There Is At Least One Dissenter To The Monetary Policy Folly
/In December 2012 I asked the question, "Do Our Monetary Authorities Know What They Are Doing?" My conclusion was, "All indications are that they don’t have a clue." But then, is it just me? Unfortunately, the question is rather important. But very few people pay much attention to what's going on in monetary policy, and the ones who do are almost all specialist economists caught up in a big dissent-free groupthink.
The official Federal Reserve word is that they operate monetary policy with two goals, one an interest rate target and the other an unemployment rate target. Does monetary policy have any direct short-term effect on the unemployment rate? The idea seems preposterous to me. Yet from presentations I have attended of the Shadow Open Market Committee, I'm given to understand that there is no dissent on the FOMC from having an unemployment rate target for monetary policy. The result has been QE I, II, and III, and the Fed balance sheet growing from about $800 billion in 2008 to about $4 trillion at the last report in March. This is a monetary "stimulus" wildly larger than anything previously undertaken in the history of the world. We have had a sluggish, gradual decline in the unemployment rate, more of it coming from a declining labor force than from more jobs. So far, no meaningful inflation. On the other hand, the monetary base created by the asset purchases turns up as excess reserves on bank balance sheets. Is that any kind of a problem? I would say that it's a huge problem -- a gigantic inflation pre-baked and ready to explode upon us at any time without notice, and probably nothing that can be done about it when it happens.
I had thought nobody was concerned about this but me, but then on Thursday the Wall Street Journal carried an op-ed by economist Allan Meltzer that says all the things I've been saying for a couple of years. Here are a few key quotes:
Fed Chairwoman Janet Yellen recently admitted that the central bank doesn't have a good model of inflation. . . .
The Fed's forecasts of inflation ignore Milton Friedman's dictum that "inflation is always and everywhere" a result of excessive money growth relative to the growth of real output. . . .
But long before idle reserves reached $2.5 trillion, the Fed didn't ask itself: What can we do by adding more reserves that banks cannot do by using their massive idle reserves? The fact that the reserves sat idle to earn one-quarter of a percent a year should have been a clear signal that banks didn't see demand to borrow by prudent borrowers. . . .
We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the "stagflation" of the 1970s. Other prices will follow.
That all sounds right to me. Nobody seems to be paying much attention. Meanwhile, back in Europe, what's the plan? More "monetary stimulus" of course! Here's Bloomberg reporting today on a speech by ECB President Mario Draghi yesterday:
Analysts from Goldman Sachs Group Inc. to UBS AG revised their forecasts to expect an interest-rate cut in June after ECB President Mario Draghi said officials would be “comfortable” adding stimulus if needed.
And then there's the Bloomberg editorial from Thursday advocating more of same:
In recent months, Europe's economies have begun a tepid revival. . . . ECB President Mario Draghi has room to maneuver and should use it.
And these people think that our big worry should be climate change! I guess it all depends on your perspective.