The Money Has to Come From Somewhere
the current turmoil in the markets, I was hoping that new Federal Reserve
Chairman Ben Bernanke would see the big picture and act judiciously. Instead he
signaled, with an aggressive rate cut, that we can expect a continuation of
the monetary policies that got us here to begin with. Alan Greenspan released
his memoir this week explaining his policies and decisions in the wake of the
irrational exuberance they fueled. His successor should see that
it is now time for a change of policy that addresses the root of our troubles.
But instead of seeing an inflation problem, the Federal Reserve sees a liquidity
problem, which is a little like extinguishing a forest fire with gasoline.
In the wake of the rate cut, the Dow jumped and brokers cheered.
Behind the headlines, however, the dollar quietly fell and was abandoned by more
of the world in favor of more solid stores of wealth.
Fed does not act in a vacuum. Mr. Greenspan rightly criticizes Congress
and the administration for abandoning principles of fiscal responsibility.
However, monetary policy at the Fed did nothing solve money problems, but merely
delayed impending crises by creating bubbles.
very real sense, the Fed and the government are close to going over the spending
limit of our nationís credit card. We
rely on foreign investors to buy our debt so our government can maintain its
appetite for spending. Yet the
market for US Treasury Bonds is rapidly shrinking as yield declines.
Still the government will need an estimated $100 billion more for every
year we ďstay the courseĒ in
the money has to come from somewhere, but we are running out of sources to tap.
more money is the Fedís typical answer, but we are on the verge of runaway
inflation. We have printed so many dollars now that we are at parity with
the Canadian dollar for the first time since 1976. Since
the Fed stopped publishing M3, which tracks the total supply of dollars in the
economy, we canít even be sure how many dollars they are creating.
Reported inflation is around 2%, but the method for calculating
inflation changed in the 1980ís, largely at Mr. Greenspanís urging.
Private economists using the original method find actual inflation to be
over 10%, which matches more closely the pain consumers in the real economy
reality is that this type of manipulation of the markets masks where resources,
or money, ultimately comes from. It
comes from the taxpayer. The
government doesnít create Gross Domestic Product, they just limit and control
how it is done. They then absorb
much of the value produced in the economy through taxation and inflation, so
they can squander our nationís wealth with runaway spending.
Fed tries to keep up with governmentís spending habits, but is sending
inaccurate signals to mask bad monetary policy.
Ultimately, weíll get back on track financially only when government
spending is held in check and the free market controls monetary policy, not the
other way around.