This week the arousal came when I read an article by Martin Wolf in the Financial Times September 18, 2012 “Bernanke Makes a Historical Choice”. Surprisingly despite the historical nature of Bernanke’s announcement and the promise to keep interest rates low and to keep infusing the economy with money until Hell freezes over or until the unemployment rates comes down to levels acceptable to the last unemployed person – Martin Wolf believes the Fed nor the government has done enough to revive a deficiency of spending in the economy. Not doing enough of course implies that the Fed and the government should be doing more. He quotes a paper given at the recent prestigious conference at Jackson Hole, Wyoming that recommends a policy leading to a 45% increase in national spending through 2016. Only Usain Bolt is faster than that!
Wolf reminds me of a song in the award winning musical Caddy Shack. Just kidding – the music in Caddy Shack was nowhere near as interesting as the scores of Oliver. Let’s face it making a musical out of a Dickens novel is no easy thing. I am not sure of the name of the song but I do recall when the poor orphan has the gall to ask for more gruel. Clearly in that orphanage asking for more food or a second helping was out of the question. Like the orphan, Wolf wants more – he wants more money. I’d be willing to give him more gruel.
In the case of monetary policy – it seems to me that Wolf is wrong on two scores. First, the source of the problem of the US economy is not deficient demand. And second, even if it was the source, pouring even more money on the problem is not going to help. It reminds me of someone suggesting that right after you ate two really large rib-eye steaks (or maybe a giant porterhouse for two) would be a great time to ingest a third steak. After all, the price is low, so you should go ahead and order and eat the third steak. And maybe a fourth too.
Little Red Riding Hood was a cute little girl who was almost duped by the wolf in that children’s story. Do you know of any children’s stories where the little girl, her grandmother and a lumberjack kill a wolf, splay it, and then fill the open body cavity with stones? That seems a little extreme to me and I am not recommending such an action for Martin Wolf. But I do wish he would stop harassing us with his evil and misleading stories.
Let’s get back to the coordinated and more aggressive monetary and fiscal stimulus that would please Wolf in 2013. While some of you choke up just hearing me say that, there is widespread and strong support for such policies. Larry Summers published a piece in the FT giving Great Britain the same advice. Last week Wolfgang Munchau expressed his desire for more stimulus in Europe. These are influential people. They keep hitting the same themes. More is better. More spending is better. Full speed ahead. Man the torpedos.
Wolf is especially good at creating straw men. He defends opening the monetary spigots even wider by pointing out that the critics have been wrong about hyperinflation. Wolf looks around and says – I see no hyperinflation. So the critics are wrong. What a bunch of hooey. While critics of liberal monetary policies often worry about the impact of too much money on prices – most of us have been pretty specific in our arguments about the current monetary failures. The money multiplier simply doesn’t work today. You can jam reserves into the system like pancakes at a church social, but you can’t be sure it will turn sinners into saints. All those trillions of dollars of money the Fed injected are either being held in safe places by uncertain financial institutions or it is leaking abroad. When Bernanke injects another trillion it isn’t going to change a thing. A quick look at the statistics shows some mind bending facts. One wonders how much more money the economy wants or needs. According to the St. Louis Fed’s Monetary Trends – bank reserves increased from $95 billion in 2007 to about $1.6 trillion in 2011. If you are bad with numbers – a 10-fold increase would have increased bank reserves to a little less than $1 trillion. So we are talking about a 16-fold increase. Imagine if my weight increased by 16-fold. I would now be a svelte 3,200 pounds. That’s a lot of folds in four years. How many more folds are going to make a difference to Mr. Wolf? How about 32-fold? Will that make him sleep better at night?
The thing that these liberal wolves forget is confidence and cause and effect. Injecting more money now just confirms to people that they should be worried as hell. After 16 eye operations by the same surgeon you sort of wonder if he will fix your problem after five more tries. Injecting money now does absolutely nothing to resolve the problems that plague the economy. Surely more money caused a small depreciation of the dollar but will that really paper over all the reasons foreigners prefer to buy their goods elsewhere?. Surely more money does little to reduce US taste for foreign goods. Surely more money does nothing to help restore the value of household saving so families will be able to spend confidently again. Surely money does nothing to improve social problems or make workers more educated or productive.
Wolf is very clear when he says he prefers the risk of too much stimulus to too little. But then he uses the loaded term deflation. He prefers the risk of inflation over the risk of deflation. That is a fair statement but again it is a red herring (no offense meant to blue mackerel). But really – who is forecasting deflation for the US economy? The US economy might be struggling but the last time I checked most of the inflation measures were coming in somewhere close to about 2% per year. As I said above, I doubt we will see too much inflation either but that’s not the issue here. The issue is that a monetary stimulus in 2012 and 2013 has no rationale. There is no cause and effect to support it. He uses no cause and effect in his articles. People like Wolf are somehow wedded to an ideology that might have had its place somewhere at some time – but the place is not the US and the time is not now. I wish Mr. Wolf would take off his grandmother costume before he ends up with a load of bricks in his gut. When Little Red Riding Hood figures all this out – the Wolf is going to be in a lot of trouble.