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The Fed will cause hyperinflation!
#1
Hawks, Doves, and Ostriches

August 14, 2013 4:10 pm

More than four years ago Allan Meltzer issued a dire prediction: the Fed’s policy of expanding its balance sheet will lead to high inflation. We’re still waiting for that to happen. So it might behoove Meltzer to admit that he was wrong and ask where his analysis went wrong.

OK, you can stop laughing now. What Meltzer does, instead, is complain that the Fed has undermined his perfectly fine analysis. You see, those dastardly officials are paying interest on reserves – a hefty 0.25 percent – and this has led to something totally unexpected:

The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.

So the money supply broadly defined hasn’t taken off – a complete surprise! – and hence no inflation.

Except that this isn’t at all a surprise; it’s exactly what those of us who had analyzed the liquidity trap predicted would happen when you expand the monetary base in an economy at the zero lower bound. From my 1998 paper on the subject (pdf):

Quote:The point is important and bears repeating: under liquidity trap conditions, the normal expectation is that an increase in high-powered money will have little effect on broad aggregates …

Nor was it just theory. Meltzer claims support from the lessons of history; but the relevant history is of other liquidity-trap episodes. Consider, in particular, the case of Japan’s quantitative easing in the early 2000s:

[Image: 081413krugman1-blog480.png]

Unlike the Fed, the Bank of Japan didn’t pay interest on reserves. Nonetheless, a huge increase in the monetary base just sat there, mostly in the form of increased bank reserves – the same as what happened in America later.

We might add further that if the Fed can neutralize the supposedly awesome inflationary effect of quantitative easing by paying ¼ percent interest on reserves, it should be very easy to contain the inflationary threat in future.

Anyway, I do get kind of annoyed here. Some of us came into the global crisis with a well-worked-out theory of monetary and fiscal policy in a liquidity trap; the predictions of that theory have been completely consistent with actual experience. People like Meltzer chose to disregard all of that, insisting that terrible inflation (and high interest rates) were just around the corner. You almost never get that clear a test of rival economic views, and the results should be considered decisive.

Instead, the usual suspects stick their heads in the sand and pretend that they have been right all along.

PS: A further count against the claim that interest on excess reserves explains everything is the fact that public holdings of currency have also surged, even though the Fed isn’t paying interest on dead presidents:

[Image: 081413krugman2-blog480.png]

Again, this is exactly what liquidity-trap models, like my 1998 paper, predicted.
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#2
Republicans’ Lust for Gold

NOV. 13, 2015

Paul Krugman

It’s not too hard to understand why everyone seeking the Republican presidential nomination is proposing huge tax cuts for the rich. Just follow the money: Candidates in the G.O.P. primary draw the bulk of their financial support from a few dozen extremely wealthy families. Furthermore, decades of indoctrination have made an essentially religious faith in the virtues of high-end tax cuts — a faith impervious to evidence — a central part of Republican identity.

But what we saw in Tuesday’s presidential debate was something relatively new on the policy front: an increasingly unified Republican demand for hard-money policies, even in a depressed economy. Ted Cruz demands a return to the gold standard. Jeb Bush says he isn’t sure about that, but is open to the idea. Marco Rubio wants the Fed to focus solely on price stability, and stop worrying about unemployment. Donald Trump and Ben Carson see a pro-Obama conspiracy behind the Federal Reserve’s low-interest rate policy.

And let’s not forget that Paul Ryan, the new speaker of the House, has spent years berating the Fed for policies that, he insisted, would “debase” the dollar and lead to high inflation. Oh, and he has flirted with Carson/Trump-style conspiracy theories, too, suggesting that the Fed’s efforts since the financial crisis were not about trying to boost the economy but instead aimed at “bailing out fiscal policy,” that is, letting President Obama get away with deficit spending.

As I said, this hard-money orthodoxy is relatively new. Republicans used to base their monetary recommendations on the ideas of Milton Friedman, who opposed Keynesian policies to fight depressions, but only because he thought easy money could do the job better, and who called on Japan to adopt the same strategy of “quantitative easing” that today’s Republicans denounce.

George W. Bush’s economists praised the “aggressive monetary policy” that, they declared, had helped the economy recover from the 2001 recession. And Mr. Bush appointed Ben Bernanke, who used to consider himself a Republican, to lead the Fed.

But now it’s hard money all the way. Republicans have turned their back on Friedman, whether they know it or not, and draw their monetary doctrine from “Austrian” economists like Friedrich Hayek — whose ideas Friedman described as an “atrophied and rigid caricature” — when they aren’t turning directly to Ayn Rand.

This turn wasn’t driven by experience. The new Republican monetary orthodoxy has already failed the reality test with flying colors: that “debased” dollar has risen 30 percent against other major currencies since 2011, while inflation has stayed low. In fact, the failure of conservative monetary predictions has been so abject that news reports, always looking for “balance,” tend to whitewash the record by pretending that Republican Fed critics didn’t say what they said. But years of predictive failure haven’t stopped the orthodoxy from tightening its grip on the party. What’s going on?

My main answer would be that the Friedman compromise — trash-talking government activism in general, but asserting that monetary policy is different — has proved politically unsustainable. You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed, which is, when all is said and done, basically a government agency run by bureaucrats, should be left free to print money as it sees fit.

Politicians who lump it all together, who warn darkly that the Fed is inflating away your hard-earned wealth and enabling giveaways to Those People, are always going to have the advantage in intraparty struggles.

You might think that the overwhelming empirical evidence against the hard-money view would count for something. But you’d only think that if you were paying no attention to any other policy debate.

Leading political figures insist that climate change is a gigantic hoax perpetrated by a vast international scientific conspiracy. Do you really think that their party will be persuaded to change its economic views by inconvenient macroeconomic data?

The interesting question is what will happen to monetary policy if a Republican wins next year’s election. As best as I can tell, most economists believe that it’s all talk, that once in the White House someone like Mr. Rubio or even Mr. Cruz would return to Bush-style monetary pragmatism. Financial markets seem to believe the same. At any rate, there’s no sign in current asset prices that investors see a significant chance of the catastrophe that would follow a return to gold.

But I wouldn’t be so sure. True, a new president who looked at the evidence and listened to the experts wouldn’t go down that path. But evidence and expertise have a well-known liberal bias.
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#3
Quote:Conservative think tanks spent the Obama years warning darkly that monetary stimulus was “debasing the dollar.” Paul Ryan called on the country to altogether abandon discretionary monetary policy and move to a “commodity-based currency” that would serve as a kind of updated version of the gold standard. Trump himself argued that the strong stock market performance under Obama was a kind of unreal bubble induced by low interest rates. Since Trump took office, mainstream conservatives have been quiet on this front. And Trump has made it clear — over and over again — that he wants and expects low interest rates to support his reelection bid. In early April 2019, he laid out a plan to gain control of the Fed by appointing Cain and Moore to two board vacancies.

Cain was a plainly unqualified pick with little relevant experience and a scandal-plagued past. He took himself out of the running a couple of weeks after the story of his potential nomination broke, citing the idea that he could earn more money — and skip the “cumbersome” vetting process — by avoiding government service. That left Moore, whose nomination collapsed after the revelation of a long series of misogynistic writings offered a plausible pretext for Senate Republicans to spike him.

So now we get Shelton, the American director of the European Bank for Reconstruction and Development who served as an adviser to Ben Carson’s 2016 before hopping on the Trump train. Shelton is the author of the 2009 book Money Meltdown, which warned that the global monetary system was dangerously inflationary and urged the world to convene a new international conference to return to the gold standard and restore “sound money.” In reality, inflation has been persistently low since 2009 in the US, Europe, Japan, and several smaller developed countries. During a 2016 interview, however, she criticized former Fed chairs Ben Bernanke and Janet Yellen for keeping interest rates too low for too long, saying, “I would have gotten back to normalization of interest rates much more quickly.”

Yet by 2019, Shelton was mysteriously telling the New York Times that she thinks interest rates are too high and would support cutting them back to the near-zero levels that she denounced as too stimulative when the unemployment rate was much higher than it was last year. Perhaps most tellingly, when the Financial Times interviewed her for a May 2019 article about her monetary policy views, she chose to do the interview at the Trump International Hotel in Washington, DC. She also suggested that Mar-a-Lago, Trump’s private resort in Florida, might be an ideal place to host her proposed international conference on the gold standard. She was saying, in other words, that she’s a Trump loyalist beyond all else. And while on one level she should be more confirmable than Moore or Cain, having already received Senate confirmation for her current lower-profile job, she poses all the same risks of politicization and lost independence as they did. But Republican senators seem increasingly unbothered..

Whether Shelton will succeed where Cain and Moore failed is unclear, but she does present the same problem that’s bedeviled Trump: He wants to keep interest rates low so that the economy soars and helps him win reelection in 2020. He certainly could find a well-qualified person with a reputation for integrity who holds this principled view on interest rates, but he doesn’t seem to want well-qualified, principled people. Instead, Trump seems to want loyalists who will support whatever it is he happens to say or want at the moment. And Shelton — who spent the Barack Obama years railing against the Federal Reserve’s efforts at economic stimulus but now says she favors low interest rates to stimulate the economy — very much seems to be cut from that cloth.
Judy Shelton’s nomination to the Federal Reserve Board, explained - Vox
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