Alt-M And Deflationist-Statist Fiat-Money Central Banks

A Benjamin Cole post

There is a still-popular framework in some monetary circles (including parts of the Alt-M crowd) that fiat-money central banks are statist-inflationist redoubts, despite the last 35 years of global disinflation and then deflation, along with falling interest rates.

The track record of the last few decades suggests that major fiat-money central banks are actually disinflationist and then deflationist, and appear unwilling to alter course.

The old argument was that nations want to pay off debts with cheap money. So nations deploy central banks to print money—the word “debauchery” and “theft” are often used—and pay off bondholders with devalued currency, cheating the lenders of their just due.

Today

Of course, today we see Europe and Japan in quicksand-deflation and ZLB, and the U.S. perhaps but one recession away from a similar fate.

The sinister statist-inflationist central banks are proving themselves incompetent at printing up cheap money. How can this be?

The Answer

What if the statist central banks are actually very clever? They have figured out that if they can engineer deflation, then nations can borrow in perpetuity for something close to free. Japan, for example, is floating the idea of perma-bonds that pay no interest.

And through quantitative easing, nations are paying off national debt without inflationary consequence, as long as central banks can keep deflation as the norm. In Japan, for example, the Bank of Japan owns one-third of that nation’s national debt.

Central banks, by keeping interest rates artificially high—remember, with ZLB rates have a floor, despite some negative-interest rates here and there—they can use QE to pay off national IOUs forever.

The long road to deflation and ZLB has also resulted in incredible riches for bondholders, who saw their holdings soar in value. Far from being robbed, bondholders have effectively enjoyed three decades of Fat City Boom Days thanks to central banks.

Just by chance, I am sure.

Conclusion

A good cabal theory is that wealthy and politically influential bondholders, through captive central banks, have engineered an economy-sapping long disinflation and then deflation, extorting rising real rents along the way on soaring bond values.

Well, as cabal theories go, it holds more water than the inflation-statist fiat money central banks tale.

The Fed Is Artificially Budging Rates—But Higher Not Lower Does Fiat-Money Central Banking Lead to Deflation?

A Benjamin Cole post

At the always interesting Alt-M website is a post by highly regarded monetary scholar Gerald P. O’Driscoll, pondering if the Fed can raise rates even if it wants to, whether Fed presently is artificially pumping up short-term rates.

O’Driscoll notes that today 20 central banks globally have negative interest rates in place.  Were now an activist Fed to jack-up the Fed funds rate and the interest on excess reserves (IOER) by another 25 basis points, the spread between U.S. rates and global rates would widen even more.

O’Driscoll points out such an action will attract capital to the U.S., thus raising the exchange rate of the U.S. dollar, slowing domestic business activity when the economy barely growing anyway.

Moreover, the Fed appears to be struggling to even keep short-term rates as high as they are. As O’Driscoll notes, in December 2015 the Fed raised interest on excess reserves from 25 to 50 basis points and also posted an offering rate of 25 basis points on reverse repurchase agreements. The Fed’s mysterious reverse-repo program has expanded to $321 billion at recent count, as it tries to sop up enough cash to prevent even lower rates.

But the Fed is battling the tide. O’Driscoll notes interest rates on short-term treasury bills (4 weeks) have recently traded down close to or even below 25 basis points.

Of course, long-term rates are primarily set by market forces, and 10-year Treasuries have been yielding near record-lows, now offering about 1.50% interest.

“There are real questions as to whether further hikes in what are administered (not market) interest rates will move market interest rates as desired. We have no experience on which to base such a forecast,” intones O’Driscoll.

There is much to admire in O’Driscoll’s blogging, but perhaps I quibble with his non-conclusion, which is that, “Fed policymakers are still mostly stuck in closed economy thinking. But, so, too, are most advocates of monetary reform. New thinking is needed all around.”

Well, bring it on, I say. Like what?

The Alt-M Outlook

In the past O’Driscoll has called for free banking, or a gold standard, and noted that modern-day central banks are aligned with nationalist malignancies of financing wars, empire-building, welfare-ism, oppressive state seizure of private assets and inflation.

Maybe all true in the past, but what about inflation since 1982 or so?

In the last 35 years the direction of interest rates and inflation internationally has been down, under globalist central-bank management. Indeed, much of the planet is now in deflation, and the U.S. but one recession away from joining the world. As Milton Friedman noted, you don’t get to chronically low interest rates through chronically easy money. For 30 years we have heard doom from inflation-mongers, and now we have global deflation.

If central banks have an inflationist agenda, they are even more incompetent than we suspect. The admirable Alt-M team still discusses fiat-money central banking as having statist-inflationary agenda. Yet the Alt-M perspective appears out of date, by a few decades.

Conclusion

Maybe free banking or a gold standard will work better than globalist central banking.

But unlike O’Driscoll, I think the problem is globalist fiat-money central bankers are obsessed with inflation and not economic growth. The ECB, for example, appears intent on crushing nations, not promoting statism.

Indeed, for now it would be better if a modern-day Korekiyo Takahashi (Japan’s central banker who ended the Great Depression on the islands) seized the Fed and sent in the helicopters. Darken the skies, and don’t stop until we see robust real growth and inflation north of 4%.

Of course, Market Monetarists contend the practical path forward is central-bank NGDPLT. It may actually happen.

The Alt-M crowd offers plenty of food for thought, but perhaps some updating is needed.