Ambrose Evans-Pritchard, the influential British financial columnist, has issued perhaps the most thorough apology anyone can write in his piece today titled Shut Down the Fed (Part II). Here are some choice excerpts:
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.
NO, NO, NO, this cannot possibly be true.
Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).
Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago. . .
Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?
Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.
If I have written harsh words about these heroic resisters, I apologise for that too.
Are the Chinese right? You bet.
Here's Professor Krugman's preferred solution, in a brilliantly-titled blog yesterday, Default Is In Our Stars:
So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt . . .
While his brief blog is a bit noncommittal, it is known that he prefers the inflationary solution rather than the free-market solution of debtors actually paying lenders back their capital according to sound money principles as best as said debtors can. Some debts cannot be paid, just as some (many) equity investments in risky enterprises will fail. So be it. If a lender lends unwisely or unluckily, that's his or her business. But it should be the lender and the borrower who in general is the sympathetic figure. The lender worked, earned money and did not get to enjoy that money. Instead, he/she deferred gratification and let the borrower enjoy/make use of the capital. Why should the borrower benefit from official policy to debase the capital which the lender earned but never used personally/
More and more serious thinkers are moving away from the policies of those who claim the mantle of Keynes (in Evans-Pritchard's case, he wraps himself in something he says Keynes got right) but who are perhaps even more Keynesian than Keynes. They are moving in favor of sound money. If you are thinking gold, you have it right.
Because the Evans-Pritchard view remains an insurgent one, I thus continue to favor gold, which is really to say that I believe that the dollar will continue to lose value faster than the discounting rate, which sadly the Fed has determined is 0.44% or so yearly for 2-year money.
It is further my empirical observation over 30 years of following gold (but not owning it or gold shares till 2001 or 2002, when the Fed went all in for allegedly anti-deflationary policies) that when the discount rate is below the consumer price inflation rate, gold prices rise; otherwise they fall or hold steady.
If the general price level actually starts declining and there is a semi-credible plan for the government to actually repay its debts, then I will say, as Keynes did, that the facts have changed and I will change my investment views.
Gold looks to be on the move. One can look at that as bad, as it reflects a declining value of the dollar. I prefer to look at it as a positive, in that the desire of an increasing number of people for sound money is being voted on in an even more legitimate "poll" (the free market) than an off-year election.
Somehow the view has taken hold in many minds that owning or investing in gold is un-American. Au contraire. The Coinage Act of 1792, signed by President Washington, provided as follows:
SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.
The Founders took their money seriously, it would seem.
Gradually, momentum is building for a return to financial sanity. The Krugmanites appear to have peaked. The rise of the Tea Party (Tea Parties, to be technical), which in core financial ideology appears to me to mirror the Perot movement, reflects the thinking of the center of gravity of America.
Stay tuned. Something good just may be coming. Converts such as Mr. Evans-Pritchard are valuable and do not come easily. Unfortunately Dr. Bernanke and President Obama can do lots of "stimulatory" damage before their influence wanes, but the cavalry may be out there just beyond the horizon to rescue us from the slings and arrows of their outrageous policies.
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Your blog is on my list of semi-regular reads. Given the state of the world, it is now priority #1 for all citizens of voting age to get a basic education in economics. The internet, unlike the past, allows one to access wide ranging information on the competing "schools," look at them in terms of results, and choose published data, theory, and opinion sources that can be trusted. Thanks for being one of the trustworthy "opinion" sources.
ReplyDeleteAs for Evans-Pritchard, I used to read him regularly as well. As time went by it became clear that he was a Keynesian and was fully committed to excusing or papering over the increasingly destructive policy prescriptions of the political-money elites. Well, under those circumstances, he was clearly irrelevant and I stopped reading. It's interesting to now hear he is getting religion. However, I'm skeptical he'll confess all his sins and become an Austrian.
Thanks, Anon. Quite a well-written and well-reasoned comment. Even if AEP doesn't go all in re Austrianism, the title of his two-part series-- "Shut Down the Fed"-- is quite a strong one.
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