Central bank policy, in one post
From The Kakistocracy:
I haven’t written much lately about The Economy. And that is a failure to prioritize, as he is the second most important American in history. The Economy has (capriciously, one must concede) modified what this country produces and who draws assistance for not producing it. One feature that was previously of grave concern to The Economy was the government’s bond purchase program called Quantitative Easing. That’s always been a formidable sounding name. Evoking images of plucky 4SD prodigies poring over abstruse datasets. Tuning economic models to the exquisite precision of a Patek Philippe. Uncovering the encrypted key to turn the impenetrable lock. Allowing The Economy to slip its surly bonds and soar untrammeled into the starlit night.
Though a perhaps less inspirational scene is the more accurate.
The Economy sucks, so we’ll print an avalanche of money to paper it over.
How much do we print?
How the fuck should I know? Just do it. We’ll figure it out later.
Some four and a half trillion subsequent, QE got “tapered.” Kind of like America’s founding stock…tapered. Though before progressing on to the QE news that now has most of you quivering like a housecat, I wanted to point out a fact that the Federal Reserve will not: money printing is a tax. Inflation is a tax. The truth is the government could operate exclusively through QE financing and defenistrate the antiquated tax regime entirely. It’s always surprised me that Krugman hasn’t suggested exactly that. Though I’m sure even the more obtuse of the herd might start noticing the outline of an abattoir in that scenario. But it is technically feasible. And if it were, do you think you’re getting those ten naval carrier groups protecting our freedoms for free? Unfortunately no. You’re still out the tab; only the form of payment is altered.
And at least one Fed president says the public has a delinquent balance.
Reuters) – The Federal Reserve should consider restarting its controversial bond-buying stimulus if inflation does not start moving back to 2 percent once downward pressure from the recent drop in oil prices dissipates, a top Fed official said on Tuesday.
(Minneapolis Fed President Narayana) Kocherlakota’s view is likely in the minority at the Fed, which stopped its bond-buying program last October after the U.S. unemployment rate dropped faster than expected. Most Fed officials now believe it is only a matter of time before inflation, which is running well below the Fed’s target, will improve as well.
Kocherlakota said Tuesday that it is a mistake to assume that just because the real economy is healing, inflation will automatically return to healthy levels.
Ah yes. Those dreadful sticky wages. All prices should perpetually rise, except the price for labor, which must always perpetually fall. I'm not privy to the Fed's personnel manuals, but I'm guessing the wages of central bank employees are damn near Loc-Tite.
Anyway, with that impressively alien name, I decided to hop over to Wiki and have a look for Herr Kocherlakota:
Kocherlakota was born in Baltimore, Maryland, to an American mother and an Indian American father, both of whom earned PhDs in statistics from Johns Hopkins University. They taught at the University of Manitoba in Winnipeg, Manitoba, Canada, where Kocherlakota spent most of his childhood.
I asked this once at Marginal Revolution: if we can 'quantitatively ease' (i.e., print money and buy our own debt with it), why don't we just eliminate taxes and the Fed can print up the money the government needs. The answer I got, as best I can phrase it, was 'institutional structures are needed to assure optimal outcomes.' That is how these creatures think, all 130+ IQ points of them.
The truth is far more ghastly than poor old Joe Sixpack with his flag and his hope in the institutions and his son in the military can ever possibly comprehend: the people at the top of the food chain are being given freshly printed money and buying real goods and services with it. Strip away all the arcane lingo and formulas, and that is all there is to it.
Thus, the inexorable, grinding price rise as the early bidders take goods off the market and the new money works its way through the economy, eventually immanentizing into groceries at $50/bag. This is ameliorated only by phenomena such as the Saudis suddenly deciding to open the taps, or that part of the real economy still allowed to function and harness productivity gains.
All the macroeconomics, econometrics, Krugman's tears, Cramer's screams, all of it is to obscure the fact that we are printing money and handing it out to some people first. (The fancy phrase for this is, money is non-neutral in the short term and neutral over the long term.) That is why government is living so high on the hog and Wall Street is swimming in cash. Slowly, the false capital crowds out the real capital (the savings from prior production). Slowly, the bubble economy replaces the real economy. It works so long as it works, until it doesn't.