Friday, 31 October 2008

Fed up with central bankers

Former leader of the National Party Don Brash talks exclusively to political editor of the Sunday Star Times  Ruth Laugesen about life after politics and the direction he plans to take now that his marriage has broken up and he lives alone in a bachelor apartment in the Viaduct, Auckland.
Pic:Lawrence Smith/Sunday News 200508 Bill Ralston interviewed Don Brash a couple of nights ago on the back of news that the US Federal Reserve has essentially given NZ's Reserve bank a 'letter of credit' for up to US$15 billion, apparently to help America's "liquidity trap" by distributing credit more widely to so called "emerging countries" like ours to assuage our potential inability to draw down foreign currency reserves given our rapidly falling dollar.

Ralston asked one acute question of Brash: "Where do they get these billions to spray around," to which Brash essentially replied that both the Reserve Bank and the Fed can print as much of their own currency as they wish -- "without limit" --  in other words, it's credit produced out of thin air -- but that's alright, Brash hastened to add, since "no one's worried about inflation at the moment."

He'd be wrong about that -- just as he's wrong, still, about inflation.  Just as all central bankers have been for decades.

If this is nothing to worry about, then I'm a Muslim.  As I've tried to explain before, the central problem the central bankers create is not price inflation, but monetary inflation -- ie., not inflation of prices so much as inflation of the money supply, which is generally the cause of price inflation, and much more else besides.  The US now has negative real interest rates (don't mention the moral hazard: with government guarantees, that means you can't afford not to borrow) but the Fed chairman still continues to inflate the money supply in the blind hope that debasing the currency, diluting the pool of real savings and reducing the purchasing power of your money will, somehow, fix the problems caused by decades of the self-same approach. 

tms-9-11 From 2001 to 2004 now-disgraced Fed chairman Alan Greenspan inflated the money supply to "ease" the US economy through 9/11 and the collapse of the Dot.Com boom (see right).  He added $1 trillion plus to the money supply in that period, "slashing the federal funds target from 6.5% in January 2001 down to a ridiculous 1% by June 2003." [See 'Did the Fed Cause the Housing Bubble?'] At that time, no one was worried about inflation either, but that didn't stop Greenspan's monetary pumping setting off the housing bubble, the boom and now the dramatic collapse.

And the Dot.Com boom itself was caused by the double digit growth rates of the MZM and M3 measures of money supply during the late 1990s to get them through an earlier crisis -- a crisis that was caused by a relaxation of the money supply from 1994 to get out of that crisis -- which was caused by the monetary pumping to rescue the economy from an early crisis ...

Crisis after crisis after crisis, the seeds of each of them planted in the "rescue" from the preceding crisis. 

And people wonder where the so called "business cycle" comes from?!  Better to call it a "Federal Reserve" cycle. [See 'Yet Another Boom?' for similar thoughts.]

So "no one's worried" about inflation, says Brash the former central banker, except several years later when the malinvestments propped up by decades of monetary pumping finally start falling over -- and even then central bankers are too blind to see it for themselves.

No wonder central bankers still read Keynes.  About the long run, they're all braindead.


  1. Totally unrelated to anything - what hours do you keep PC? Being on the other side of the world, I notice new posts popping up in the middle of my day, ie your night. Are you some sort of vampire? The world needs to know...


  2. Central banking is a policy straight from the Communist Manifesto, and we all know how well Communist economic policies work.

    Who profits from central banking? Governments and bankers who get to use the newly printed money before it reduces the purchasing power of each existing dollar. Who suffers from central banking? The man on the street, who only gets the newly printed money after it has reduced the purchasing power of each existing dollar.

    It's not how many dollars you have that matters, it's how much you can purchase with each dollar that matters. Inflation (caused by central banking) reduces the quantity of goods that each dollar can purchase. E.g. a few years ago you could get a loaf of bread for $1, now the same loaf is $1.20, so $1 can now purchase 83.33% of a loaf of bread instead of 100% of a loaf of bread.

    A dollar is only worth what the central bank decides it is worth, so the State controls your wealth.

  3. "Are you some sort of vampire?"

    Now you have me. Notice how there's no photos showing me in front of a mirror? ;^)

  4. I think that Brash ought properly be read as saying that folks are viewing inflation currently to be less a problem than would be the increased downturn that would result if they didn't currently pump up the money supply. Brash isn't one who's generally in favour of inflation: his term as RBNZ Governor was admirable (as such things are conventionally measured in a standard neoclassical framework).

    If we stick within standard theory, money consists of more than just base money; it also includes a lot of bank created money. During the recent unpleasantness, it could reasonably (again, within standard theory) be argued that maintaining a level footing on base money would be massively contractionary in effect given a big contraction in the broader monetary aggregates (net of M1). M2 has grown much more slowly than M1 though M1 is a component of M2.

    I've been very critical of RBNZ's record on inflation in recent years. I'm more willing to cut them a pass currently because at least they're acting consistently with standard theory and I know that I'm in a pretty small minority that puts at least reasonable weight on Austrian concerns (my macroeconomics PhD prelim exam, written Jan 2000, argued that we were set for a big bust based on massive money growth in the late 1990s and malinvestments...)

  5. Hi Eric, I appreciate your comments -- and your PhD topic -- but I get incredibly frustrated by both the short term thinking of central bankers, and their utter inability to appreciate the effects of all the counterfeit capital they either pump out or endorse.

    Yes, the RBNZ has been good on "price inflation," but (just as in the twenties when real productivity gains were buried under the "stable" price inflation figures) the phoney price "stability" was purchased at the expense of a huge real inflation of the money supply.

  6. Heck, I really like free banking as an alternative: get rid of central banks entirely and move to competitive issuance of currency. Selgin and White made a very nice case for it a few years back; Larry White's book Theory of Monetary Institutions goes into much more detail on how it would work. But I know that I'm in a very small minority on those kinds of things, even among economists.

    In a world where standard theory rules, price stability is a pretty decent goal. The vast bulk of the time, it'll recommend keeping money growth much lower than it would be absent such a rule (given political pressures to inflate). It's only in cases of potential deflation where a price stability rule turns inflationary, and that rarely happens. I got incredibly frustrated when RBNZ was inflating even when such inflation was utterly contrary to the rules under which they were meant to be operating and the standard theory they were meant to be using :> I guess frustration is relative to expectations.

  7. Clarification: business cycles weren't my PhD topic. That was just part of my answer on the prelim macro exam question asking for explanations of the 1990s boom. I'm by no means a macroeconomist; everybody has to write an exam in macro though. My PhD topic was in public choice with specific application to linkages between voter preferences and economic policy outcomes.

  8. Re frustration: If you involve yourself in national finance, however tenaciously you hold an indie position, you will inevitably be drawn into what simply *is*. And in that horrible place there is not much room for libertarianism.

    Mises org has been posting this stuff for years and years - no one has really listened or is likely to.

    Maybe when the wheels come off the economy entirely people will consider the badly needed reorganisation, but until then something resembling a second New Deal is what they will go for.

    And if enough money is thrown at this problem it will appear to go away - until the next time.

  9. Yes, undoubtedly you're right again, and the sensible thing would be to say nothing and simply hope it all comes out right in the end despite all the signs that they're making a complete bollocks of it...

    But does that sound like me?

    Seems to me that the economic collapse should be as much of a wake-up call to honest people as the collapse of the Berlin Wall should have been.

    The collapse of the Berlin Wall exploded for all time the myth that socialism could produce either wealth or happiness -- the only possibility for socialists thereafter was to hide their eyes from the evidence of all that misery.

    And now this economic collapse has, or should have, exploded the myth spun out over nine decades of central banking that nationalising the money supply and creating credit out of thin air works in any way.

    The evidence is now in on both these disastrous theories -- and ironically Ludwig von Mises was right on both of them. He predicted the former in 1922 in his book 'Socialism,' and the latter in 1912 in his book 'The Theory of Money and Credit.'

    You'd think some bastard would give him credit for something, wouldn't you?

  10. Oh, incidentally, this isn't entirely "indie thinking."

    Liberty Scott drew my attention to this letter in the Telegraph from 16 economists, opposing a Keynesian style government spend-up in the UK:

    "Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country's way out of recession.

    "It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession.

    "Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.

    "Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.

    "Occasional slowdowns are natural and necessary features of a market economy.

    "Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

    "If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.

  11. And just to overload you with quotations [ :o) ], I agree with Thrutch, who "found some solace in this quote from Lincoln's journal where he's grappling with the thought of whether or not to keep fighting for the abolition of slavery, a fight which at times seemed utterly hopeless":

    "I have never professed an indifference to the honors of official station; and were I to do so now, I should only make myself ridiculous. Yet I have never failed -- do not fail now -- to remember that in the republican cause there is a higher aim than that of mere office. I have not allowed myself to forget that the abolition of the Slave-trade by Great Britain, was agitated a hundred years before it was a final success; that the measure had its open fire-eating opponents; its stealthy "don't care" opponents; its dollar and cent opponents; its inferior race opponents; its negro equality opponents; and its religion and good order opponents; that all these opponents got offices, and the adversaries none. But I have also remembered that though they blazed, like tallow-candles for a century, at last they flickered in the socket, died out, and were remembered no more, even by the smell. "

  12. I agree someone should give Mises credit. To my credit I wrote a letter on him a few years ago and Mary Holms of NZ Herald made it her lead and got a picture drawn ;-). But in the age of globalisation Mises seems old hat. Things change.

    And globalisation has exacerbated the problem here - there is no dount about that.

    Today Mises is far more likely to find favour with leftist anti-globalisation wingnuts than any other group.


    I would be interested in how you think Mises would view globalisation.


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