Ambrose Evans-Pritchard Bravely Calls on Bernanke to Print More Money
Posted by Michael A. Kamperman on March 1, 2010
This man is now my hero. He is the first highly respected financial commentator to recognize the seriousness of the current debt-induced deflationary depression. At risk to his reputation he has manned-up and called on Ben Bernanke to resume quantitative easing. When it comes to quantitative easing ignorance reigns. Many people have left comments on his column that the way to get out of debt is not to take on more debt. They are confusing borrowing and spending with printing. In the U.S. quantitative easing involves the Federal Reserve creating money out of thin air (printing) and purchasing assets. When the Fed purchases U.S. Treasury bonds with printed money the U.S. debt is reduced, not increased. This gives the federal government the leeway to maintain or increase spending without raising taxes or increasing the national debt. The economy desperately needs support. Increasing federal spending is the only way to stabilize the economy. As Evans-Pritchard points out the state of Illinois is running a $13 billion budget deficit on a total budget of $28 billion. Basically, Illinois needs to double state tax revenues or cut state spending in half. Many other states are in similar dire predicaments. The states cannot print, the Fed can. It must fulfill its duel mandate of price stability and full employment. Likewise, the federal government must fulfill its moral obligation to support the states.
Evans-Pritchard points out “the Fed’s Monetary Multiplier dropped to an all-time low of 0.809 last week.” Money is not circulating as it should. He also points out that “the M3 money supply has fallen at a 5.6pc rate since September.” Additionally, he highlights that ”the contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while eurozone M3 fell by a further €55bn. Japan’s GDP deflator has dropped to a record low of -3pc. He claims “these are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.” He is so right!
Evans-Pritchard quotes the Bank of England’s Head Governor Mervyn King as saying “”I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can’t be true of everybody,” he said. We already know Larry Summers is advising President Obama to pursue just such a strategy. He believes we can spend less in America and save more, all the while growing our economy by selling more to others just like China does. As King states we can’t all run an import/export surplus. Meanwhile the British Pound is getting pounded by currency markets limiting the ability of the Bank of England to aggressively print money and revive its economy. It is up to Ben Bernanke and the Federal Reserve to aggressively print more money thereby providing cover to Britain, Japan, and the European Central Bank to pursue their own quantitative easing programs. Fed Vice Chair Donald Kohn retired today. This means President Obama now has three openings on the Fed. His appointments will decide the course the Fed ultimately takes. Hopefully someone in the Whitehouse is pointing out Evans-Pritchard’s comments to him.
NorrieC said,
There is a very good reason why the comments section is full of people berating his viewpoint. The people in the comments believe that printing money solves precisely nothing. In fact, in practice it has the opposite effect to the intended one.
No need to repeat Mish here:
http://globaleconomicanalysis.blogspot.com/2010/03/rep-suzie-bassi-illinois-in-utter.html
“In the U.S. quantitative easing involves the Federal Reserve creating money out of thin air (printing) and purchasing assets”
Yes, yes, and the obfuscatory vocabulary here is ‘assets’. Generally, most people view an asset as something of worth as opposed to a liability. In the FED’s dictionary the word ‘asset’ has a completely different meaning. What the FED has purchased with its freshly printed dollars is the largest pile of overpriced excrement the world has ever known. Not only will those ‘assets’ never generate an income stream, they will never return the original capital. The FED has printed dollars which cannot be distinguished from the dollars already in the pockets of the US public. They are completely fungible. So the cost of purchasing those grossly overpriced ‘assets’ is laid firmly at the feet of the US taxpayer and hence when the true losses are eventually recognised the taxpayer will get stiffed.
“It must fulfill its duel[sic] mandate of price stability and full employment.”
Where does this word ‘must’ come from? Surely you dont refer to yhe constitution? Why would the FED obey that tiny part of your constitution whilst, at the same time, running roughshod over all of the rest? ‘Stability’? Look back at any graph from 1913 onwards. Does that look like stability to you?
There is some truth in what you say. We are going through a very bad bout of deflation. The collapse in credit hugely overshadows the increase in printed money hence the reason printing money is having no effect in trying to increase the overall money supply. The effect of continuing deflation is not in doubt. We have plenty of history to light the way down that particular tunnel and there are global conflicts along that path. However, what the mechanism of deflation does do is that it clears the bad debt from the system. Once cleared, the powers that be can resume their wealth transfer mechanism of debt-based, fiat, fractional reserve banking money.
If however, you attempt to ’save’ yourself from the deflationary spiral and keep the bad debts on the books there is also a clear template for the outcome. One need only look at Japan for that particular example.
If the deflation is allowed to occur and the bad debt is cleared then the parties holding the bag (banks)take a haircut. The public suffer in the meantime due to the combined effects of unemployment, rising real prices and shortages. But historically the recovery period is relatively short. If attempts are made to prevent the deflation spiral they have cancerous effects which last a very long time. Arguably both the bag holders and the public suffer a slow painful death over decades.
The only reason for opting for the latter therefore would be a desire to ’save’ the banks. This current trend of government colluding with Wall Street/The City to lie about the bad debts with mark-to-fantasy and Enronesque off-balance sheet accounting serves only to sustain the very entities which caused the problem in the first place. Your support for this methodology leads me to believe that you would prefer to support the corrupt governments and banks at the expense of the population at large. Please tell me I’m wrong.
Badtux said,
Yes, Norrie, we know that there’s a lot of people who’ve bought the neo-Austrian snake oil. The problem is, that’s all it is — snake oil, based upon faith that holy Saint Von Mises, He who has not a single equation in any of his books, is correct simply, because, well, He is God or something I guess.
For the current situation where $4 TRILLION in real estate assets disappeared from our economy, we are a long ways away from having printed enough money to replace even that decline in our effective monetary base. I am still not convinced that buying Treasuries is the most effective form of monetary easing, but one thing I do know is that it certainly is the most effective way to fund fiscal stimulus, because it requires neither raising taxes (which could harm the economy) nor cutting spending (which would raise unemployment and thus harm the economy), and the $4T in asset value declines give us sufficient cover that it won’t cause inflation (remember, we’re at 0% real interest rates right now, and given the size of the world economy and the number of dollars out there, we can print a *lot* of dollars before we raise the money supply — and thus inflation — by even 1%). As a long term solution clearly you can’t print money forever. But we don’t need to print it forever — just until the economy turns back up, which fiscal stimulus *will* do if done on sufficient scale (i.e., much larger than anything the Obama administration has attempted).
As for the neo-Austrians… well, they can repeat as much claptrap as they want. They don’t have any data to support their religious beliefs — indeed, like Christian fundamentalists they completely reject the notion that you need to test their beliefs against actual data — so I view it as more of a religious faith, a religion with the works of von Mises as their Bible that is true “just because”, rather than something useful for determining proper monetary policy. People who think that religion should be in charge should move to Saudi Arabia or Iran, because that’s what happens when religion is in charge. No thank you, sir!
NorrieC said,
Badtux
Why the ad hominem attack rather than an argument based on numbers? I never once mentioned Mises or Austrian economics. What are you running away from?
“$4 TRILLION in real estate assets disappeared from our economy”
Er…no. What disappeared was two things and $4 trillion of real estate assets was neither. 1)The first thing that disappeared was a completely and utterly false and exaggerated valuation of real estate that bore no resemblance to the true underlying asset value i.e. the cost of the bricks, tiles, plumbing, electrics, labour, land (plus a bit of profit for the builder). 2)The second thing that disappeared was the completely unsupportable income stream from the ‘investment’ in 1). These ‘investments’ were made full in the knowledge that the loan recipients could not and would not ever pay back. Thats what disappeared. The tide went out and it became all to obvious who was swimming naked. ONly the exaggeration has disappeared. And not all of it has disappeared yet by any means.
“we are a long ways away from having printed enough money to replace even that decline in our effective monetary base”
Ahem…I think you’ll find that’s what I said.
“we can print a *lot* of dollars before we raise the money supply — and thus inflation”.
That is confusing two issues. I agree, you would need to print a lot more dollars to make up for the quantity destroyed as credit. If they were matched one for one then we would have neither inflation nor deflation (referring to the money supply here, not prices and wages). However, the newly printed cash is currently remaining on the banks balance sheets to attempt to fill that enormous black hole which they are currently covering up with their mark-to-fantasy accounting. If that money were not to remain there and be lent out to Joe public then we would definitely see a rise in prices and hence wages (what in the media is referred to as inflation). So yes, you can print a lot of new dollars and not create inflation of either sort as long as they reside in the same location as the lost credit dollars. You cant allow them out without causing a very big rise in prices and wages.
“As a long term solution clearly you can’t print money forever.”
Ah, now we get to the nub of it. Judging by history how long do you estimate we can continue to print money? Think Japan. 1 month? 3 months? 6months? 1 year? 5 years? 10, 20, 30 years? At what point do you decide to call it a day?
“just until the economy turns back up, which fiscal stimulus *will* do if done on sufficient scale (i.e., much larger than anything the Obama administration has attempted). ”
So can you offer any of your equations or data to prove this has worked in the past?
And ending with more ad hominem attacks.