23 Jul
Posted in: Blog
By    1 Comment

Helicopter Pilots Wanted!

The expounders of the Keynesian paradigm are nothing if not consistent.  Is there a danger of deflation?  Then open the money spigots some more, and raise that price level!

In his article “What Can the Fed Still Do?,” Keynesian Bruce Bartlett explains that banks are sitting on over $1 trillion of excess reserves.  This money was, as they say, “injected” by the Fed during the financial crisis.  Economically, this makes is no different than counterfeiting, but I digress.

A little primer: For almost 2 years now, very smart people have been fretting about the rise in the price level, which is popularly called “inflation” (though historically the term inflation referred to the cause of rising prices, i.e. currency debauchment by governments).  For the most part inflationary measures, such as the CPI, have reported very modest inflation, about 1%-2% annually.  More information on the CPI can be found here.  The reason why this general price rise has not materialized is because banks are not yet lending all that freshly printed cash.  Thus, as credit collapses and the total volume of fiduciary media (money and money equivalents) declines, you get a decline in the price level, what’s popularly referred to as deflation.

Bartlett, in attributing the fear to lend on deflation, then suggests we end the policy of paying banks interest on money held on deposit with the central bank.  Correctly, he points out that this (albeit small) interest income from the government provides for a disincentive to lend.  That’s fair enough, although I’d argue that banks aren’t lending primarily because of excessive and unnecessary political uncertainty introduced by Obama and Congress.  Banks are also likely terrified of future inflation as they do start to lend.  This fear ironically contributes to the present deflationary conditions.

His quibbling about ending the interest on deposits aside, it’s hard to describe just how exactly wrong Bartlett is.  If a classical economist were brought back from the dead to read Bartlett’s piece, he’d think it satire.  Deflation is natural and normal following the burst of an inflationary bubble (i.e., the necessary result of credit expansion).

A few point here: First, what’s wrong with falling prices anyway?  And second, Bartlett should recognize that once banks DO start to lend, the alleged bogeyman of deflation will be replaced by the horror of potentially crippling inflation (again, I am using these terms in their popular sense, referring to price levels).  Remember, a mere $2 billion in excess reserves supported the 2008 bubble height of $6 trillion.  Presently, we have over 500x that amount.  (See this excellent article by Pepperdine economist George Reisman here for more.)

Only a thinker like Bartlett (i.e., a Keynesian) could write “…the zero-bound problem is a very severe constraint on monetary policy” and not be joking.  Seriously, what Bartlett means by that little statement is that the Fed must be creative when attempting to deal with the seemingly inconvenient fact of life that negative interest rates don’t exist and never will.  Think about it: only a statist intellectual has the gumption to suggest that the one lending money should be paying the interest on the loan.  Wouldn’t that be a different world?

(I should note here that interest rates and money creation are not directly related in the way Bartlett’s article implies.  However, it is characteristic of our Federal Reserve system – and other central banks – that new money is injected via the banks, with the stated purpose of lowering interested rates.)

This is the illogic of Keyensianism brought to its logical end.  Milton Friedman famously said that one way around this “constraint” was to drop money from helicopters.  How much longer until Obama starts hiring the pilots?

DISCLAIMER: This post and the contents thereof are the views of only the author identified immediately above and do not necessarily represent the views of the New York Young Republican Club (the "NYYRC"), its officers or its members. The NYYRC expressly disclaims responsibility for the contents thereof and by its charter documents may not, and does not, endorse any candidate for any office, except in a general election.

1 Comment

  • […] are all but spent.  The Fed has hits its ultimate constraint – 0% interest rates.  Short of dropping money from the sky, there’s not much left for the Fed to try.  The administration’s 45% approval rating […]