Ron Paul Critic at the Fed: 'I Know Some Powerful People'
by Robert Wenzel: Fed
Economist Who Called Ron Paul a Pinhead Isn't Even an American
Williamson, another Fed economist from the same Fed branch, the
St Louis branch where another economist, David Andolfatto, called
Congressman Ron Paul a pinhead is out with a clarifying rant.
He starts his
rant by telling us that:
I have worked
full-time at the Minneapolis Fed (2 years), and have been a visiting
academic at the Federal Reserve Banks of Richmond, Cleveland,
Philadelphia, Kansas City, Atlanta, and New York. I currently
spend an average of something less than one day per week at the
St. Louis Fed, in my hometown, where my full-time job is at Washington
University in St. Louis. My title at the St. Louis Fed is "Research
Fellow," and I have an office over there (no window unfortunately)
with my name on the door. I also know some powerful people. I
went to graduate school with 2 Fed Presidents, know 4 Fed Presidents
well (Narayana Kocherlakota is a rather aggressive poker player;
Dean Corbae is not), and am an acquaintance of Ben Bernanke's
from back in the day (e.g. we both belonged to Glenn Hubbard's
NBER group for a time).
I am not
trying to boast here.
He then goes
on to attack some of Ron Paul's specific points:
Fed is immoral. The idea here has to do with what Paul calls
"printing money out of thin air." We have a government,
and the government is a tyrant. The tyrant must confiscate resources
in order to keep itself alive....Is the Fed immoral? Ron Paul
wants you to think that what the Fed is doing is mysterious, secretive,
and underhanded. We have all been hoodwinked but, according to
him, he has figured it out, and will proceed to enlighten us.
You can forgive Paul somewhat for the "printing money out
of thin air" idea, as this is part of what is conveyed in
conventional money and banking undergraduate courses. Indeed,
Paul's exposure to formal economics training appears to be confined
to a single undergraduate course, in which he seems to have been
exposed to the money
multiplier, probably the most misleading idea propagated in
He then argues:
here, a central bank is best viewed as just another financial
intermediary, the unique characteristic of which is that it has
a monopoly on the issue of some class of liabilities. The Fed
creates liabilities out of "thin air" to purchase the
assets in its portfolio. A bank creates deposit liabilities out
of thin air to purchase the assets in its portfolio. General Motors
can create equity claims out of thin air to finance the purchase
of new plant and equipment. Further, the fact that the liabilities
of the Fed do not represent specific claims to anything in the
future is neither here nor there. In private markets, in which
Paul puts much trust, we have developed arrangements by which
private firms issue claims (stock) which are not specific promises
to pay anything specific in the future (dividends are discretionary).
Further, private firms make no commitments about their future
plans to issue more stock, or to buy back stocks, decisions which
will affect the value of stock held by existing shareholders,
just as decisions by the Fed affect the value of the existing
stock of money outstanding. Nothing mysterious here at all
This is typical
Fed bait and switch talk. By calling money "a liability,"
Williamson is removing it from a special class and arguing a point
about Fed money because it falls into a larger class, also. It's
like calling Sports Illustrated cover girl Irina Shayk, a homo sapien.
Well, yeah, she is a homos sapien, but being a homo sapien is not
sufficient to get you on the Swim Suit issue cover of SI. Or maybe
Williamson thinks this is going to happen.
as issued by the Fed can be, I guess, considered a liability, given
their crazed Fed bookkeeping (which Ron Paul wants to audit). But
the essence of money is that it is a medium of exchange. Gold, for
example, has been used during various periods as money, but it is
certainly not a liability. Debt issued by General Motors is a liability
of GM, but it is not a medium of exchange. By confusing all these
classes, of liabilities and mediums of exchange, it truly is worse
than Williamson arguing that homo sapien is the only requirement
to get on the cover of SI. But judging from his "powerful people"
rant, I would not be surprised if he thinks Bernanke should be on
the cover of SI.
goes into a bizarre calculation of the impact of inflation, without
once mentioning prices! Nothing about the price of food, energy
or, even the iPad2. Don't spend too much time on this crazed paragraph,
but just know he reaches a conclusion on inflation based on this
seems very focused on inflation, and the resources extracted from
the private sector by way of the inflation tax. It would help
here to do some back-of-the-envelope calculations to get an idea
of the magnitude of resource extraction. From fourth-quarter 2010
NIPA numbers, GDP was about $14.9 trillion, and total expenditures
(by all levels of government) were about $3 trillion, at annual
rates (seasonally adjusted), so the tyrant was extracting about
20.1% of GDP (this is all levels of government). Now, inflation
has been hovering around 1% per year recently, but suppose it
were 2%, which is the Fed's stated inflation target (not officially,
but Bernanke says as much in public). What is seignorageNIPA numbers,
GDP was about $14.9 trillion, and total expenditures (by all levels
of government) were about $3 trillion, at annual rates (seasonally
adjusted), so the tyrant was extracting about 20.1% of GDP (this
is all levels of government). Now, inflation has been hovering
around 1% per year recently, but suppose it were 2%, which is
the Fed's stated inflation target (not officially, but Bernanke
says as much in public). What is seignorage, i.e. the implicit
revenue the government collects, through the Fed, from the inflation
tax? To calculate this, we need to know what the tax base is.
Let's think of the current stock of reserves as essentially T-bills,
which the Fed plans to retire in good time (to take it at its
word). Then, the remainder of outstanding Fed liabilities is essentially
currency (which certainly corresponds to Paul's language) which
is just short of $1 trillion, so let's call it $1 trillion just
for argument's sake. Then, with 2% inflation, the revenue from
the inflation tax is about $20 billion per year, or 0.7% of government
spending, or 0.14% of GDP. Small potatoes, and certainly not enough
to justify an armed mob outside the Fed in Washington screaming
"end the fed," as Paul seems to envision.
No not small
potatoes, high priced potatoes!
As Lew Rockwell
out just today:
3.9% increase in food prices last month the most since
Nixon is an alarming indicator.
Yet, in Williamson's
mind, and his equations, there is no problem. He ignores what people
have to pay for food at the grocery store or for gasoline. As long
as his equations tell him, inflation is under the Fed "target,"
there is nothing to worry about:
2% inflation, the revenue from the inflation tax is about $20
billion per year, or 0.7% of government spending, or 0.14% of
GDP. Small potatoes, and certainly not enough to justify an armed
mob outside the Fed in Washington screaming "end the fed,"
as Paul seems to envision.
He then finally
admits what the Fed is about, secretive taxation, but of course
this secretive, underhanded tax, is superior in his mind to the
"primitive" concept of honest, upfront taxation. I kid
then a whole branch of economics public finance
that deals with the issue of how those contributions can and should
be made, and the consequences of alternative means of resource
extraction for the government. In primitive economies, where the
costs of collecting taxes are high and financial markets undeveloped,
it can be economically efficient for the government to generate
much of its revenue with the inflation tax. In modern economies,
we think not.
He then bizarrely
tells us that the Fed isn't doing any significant inflation taxation:
that inflation is costly, and modern disciplined central banks
keep inflation rates low.
He says this
despite the trillion in assets that the Fed has bought since the
crisis and the continued buying of assets (now Treasury securities
via QE2). A lot has ended up as excess reserves not in the system,
but the increase in prices to date makes one shudder, if like a
Japanese nuclear reactor, significant amounts of funds start to
leak from excess reserves into the system.
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