Ruinous Inflation Proposals

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In this day and age, one should never assume that “educated” persons, especially those who have “earned” advanced degrees in economics, know the least bit of economics or possess the least bit of sense that might steer them away from the refuse that passes for economic thought. This is especially true in the case of those who propose ruinous money policies, thereby joining the ranks of monetary cranks and demonstrating to one and all an economics IQ south of 25.

I speak specifically of Biagio Bossone and Richard Wood. They have penned an article that more than amply wins them the prize of monetary crank of the year. Unlike lay populist-inflationists who are commoners lacking in economics education, these two gentlemen have no such excuse. Both are professional economists who have been and still are very deeply involved with governments and government institutions.

Bossone and Wood are very dangerous men. Their ruinously inflationary ideas, if adopted, will destroy the economies that they think will be saved. The lofty positions they have held in such institutions as the World Bank, the IMF, the OECD, the Paris Club, and the Australian Treasury make them all the more dangerous. But what makes them most dangerous is their ability to make their proposals sound logical, necessary and effective. They are persuasive to the kinds of officials and politicians who respect statist credentials and who are looking for a magical solution to what they view as “problems”. We are living in such a topsy-turvy world of ignorance married to power that the most incredibly stupid policies can be recommended and adopted. Shallow, impatient and ignorant politicians possessed of an agenda and biases listen to a brain trust, as in the classic case of Franklin Delano Roosevelt. They then proceed to inflict terrible policies upon a nation.

Bossone and Wood have a ready recipe for ruining the market economy of any country. The name of it is – MONETARY INFLATION. But they do not call it by that name. We already have one new name for inflation of the monetary base, and that is QE (quantitative easing), and now we have another, thanks to them. It’s OMF or overt money financing. There is an important institutional difference in QE and OMF, the result of which is that the price inflation under OMF is worse than under QE.

The word inflation appears once in the cited article, and it is to assure readers that the QE policies so far have not triggered something called “demand-pull inflation”. Forget the adjective demand-pull. They are wrong about inflation, in the monetary aggregates (like the monetary base and  money supply), in asset prices, in commodity prices and in retail goods and services.

In the U.S., for example, food prices are rising at over a 4 percent rate. Salmon prices are up 40 percent. Many prescription drug prices are rising 7-10 percent. U.S. home prices are up over 12 percent this year. In 2007, gasoline made a record high of $3.18. Crude oil was $65 a barrel. In 2008, gas fell to $2 and crude to the $40 area where it remained in 2009 until the FED launched its inflation known as QE. Gasoline in 2013 averages $3.55, above its previous record while crude oil is now about $105 a barrel. Bar soap, tuna fish, sardines and potato chips have all been downsized. Palm oil, a major component in commercial soaps, was $382.83 a metric ton in July of 2003. It has doubled to $763.04 as of June, 2013. That’s 7 percent a year, on average.

The government constantly adjusts consumer price indexes downwards, under the presumption that when prices rise, people substitute away from their preferred goods to cheaper goods. Yes, one can now read on forums that people decide to make their own soap and do their own auto repairs. This doesn’t negate the fact that prices have risen! It only means that the price index doesn’t measure the fact that prices have risen. The government can get away with murder in more ways than one.

It is misleading and outright wrong for Bossone and Wood to use technical jargon like “demand-pull” in describing inflation. A continuing rise in prices over many years, which is how inflation manifests itself, has its origin in one cause only and that is excessive money-printing. It is absolutely no accident that Americans are experiencing inflation right now at a high rate, once we observe that the FED’s policy has doubled a money supply measure like M1 in just 4 years. That’s a rate of 18 percent a year. Bossone and Wood want even more money growth than this. They think the central bank has been too stingy.

Bossone and Wood begin their effort in persuasion by observing “that current monetary and fiscal policies are misplaced and are largely impotent” at stimulating economic growth. I would say they are totally impotent. I would say that they are not only totally impotent, they cause the opposite to happen. They degrade economic growth. There are good reasons for this impotence, which is why their recommendation to change QE to OMF will fail and produce a result opposed to their hopes.

Bossone and Wood think that monetary and fiscal actions by the central bank and government can stimulate economic growth. They are wrong. There is no way in the world that monetary policy can stimulate growth because such growth comes not from “money”. There is more than an ample supply of money to conduct economic exchanges. As long as there are market prices, any supply will suffice; and certainly decades of rising prices attest to the fact that money growth has more than sufficed for the purpose of market transactions.

Growth comes from businesses that invest in profitable projects financed by real savings. It comes from capital accumulation, and that requires saving in an expectation of earning a return. To the extent that central bank and government policies are manipulating interest rates and influencing asset prices, they are discouraging saving and increasing the uncertainty of future returns. There is certainly no way that government can stimulate economic growth if, as it is doing, it borrows from banks, the central bank and the public, thereby either inflating the money supply or diverting savings from business enterprises, and then plows the money into non-productive projects like foreign wars and pseudo-education. Calling these “investments” doesn’t make them investments.

The delusion that central banks and governments can stimulate economic growth is at the heart of the Bossone and Wood argument. They think an economy is like a patient with a heart attack who requires stimulation or heart massage. In fact, an economy is more like a basically healthy person who has been battered and shackled by police.

Bossone and Wood drag in the canard of government austerity. To them there is government “austerity”. In April of this year, federal government expenditures are running at an annual rate of $3.82 trillion, just below a record $3.84 trillion one year earlier. Six years earlier, the rate was $2.92 trillion. An increase of 31 percent in 6 years or just over 5 percent a year can hardly be termed austerity.

Bossone and Wood think of the economy in misleading metaphorical terms that make the economy sound like a person who is a sick patient subject to inexorable diseases that require the interventions of physicians. They say that “recovery is failing to take hold” in the same way that a patient fails to recover after being given doses of medicine. Here the medicine is monetary and fiscal medicine or government doctoring. Some countries are “sliding deeper into depression.” This is like a patient sliding into a coma. What’s the disease? They say it’s “deflationary tendencies”. How wrong can these doctors of economics be when their thermometers cannot even measure prices? How wrong can they be when they assume that the patient’s temperature is the cause of the purported disease? How wrong can they be to think that a falling price level, if ever we were to observe such a phenomenon which we are not now observing and haven’t observed for decades, is a bad thing? Have consumers not benefitted tremendously from lower prices for information storage and manipulation?

Bossone and Wood are clueless men who nevertheless possess the power of intellectualizing their false ideas. This would not be a bad thing in a stateless world. In this world where governments have powers to enact their destructive policies, we get invasions of Iraq and invasions of market economies.

At least, the two do not hide what they want. They endorse an article by two other inflationists with the title “Helicopter money: or how I stopped worrying and love fiscal-monetary cooperation”. What Bossone and Wood advocate and dub OMF is the age-old fiat money inflation in which the government directly prints and distributes money. The central bank is bypassed. This is the same idea proposed by lawyer Ellen Hodgson Brown. What Bossone and Wood want is “for governments to legislate to enable the Ministry of Finance (not the independent central bank) to create new local legal tender currency to be used to finance budget deficits.” In the U.S., the Ministry of Finance is the Treasury Department.

At present, the central bank has a degree of separation from Congress in the control over the monetary base. This prevents Congress from issue after issue after issue of fiat money. Instead Congress has to borrow money, and borrowing entails subsequent taxation. This stems the money creation. Bossone and Wood propose to remove this institutional barrier. QE policies have already crossed this barrier to a large extent, but Congress built a new one by allowing the central bank to pay interest on bank reserves so as to prevent the conversion of the monetary base into money via bank loans to the public. OMF enables direct fiat money inflation.

Direct control over money has been tried before in this country, in fact, direct government issuance was tried many times by colonial governments. The money issues were called “bills of credit”. Unless the system had built in constraints, not usually the case, the issues far outran the capacities of the governments to collect taxes and to redeem the issues in gold coin, if they so promised. The result was ruinous inflation.

The U.S. Constitution closed the door on bills of credit and mandated silver and gold to be used by the governments, state and federal, as money. This mandate was breached during the Civil War but later repaired. However, the mandate for metallic money was fully erased in stages in the twentieth century, replacing metallic money with central bank money. Now Bossone and Wood are recommending another major step backwards, which is that the central bank money be replaced by government fiat money. It would be obtained by issuing non-marketable bonds to the central bank, which becomes a passive and empty player that ships the dollars or euros to the Treasury.

Bossone and Wood are politically naive. They mention constraints on fiat money issue. Using Italy as an example, they say that the fiat currency would be issued “to directly finance a budget deficit of predetermined magnitude.” The constraint is supposed to be that the budget deficit is “predetermined”. But how? What legislature operating in a democratic political system will not enlarge the budget indefinitely? How could such a predetermination ever occur except by constitutional amendment? How likely is that? What guarantee is there that such an amendment, even if adopted, would not later be altered or ignored?

Bossone and Wood also naively write of the government returning dollars or euros to the central bank to redeem these bonds: “At a later date, if and when appropriate, and after economic growth has provided a revenue dividend, these bonds could be redeemed.” How likely is that to happen? Even now, five years since the panic of 2008, the FED continues to buy $85 billion of mortgage and government bonds a month and constantly devises new excuses for doing so. What government would not have even more excuses not to redeem its modern bills of credit being dubbed OMF?

Bossone and Wood act as if markets do not exist. They act as if the government controls the economic decisions of billions of people, when the reality is that people have substantial power to make their own decisions. Faced with the proposed monetary system, their incentive is to insure themselves against the expected greater depreciation in the currency, which will be caused by even greater fiat money issues than is now the case. They will bid up prices as they attempt to rid themselves of the new money issues circulating in the economy. Price inflation will worsen. Asset price bubbles will occur. Uncertainty over monetary calculation will rise steeply, inhibiting economic growth. It is absolutely astonishing that Bossone and Woods never once mention these consequences of their recommendations even though they have been the ruinous results of such policies many times in the past and even in the recent past.

Every country should only be Zimbabwe, according to Bossone and Wood. Good luck with that.

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