The convention wisdom at the Economist, Bloomberg and Financial Times is that Ben Bernanke should be doing even more to irritate the economy. Sorry, wrong word. They think Bernanke should stimulate the economy, but even within the Fed, there is dissent about continued quantitative easing as the solution for all the world’s problems.
More, more, more quantitative easing is a persistent theme of columnists in the Economist and the Financial Times. Keep the faucet open, they write. They make this argument particularly strenuously where the Bank of Japan is concerned.
Not that the faucets are open. Bloomberg’s Brendan Murray and Scott Lanman wrote that “the world’s four biggest developed-market monetary authority – the BOJ, the Fed, the European Central bank and the Bank of England – are aligned in their commitments to spur growth and return their economics to full strength....The Fed,, the EC and the BOJ have more than doubled the combined size of their balance sheets since the global financial crisis broke out in 2007, expanding them by a total $4.7 trillion. With the BOJ’s action, that amount could e increased by at least a further $1.3 trillion by the end by the end of 2014.”
With all this money, one would think that the rising flood would raise all boats. However, back in November, Dallas Federal Reserve President Richard Fisher remarked to CNBC’s Larry Kudlow: “Well, Larry, this is purely my opinion, but so far we have been carrying the ball trying to stoke recovery with monetary policy. It would be nice to have the fiscal authorities get their act together so we wouldn't be dependent on monetary policy. There's a limit to what we can do. We just can't have what I call a Buzz Lightyear monetary policy "to infinity and beyond" because every time we purchase a Treasury Security--and the duration of our securities and treasuries is now out to eight years, almost eight years--what we're doing is we're encumbering, as a fiduciary, those who will follow upon us and they're going to have some very tough Hobson's choices to make just as the Congress now has to make. I want the Congress to make them...”
Bloomberg News’s editorial board has taken a more expansive view. It recently observed: “The combination of QE and an explicitly higher inflation goal – the step central bankers are so reluctant to take – would be far more powerful than QE by itself. But the most powerful monetary stimulus of all would go even further than this. With or without a more commodious inflation target, QE is self-limiting in the sense that the central bank promises eventually to unwind it. This is why financial markets are so preoccupied with the Fed’s exit strategy. Once the U.S. economy is back at full employment, investors assume the Fed wills tart to sell the securities it has bought under the QE program back into the markets, thus shrinking its balance sheet, reducing the supply of money and returning monetary policy to normal operations.”
Jazz double bassist Charles Mingus thought you had to learn the musical craft before you played free jazz. The late Rev. Maurice Boyd wrote: “Mingus treated with fierce contempt those exponents of free jazz who aspired to be original before they had learned their notes, and thought themselves avant-garde before they had mastered their instruments. He had no respect for charlatans who wanted the haunting without the trying. Mingus thought of free jazz as Robert Frost thought of free verse: it was like playing tennis with the net down. Mingus used to say, ‘you can’t improve on nothin’, man. You gotta improvise on somethin.’”
When it comes to monetary policy, there has been a whole lot of improvisation over the last decade. And improv seems to be the main feature of the central bank presentations. It is unclear where all this improve leads. In an interview with Fortune magazine, FP Crescent Fund honcho Steven Romick argued: “The Federal Reserve cannot keep managing interest rates at these levels forever. It’s an incredibly dangerous strategy. Since the beginning of time, I don’t think an economy has successfully grown with government involvement to this degree.”
“If something cannot go on forever, it will stop, ” is the usual formulation of Stein’s Law What economist Herbert Stein actually said about the American balance-of-payments problem was: “But if it can’t go on forever it will stop. And if we never do anything that we can’t go on doing forever we will never do very much.”
In our current economic climate, it is easy for adults to understand the importance of the old expression “a penny saved is a penny earned.” Parents often try to instill this timeless message in their children by instructing them on the importance of saving money, and attempting to provide their kids with a basic understanding of how money works. Of course as a child it can be difficult to grasp some of these basic concepts, but thankfully, parents now have Treasure Hunt in the Enchanted Forest to make that task a lot less challenging.
Treasure Hunt in the Enchanted Forest is an outstanding children’s book written by Ian Lucas and Chris Mendoza. In the book, the wise and wealthy “Grandpa Owl” teaches the younger owls about how money works, and what gives currency its value. The Grandpa Owl then breaks down some of the flaws with America’s current monetary system using analogies that kids can understand- such as the game monopoly. Economic concepts, such as using the gold standard as a means of combating inflation, are explained in a way that is easily comprehensible to younger readers. By the end of the book, the young owls discover how currency gets its value and they begin discussing ways to save money. Once read, children will likely feel inclined to begin saving their pennies and nickels as “treasure”.
Treasure Hunt in the Enchanted Forest makes a great gift for a young mind. The informative lessons in this book are accompanied by excellent illustrations by Heather Cash, which aid in making economic concepts more exciting for kids. Since this book will encourage and inspire your son or daughter to begin saving their money, it is certainly a gift that keeps on giving. Once your child completes this children’s book, they will understand the value of the paper dollar (or lack thereof) at an early age.
So let us examine what monetary policy should be going forward.
-- Vice Chairman Kevin Brady, Joint Economic Commission, April 24, 2012
Not far from here on West 141st Street stands the Grange, the recently restored home of Alexander Hamilton, our first Secretary of the Treasury. After careful consideration, Hamilton devised a monetary system that revived a moribund American economy and fostered rapid economic growth. As Hamilton did in his day, we must thoughtfully and clearly define the role of the Federal Reserve going forward.
A sound dollar is the sure and strong foundation for long-term economic growth. A sound dollar creates certainty and facilitates new business investment and long-term job creation. I believe the focused role of the Federal Reserve should be to protect the purchasing power of the dollar by maintaining long-term price stability.
Are there many other actions that Congress and the President must take to retain America's economic preeminence for the next 100 years? Of course. We must:
However, these reforms by themselves will be insufficient if the Federal Reserve fails to maintain the purchasing power of the dollar over time. You only need look to the Great Depression of the 1930's and the Great Inflation of the 1970's to see that both price deflation and price inflation are twin evils that reduce real output and employment.
Learning from the past and looking to the future, Congress must select the right monetary policy mandate, maintain a Fed independent of political pressure, and hold the Fed accountable for the results.
So let us examine what monetary policy should be going forward.
“[T]he Federal Reserve should move to a … more rules-based policy of the kind that has worked in the past.”
So observes Prof. John Taylor, of Stanford, in The Wall Street Journal.
Prof. Taylor thereby invites a most interesting conversation.
What kind of policy has worked in the past? What is the empirical evidence?
The late Roy Jastram, professor in the School of Business Administration, Berkeley, from 1946 through 1982 is widely recognized as one of the greatest scholars of the empirical data relating to the performance of monetary standards in practice.
On December 2, 1981, not long after testifying before the U.S. Gold Commission, Prof. Jastram addressed the Security Analysts Society of San Francisco.
This is, in part, what he said:
"From the time the United States went off the gold standard in 1933 the wholesale price level has gone up by 760%. Since England abrogated the gold standard in 1931 her price index number has risen by over 2000%.
"Before that the two countries had a combined history of 350 years of long-run price stability. The price level was the same in the United States in 1930 as it had been in 1800. In England the price index stood at 100.0 in 1717 (the first year of her gold standard) and it was at that figure again in 1930.
"I am here today as an analyst, not as an advocate of a single point of view. I do not believe that a return to a gold discipline would be a magic cure for all economic ills. Nor do I take the opposite extreme of blaming on a Gold Standard every economic ill that humanity was heir to during its tenure. Instead, I would like to take some time to sum up, very briefly, the conclusions I have reached based on my years of research leading to two books on the precious metals, The Golden Constant and Silver: The Restless Metal (John Wiley & Sons, New York).
Professor Lawrence White addresses and neatly dispels the confusion shown, even by certain political aspirants, as to the sufficiency of American gold stocks on which to base a restoration of the classical gold standard.
From Making the Transition to a New Gold Standard, as presented at the 2011 Cato Institute monetary conference and published at FreeBanking.org, extract reprinted with permission, Prof. White presents decisively argued reasons why it is impractical (as well as unnecessary) to establish 100% reserve requirements of gold for circulating currency.
Larry White is Professor of Economics at George Mason University. He specializes in the theory and history of banking and money, and is best known for his work on free banking. He received his A.B. from Harvard University and his M. A. and Ph.D. from the University of California, Los Angeles. He previously taught at New York University, the University of Georgia, and the University of Missouri - St. Louis.
Professor White is the author of The Clash of Economic Ideas (Cambridge, forthcoming); The Theory of Monetary Institutions (Basil Blackwell, 1999); Free Banking in Britain (2nd ed., Institute of Economic Affairs, 1995; 1st ed. Cambridge, 1984), and Competition and Currency (NYU, 1989). He is the editor of F. A. Hayek, The Pure Theory of Capital (Chicago, 2007); The History of Gold and Silver (3 vols., Pickering and Chatto, 2000); Free Banking (3 vols., Edward Elgar, 1993); The Crisis in American Banking (NYU, 1993); William Leggett, Democratick Editorials (Liberty Press, 1984); and other volumes. His articles on monetary theory and banking history have appeared in the American Economic Review, the Journal of Economic Literature, the Journal of Money, Credit, and Banking, and other leading professional journals.
In 2008 White received the Distinguished Scholar Award of the Association for Private Enterprise Education. He has been Visiting Professor at Queen's University of Belfast, Visiting Fellow at the Australian National University, Visiting Research Fellow and lecturer at the American Institute for Economic Research, visiting lecturer at the Swiss National Bank, and a visiting scholar at the Federal Reserve Bank of Atlanta. He co-edits a book series for Routledge, Foundations of the Market Economy. He is a co-editor of Econ Journal Watch, and hosts bi-monthly podcasts for EJW Audio. He is a member of the board of associate editors of the Review of Austrian Economics and a member of the editorial board of the Cato Journal. He is a contributing editor to the Foundation for Economic Education's magazine The Freeman and lectures at the Foundation's annual seminar in Advanced Austrian Economics. He is an adjunct scholar of the Cato Institute and a member of the Academic Advisory Council of the Institute of Economic Affairs.