very complex subjects, so we thought we’d go through the highlights of his speech to help you better understand it:

Since 2008, we've used… less-traditional monetary policy tools to bring down longer-term rates. The first of these less-traditional tools involves the Fed purchasing longer-term securities on the open market--principally Treasury securities and mortgage-backed securities…”

Some tools are less traditional for a reason. Like when Alexander P. Broughton, a 20-year-old University of Tennessee student, used a “less traditional tool” to get drunk.  (You probably don’t want to click on that.)

“The securities that the Fed purchases in the conduct of monetary policy are held in our portfolio and earn interest. The great bulk of these interest earnings is sent to the Treasury, thereby helping reduce the government deficit. In the past three years, the Fed remitted $200 billion to the federal government.”

If you’re wondering why, if we can reduce the deficit by purchasing Treasury bills with fake money and turning the fake interest payments back in to Treasury, why don’t we just have the Fed purchase all the treasury bills, well, good news!

They’re getting there!

“I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress.”

Exactly. It would be like if someone blamed you for giving whiskey and car keys to a teenager.  The responsibility for not plowing into a crowd of young schoolchildren at a bus stop lies squarely with the teenager, not with you.

And keep in mind, the Fed’s actions are in no way political. In fact, in response to the suggestion that the Fed should stop interfering so aggressively in the markets and allow rates to rise, Mr. Bernanke said:

“Using monetary policy to try to influence the political debate on the budget would be highly inappropriate.”

Exactly. Were the Fed to cease intervening in markets and allow interest rates to float at normal levels so that prices could adjust and markets could go through the painful but efficient process of healing as market-clearing prices are established, it would clearly “influence the political debate” and be “highly inappropriate.”

In contrast, actively forcing on the markets historically unprecedented low interest rates and running the printing presses so as to purchase government bonds with the express purpose of inflating financial asset prices just one month before a presidential election regardless of the long-term consequences is 100% non-partisan straightforward policy making.

That is how you can tell Ben Bernanke is serious about maintaining the credibility of the Fed.

“[An important question] is whether the Federal Reserve's monetary policy will lead to higher inflation down the road. In response, I will start by pointing out that the Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it.”

FUN FACT: The dollar has lost over 95% of its value since the creation of the Federal Reserve.

“With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear--which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you "monetizing the debt"--printing money for the government to use--and will that inevitably lead to higher inflation? No, that's not what is happening, and that will not happen.”

We don’t know about you, but we sure feel a lot better.

“Monetizing the debt means using money creation as a permanent source of financing for government spending.”

You see, “monetizing the debt” is when you print money forever, whereas Fed policy is to print money until the “appropriate time.”

And they won’t tell us when that appropriate time will be, only that it will depend on how much the economy strengthens.

And they won’t tell us how much the economy needs to strengthen first for them to stop printing money.

And even then, they will still continue to print money.

“The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

But other than that, it’s absolutely not “monetizing the debt.”

That would just be wrong.


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October 2, 2012 at 03:20 PM in Current Affairs | Permalink


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Two points:

A) A quibble. The dollar hasn't lost 95% of its value since 1913, there's no remotely comparable basket of goods and services. Gold has become 20 times more expensive in nominal dollars.

B) The "we make money from interest" argument doesn't pass the laugh out loud test.

"Look, we're getting interest and returning it to the Treasury to reduce the deficit"

"Where does the deficit come from?"

"Well, a lot of it comes from the interest we have to pay to our lenders".


Posted by: Michael | Oct 2, 2012 6:05:13 PM

There is an argument to be made against the 98% number that is often kicked around and is typically based on the value of gold. I used the 95% number because it is based on various baskets of goods and was even largely verified by the self-appointed fact checkers, if reluctantly. (I could have used a better link to make that clear.) There are some problems with that as you note, but there are enough comparables that I consider it clear that the "value" of a dollar has taken a giant hit (whereas the value of gold, hasn't).

As for laugh-out-loud tests, I agree totally. In fact, I thought his speech reads in large part as part parody, which is why I quoted it so extensively. Hey, if he's going to do my work for me, why not let him?

Posted by: Planet Moron | Oct 2, 2012 8:33:24 PM

Typepad needs a "like" button for your "if he's going to do his own parody..." comment.

Posted by: Michael | Oct 3, 2012 4:25:07 PM

That's why they call it "circulation". The more money in "circulation", the more everyone prospers.
Reminds me of another "circle" thing whose context I can't recall at the moment.

Posted by: barryjo | Oct 7, 2012 10:09:35 AM

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