A Benjamin Cole post
From David Glasner’s excellent blog, Uneasy Money, we learn that Stanford scholar John Taylor recently lectured the NY-based Manhattan Institute on the virtues of stable money, and that he will be followed this year by James Grant, the perennial doomster and gold fetishist. Grant will get $50k “Hayek Prize” for the chat, as did Taylor.
Grant, who has accurately predicted six out of the last zero U.S. hyperinflationary holocausts, will likely lecture the Manhattan Institute on the splendid 1921 recession, in which prices and wages tumbled, setting up a near-instant recovery, so that by 1923 everything was better than ever. The Fed existed, but did nothing, and that is the lesson, says Grant.
The GOP-right-wing today has so tightly embraced deflation, gold and Fed-bashing that nearly erased from history is that the Nixonians and Reaganauts wanted looser money (as I have documented in this space), and that Reagan’s Treasury Secretary Don Regan went so far as to propose putting the Fed under wing at the Treasury where it would report to him, and not then-Chairman Paul Volcker, inflation-fighter.
Thus, this modern-day GOP devotion to gold and salubrious deflationary recessions is historically recent—but is it mere posturing? We can hope.
2016: A GOP Sweep?
Pending is 2016, and the potential of another GOP sweep in Washington, D.C., ala 2000, when the GOP captured the House, Senate, and White House, and owned the Supreme Court too.
The last thing gimlet-eyed GOP operatives (assuming some are left) want after they get power in 2016 is a 2008 replay, when the Fed tightened, the economy collapsed, and the American public was so disenchanted they voted in an unknown, pretty-talking, skinny black man with a Islamic surname to be U.S. President. That is very disenchanted.
But with each of these tight-money-love-ins such as the Manhattan Institute pow-wows, and with each lifetime pledge of fidelity to gold that GOP candidates chisel into granite on the campaign trail, the harder it will be to gun the money presses after 2016.
Of course, maybe there is no problem. I am thinking like a human with some shreds of honor left, not a pol. After all, the GOP endlessly rhapsodizes about fiscal rectitude, but changes the mantra to “deficits don’t matter” whenever they control the federal purse.
Still, going forward, nothing but QE will probably work (see Japan) and that is rather obviously “printing money.” And big-time QE is rather obviously a long, long way from genuflecting to gold on the White House lawn, while James Grant looks prayerfully skywards.
So, I suspect the GOP will have to pass some sort of tax cuts (however minimal), a few regulatory changes, and then say that because structural impediments have been removed, the time has come to “gear America up.” That’s not a bad catchphrase, btw. “Gear America Up.” I hope the GOP is reading.
And then the GOP will print lots of money. I mean, boatloads of the stuff, like going over Niagara Falls in a record wet year. And indeed, I hope they do. I do not think the U.S. economy is inflation-prone. See Japan.
2016 could be a very good year.
PS. The Donks are no better than the GOP, and maybe worse.
PPS. Manhattan Institute: For $50,000 I will take the first Greyhound bus to NYC, and deliver the best speech ever made for tight money, lower taxes, radically diminished regulations and ______________. You can fill in the blank.
I’m missing something here. First, why do you say that the 2008 recession was caused by the Fed tightening? That needs clarification.
Next, why do you believe that “going forward, nothing but QE will probably work”? Quantitative easing has buoyed the stock market and in even lead to borrowing by corporations to buy back their own stock, further buoying the stock market. After rounds one, two and three of QE, we have had a distinctly anemic and lackluster economic recovery. The stock market’s performance is divorced from the economic well-being of most of the populace now. I’m not blaming the Federal Reserve for the ineffectiveness of repeated rounds of QE. They did what they could. Government can’t totally rely on the Fed for all economic policy. There has been a distinct lack of supportive fiscal stimulus since 2009 or so, although there has been lots of government spending.
Another thing to take into consideration is the war. We’ve had a war, actually, wars, from 2003 through the present. The fiscal stimulus of defense spending is often overlooked, given that it has become status quo. Winding down (one hopes) will be another huge, looming problem for the next administration, which I agree, is unlikely to be Democrat, given the only candidate allowed is Hillary.
Thank you for your comments.
Well, books have been written not he questions you ask, and blogs have fulminated for years. High IQ people can and do disagree. I will give you my view.
Yes, in 2008 the Fed over-tightened, as it feared rising oil prices and some other commodities prices would lead to general inflation in the 4% range. The Fed chose to tighten just as the economy was weakening anyway (perhaps due to higher oil prices and the parasitic wars you mentioned). Moreover higher commodity prices are self-correcting. The US was then heavily leveraged in real estates, in part thanks to the explosion of the CMBS and RMBS markets.
So, the Fed put the monetary noose on the US economy at exactly the wrong time. Once real estate cracked, all those CMBS and RMBS cracked, and we had large financial institutions going bust left and right.
Does QE work? I contend it does, and just should have been bigger harder and longer, and ceasing QE should be results-dependent. That is, in its first two rounds of QE, the Fed said it would quit on a schedule. In QE3, it said it would stop when some results were obtained. QE3 worked better.
I an agnostic on federal deficit spending, but I prefer tax cuts to more spending. I have lost faith in large organizations to do much, unless the whip of the market us upon them. This applies to US overseas operations as well as domestically.
I like the idea of FICA tax holidays financed by QE–that is, the Fed buys bonds and places them in to the Social Security and Medicare trust funds.
Most of all, Ellie I hope you pursue your interest in this topic and QE and especially Market Monetarism.
Great blogging, as always.
I just wanted to point out Jeb Hensarling and the softening of the “raise interest rates sooner rather than later” Fed rhetoric since the IG investigation into information leaks at the Fed was reopened. Very recently, Dudley has changed his tune somewhat as well as Powell – who are now not so sure raising interest rates so fast is a good idea. Nobody on the outside can be sure of Hensarling’s motives. But if one cannot ensure accountability in performance, the ethics route can be an effective substitute. He also has the assistance of a congressman from Texas (I’ll have to look up his name) who castigated Yellen for not being more sensitive to labor; a development I was shocked to hear about. I tried to find a video of the testimony, but there doesn’t appear to be one on the CSPAN library.
Hello! Well, I think some FOMC’ers are scared about another dead quarter, or even a recession. They have not smelled the coffee yet, but the alarm clock might have gone off.
Texas is a funny place; I lived there for two years. Ron Paul (the elder) just castigated GOP Senators for being fearful that “peace would break out” in the Mideast if the Iran talks work. He all but said they want war all the time. Texans sent to tolerate oddballs, as long as they are Texans and talk right.
In my opinion, after having pulled off the tightest monetary policy stance since Herbert Hoover was President with reputations and jobs as secure as ever, there is room to doubt whether these people are afraid of a dead quarter or a recession. A read of the FOMC minutes from 2009 provides ample hints at just how above the law these people believe they are in addition to hints of conflict of interest. Mr. Warsh, for example was the the Fed’s liaison to Citi while Mr. Parsons, a then Citi board member controlled, and still controls his wife’s multi-billion dollar trust fund. And this example is from stuff I found just lying around in the open. I could only imagine the stuff an inspector general would have access to. I really think the only thing these people are afraid of, considering that the last Fed guy to get caught with his hand in the cookie jar ended up selling beads for bracelets at a beach stand for the rest of his life, are ethics investigations.
I am a Brazilian living in Brazil, so I don’t get most nuances in US politics, but this post actually gave me the opportunity to reinforce a notion that I believe is helpful. I understand that given the Great Recession MM is associated with easy money policies, particularly NGDPLT proponents. But that is because of the historic moment. If we were at a different moment in time, maybe most of defendants of MM might be associated with tighter money. The reason I come back to this is because if one is a serious proponent of MM, then he/she should distance herself from easy money policies monotonic speeh and seriously try to convince conservatives (or people who defend tight money in general) that MM is the best nominal anchor economists have been able to come up with, and that has nothing to do with printing money per se. If you are on the hawk side of the equation, you can still use MM (NGDP targeting) with low rate targets, and still have tight money. It is not the momentary stance itself that is important, but the method and the process.
Mr. Robazzi: Marcus Nunes is a countryman of yours, btw. Down Sao Paulo way.
I never thought in my life I would be lectured about being serious by an Italiano living in Brazil!
I have never been a very serious sort of guy, and your comments are actually very astute. Yes, I am very growth-oriented now, and have been since 2007. I think the Fed and US government needed to pull out all the stops—cut taxes, regulations, print a lot of money.
But you are correct, a Market Monetarist is actually prudent, and wants stable nominal growth of GDP in the 5%-6% range for a mature economy. So it may be at some point I think there has been too much monetary stimulus. I doubt that will happen soon in the US, given the 2% IT, and the predilection of central bankers to obsess about even microscopic inflation rates.
From a political angle, your comments are true as well. MM’ers should emphasize their conservatism to some.
But…that would be boring, no?
Loosen up Robazzi, leave the pinch-faced long faces to the Austrians!