Friday, February 11, 2011

Would You Buy A Used Car From These Guys?

Here, one of my favorite economists and essayists, Robert P. Murphy, provides yet another look at the Ben Bernanke Fed's explosion of the monetary base.  From the St. Louis Fed, we get the nearby chart.  But Uncle Ben says not to worry.  Yeh, right.  That puts my mind at ease.  How about you?

The Fed has pumped up the monetary base through purchases of U.S. Treasuries and toxic assets formerly owned by banks and other financial institutions.  If you think that nothing important is happening when the Fed buys U.S. Treasuries, I would invite you to think harder. 

If the U.S. Treasury is growing its debt, which it definitely is, and if the Fed buys additional U.S. Treasuries, which it is, the Fed is monetizing part of the Treasury's debt.  If I'm wrong about that, I'd really like someone to explain where I'm missing the boat.  Monetizing Treasury debt is printing money.

Some folks are concerned about inflation.  Some folks aren't.  If you have what amounts to a fixed pot of dollars to finance your spending in the future, you should be concerned about inflation.  Your pot of money will end up buying much less real stuff when you get around to spending it.  If your pot of money will expand at approximately the rate of inflation, you don't need to be so worried about inflation, per se.

More than I'm worried about inflation, I'm concerned about the Fed financing the U.S. Treasury by creating additional bank reserves.  Inflation is a form of taxation.  Inflation is created by government, everywhere and always.  Only government can create inflation, notwithstanding how many angels actually can stand on the head of a pin (I say it that way because I can hear some economists mumbling in the background about one an another technical detail that I'm leaving out).

Hey, if you're just fine with the U.S. Treasury and Congress directing spending of ever larger shares of our national income, then you won't be worried about the Fed's purchases of U.S. Treasury bonds, notes, and bills.  But if you do have some pause about how much of our national income is controlled by Washington and the 545, then please understand that the prospects of future inflation are only a potential side effect of the problem with current Fed policy.  For me, prospects of inflation are not the main event.

You can make your own call, of course, but I would not buy a used car from Congress or the Fed.

No comments: