Ben Folds 5

A non-sequitur is a Latin term translated as ‘it does not follow’; referring to a conclusion that does not follow from the main premise.  It is usually considered a fallacy, meaning an error in one’s thinking.

I had a similar thought when I read HOW the Federal Reserve will use discrete macro policy to conjure job creation through extensive purchasing of long term debt instruments, or what’s called QE3+ (quantitative easing three, plus an open ended commitment to accommodate a lost spendthrift Congress.)  In a sentence, this is the third failed Keynesian initiative from the Federal Reserve to stimulate the economy.  It will not work!

But first some explaining is needed.

Printing money isn’t new to any central banker who is familiar with history.  Any initial study of the hyperinflation that brought Germany to its knees in the 1930’s ushering in the rise of Adolf Hitler would be familiar with this conjuring wealth tactic.  I should add one point of difference; today we use digital media instead of actually printing the money.  In reality, quantitative easing is not just simply printing money; it is a formal policy of credit allocation whereby the Federal Reserve actually permits US banks to borrow unlimited amounts of money.

Why won’t it work?  Because banks don’t suffer a liquidity crisis, they’re awash with cash.  They don’t need any.

Most economists are Keynesians, meaning they love the mystical authority esteemed by technocratic ‘professional’ central planners.  This political philosophy is similar to socialism.  It is also bereft of any ethics.  The myopia of contemporary macroeconomists reveals that they often begin any discussion of quantitative easing with the false premise that prior to the ‘lost decade’ experienced by Japan throughout the 1990’s, their really wasn’t enough available evidence to support the credibility of this fiscal/macro tactic to conjure wealth through immediate credit allocation/printing money.  They deliberately ignore Weimar and the social/fiscal experiment that ushered in the Nazi’s.

The Federal Reserve’s desire to devalue the US dollar means that prices go up.  The only immediate payoff is a relative rise in exports and an increase in the rate of inflation.  This type of currency manipulation (a formal fiscal/macro policy) permits more money chasing the same amount of goods/services, hence driving up prices and inflation.  The Reaganite policy mix termed ‘supply side’ inverted this stupidity and increased the rate of production, outpacing the rate of inflation.  We term this wage growth, meaning the purchasing power of the dollar got stronger.

Exactly how does the Federal Reserve wish to execute this current round of quantitative easing?

It will sell some assets of its portfolio, mainly US Treasury bonds and other kinds of securities.  It does this so as not to add to the supply of money in circulation, the main cause of inflation.

I firmly believe this will fail.  Why?  Because if the Federal Reserve makes no changes to the relative net amount of the money supply, it affects nothing.  Monetarism is a school of thought that firmly believes that without changing the fundamental relation of either the supply of money or market fundamentals regarding the relative values of competing currencies nothing happens. All we get is a weaker dollar with the same higher rate of both inflation and taxation.

What does this have to do with jobs?  Remember the non-sequitur.

Ben Bernanke and his professional technocrats firmly believe that if they intervene in the market for domestic securities through the formal policy of quantitative easing, it can increase the amount of liquidity available to banks for loans.  Their thinking is to effect lower costs of mortgages and other forms of long term borrowing that serves to only increase spending and hence tax revenue.

I should add that the Federal Reserve is preventing inflation by paying very high interest to US banks to keep reserves very high.  This means that banks will retain high amounts of money.  (Catch the non sequitur again.)

How does one fix this most intractable problem?

Allow individual citizens to get to both equity formation and asset formation.  Apply the political Republican ideals of individual sovereignty, limited enumerated government to the fiscal mess that haunts us.  Liberate the citizen to accept massive wage growth.  Do what Reagan did.  Unleash the American citizen.

Better ideas about the role of government and the sovereignty of the individual will fix the mess that besieges us.  Until we get to the renewal of these political ideas, we’re stuck with centralized authorities conjuring wealth through arcane un-ethical policies of currency depreciation in the hope that we’ll finance govmint by spending money to create tax revenue.


About William Holland

Systematic Theologian/International Relations
This entry was posted in Economics, Money and tagged , , , , , , , , . Bookmark the permalink.