Out on the campaign trail, Fed head Ben Bernanke is an unpopular guy.
Mitt Romney and Newt Gingrich have both said they would replace Bernanke, not reappoint him. Congressman Ron Paul would swap the whole Federal Reserve monetary system for a gold-linked dollar, making the yellow metal legal tender. And it was Gov. Rick Perry of Texas, before he dropped out of the race, who said more quantitative easing by the Fed would be “almost treasonous.”
Republicans in Washington are equally unimpressed by Bernanke. Rep. Paul Ryan recently criticized the Fed for bankrolling our huge budget deficits and thereby accommodating a profligate fiscal policy. And former Federal Reserve Board governor Kevin Warsh, a Bernanke intimate before he left last April, just leveled criticism at the Fed’s extensive zero-interest-rate policy and its “operation twist.” (Warsh, by the way, was an economic official in the Bush White House.)
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Finally, former Bush Treasury undersecretary John Taylor, author of the Taylor rule that is monitored inside the Fed, recently told me that the central bank target rate should be 2 percent, not zero.
There are two key takeaways from this onslaught of Fed criticism: First, the critics worry that the ultra-easy money pumped out by the Bernanke Fed will in the future create periodic inflationary bubbles (housing and energy) such as we had in the 2000s, which contributed mightily to the ultimate financial meltdown.
Second, and very much related to the inflation worry, the Republican party is gradually becoming the King Dollar party. After watching the greenback collapse almost 40 percent during the Bush years, Republican leaders are moving back to a Reaganesque dollar approach whereby a great nation with the world’s leading economy should have a strong and reliable currency.
The dollar soared and gold plunged during Ronald Reagan’s first term, just as it did during Bill Clinton’s second term. In both these eras, stocks rallied mightily and the economy grew rapidly. Supply-siders note that a good-as-gold dollar and low marginal tax rates were the ultimate prosperity tonics during these two periods.
But today we’re witnessing the opposite of supply-side prosperity. The current economic malaise seems borne of a weak-dollar/high-gold monetary policy coupled with a huge tax-hike threat looming in 2013.
To be fair, Bernanke has his supporters. They’re mostly from the canyons of Wall Street where money-market economists are loathe to criticize him. Then there’s NYU professor Mark Gertler, who has coauthored research with Bernanke. A recent Bloomberg story cites Gertler as saying, “Criticism about the Fed being inflationary is not fact-based. In terms of an inflation record, the facts are the Fed has been as close to impeccable as you can possibly get.”
Hmmm. We have a massive growth of government programs, and a reduction of international trade with calls for punitive tariffs on foreign products.
About the only two missing ingredients from the economic conditions that worsened and lengthened the Great Depression are those punitive tariffs... and the gold standard.
...and, RightEveryTime, we cannot trust governments. It's not that gold has intrinsic value, its that gold's supply is beyond government direct manipulation.
Those that see gold standards as such problems are probably often conflating two things: anchoring the dollar to gold on the one hand, and allowing banks to indulge in fractional reserve lending on the other. When the latter is overindulged - because banks aren't held accountable for lending policies by their depositors - achieving a gold standard is made problematic. Most gold standard flaws are epiphenomenal of supply shocks or poor reserve ratios.
I agree with Larry Kudlow, but he leaves out an important point: Inflation is not the only reason why tinkering with the interest rate is a bad idea. Even if someone told me we could have 5 years of 0% interest rates without resultant inflation, it'd still be bad monetary policy, because (a) the savings pool will dwindle in those 5 years, (b) investment will be mis-allocated ("mal-investment"), & (c) instead of a change in time preferences gradually transmitting through the financial system, the interest rate will have to climb more rapidly. That means another wasteful go-around will be followed by an income shock on the scene when there's another credit crunch.
The practical effect of adopting a "King Dollar" monetary policy will be to raise interest rates significantly. This will cause housing prices to fall even further and is likely to cause a deepening of our current recession. We would endure all of this pain in order to fight an inflation that most Americans aren't noticing. One of the major causes of the Great Depression was the Federal Reserve tightening credit from 1930 through 1932. I would prefer to not repeat this history.
A far better prescription for our economy is to cut the top federal corporate income tax rate from 35% to 20%, increase the child tax credit from $1,000 to $5,000, make this tax credit non-refundable, eliminate the adjustments for dependents and state taxes from the Alternative Minimum Tax, prohibit state governments from taxing capital gains and dividends, and otherwise preserve our tax and monetary policies as they currently exist. We would do much better to reduce the federal government's spending level back to 2006 levels to fight the annual deficit.
If inflation is such a big problem for our country, why have I heard no one complaining about it outside of a few writers in the financial press?
You don't hear about the inflation because the economy is so weak it hasn't shown itself, but the Fed can't keep "easing" by buying Treasury notes with money they don't have. It's just a more sophisticated method of paying off one credit card with another: it is not sustainable.
Yes, there WILL be pain. Recessions always bring pain, it is part of the "creative destruction" process. But the federal government has pulled out every stop to avoid that pain being felt from this one: bailouts, mortgage "modifications," extended unemployment and expanded food stamps, deficits which would have seemed unbelievable as recently as five years ago. This does not avoid pain, it only postpones it - and like any other postponed unpleasantness, it makes it more painful in the end.
The difference is that we allow the pain to happen as we do the right thing, it will cost us the White House in 2016, but it will save the country and set us on a path toward prosperity again - a prosperity which, unfortunately, will like elect a lot of Democrats who arrive just as the good growth finally kicks in too late to save our seats.
The current (Bernanke/Obama) policy of near-zero interest rates, government "stimulus," tight regulation of banking, and deficit spending seems remarkably similar to the Bank of Japan strategy when they faced a banking crisis over 20 years ago. It accounted for near-zero growth and economic stagnation through the '90s - also known as Japan's "Lost Decade."
Only one republican candidate has presented a budget, and his balances the budget in three years while significantly reducing revenue. It's all on Ron Paul's website. All his opponents stand for ever-expanding deficits.
A strong stable currency is a necessary ingredient for growth and prosperity.Commodity price rules would help to create a sense that the central bank is somewhat under control and hamper their ability to print money. Those who promote the current system and fed actions have us all skating on thin ice.
A strong stable currency is a necessary ingredient for growth and prosperity.Commodity price rules would help to create a sense that the central bank is somewhat under control and hamper their ability to print money. Those who promote the current system and fed actions have us all skating on thin ice.
IMO there are several long term structural issues in our economy today that are placing us at risk.
1. Progressive tax code or lack of a flat tax. Our tax code is providing the illusion that it is benefiting the poor while the loopholes are benefiting the rich creating a mishmash of wasteful nonsense. All our progressive, complicated tax code is really designed for is to allow politicians to hand out loopholes to their cronies, while convincing the general public they are looking out after them. A flat tax would mean a more productive economy for all (due to greater efficiency) and perhap even more important, less power for Congress.
2. Lack of a balanced budget amendment or more accurately a limited debt amendment. I am not opposed to moderate, short term government debt to provide flexibility to Congress just like businesses have. We have one in my state and it is working well. But we have no federal limits, which means there is no way even the most stalwart Congressman can withstand the pressure to spend too much. He will be swept away without a backstop. A balanced budget amendment/limited debt amendment should have accompanied the income tax amendment and we would have avoided the problems we are in.
3. Fiat currency in it's current form. There are some historical schools of thought that link currency degradation to the fall of every major empire in world history. As the politicians spent too much on wars, palaces, harems, games, bribes, controlling the mob, etc. they would run out of money (sound familiar?). Then they would degrade the currency through coin clipping, reducing the alloy, etc. to try to squeeze out more of their objectives. Eventually the currency, economy and country would collapse. I do not know that the gold standard of old is the right answer, but I wonder if the Chinese are right calling for a basket of commodities (including some gold) to back the worlds currencies. We need a currency that will stretch and contract a little as needed but will stay within reasonable limits so that the buying power stays reasonably stable over time.
These three structural changes would provide limits to politicians that would allow and require them to make more responsible and reasonable decisions. Our current system provides no real structural limits to Congress. Is it any wonder they are a disaster? They are only human and humans need limits or they make a mess of things.
Now that I have ventured far, far, far into fantasy land, let me return you to the reality of today's economic chaos. I would be very surprised to see any of these reforms in my lifetime.
Would like to add to some of the good points made, from recent thinking by David Ranson, research head with Wainwright Economics. The US economy remains on the losing side of a worldwide competition for capital. In fact, the theme of much of Wanwright’s work in recent months has been the controlling role in the world played by the flow of capital. Growth appears wherever capital converges, and you could say that capital pursues economic wisdom, or that economies managed by wise policies show a strong tendency to grow at the expense of economies where unwise policies prevail. In other words, follow the wisdom.
In the field of macro policy, of course, professional economists debate what is wise or unwise all the time, and they are notoriously unable to agree. Doctrinal disputes have become an obstacle to distinguishing wise and unwise economic policy.
Surely, the better way to tell the difference is to study historical experience. A series of the advisory’s reports, covering the US evidence for over a century, has demonstrated that government spending, income-tax hikes, quantitative easing, and the dollar’s depreciation are all associated with weaker economic growth and stock-market performance. The evidence has also enabled Wainwright to recognize that instability in the dollar is the most influential of these policy variables.
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