Thursday Idiocy on Wednesday: The Astonishingly Unprofessional Allan H. Meltzer in the Wall Street Journal…
I confess, if I myself wanted to plant a piece by a right-wing economist in the Wall Street Journal to demonstrate that they and it are either (a) completely disconnected from and uninterested in reality and in marking their beliefs to market, or (b) completely cynical and uninterested in anything but misleading their readers, I could not come up with anything more effective than this:
Allan Meltzer: How the Fed Fuels the Coming Inflation: “As Milton Friedman said, ‘inflation is always and everywhere’ a result of excessive money growth….
…The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings… the U.S. has been printing money—and in a reckless fashion—for years.
A twelve-month CPI inflation rate of 1.5%/year is a “warning” of the consequences of “printing money—and in a reckless fashion”? Shouldn’t one of the interns who reads the electrons before they are committed to the database fire off an email to Paul Gigot saying: “Do we want to look that ridiculous?”?
The Obama administration has run huge budget deficits… together with the Bush administration… $6.7 trillion from 2006 to 2013. The Federal Reserve financed almost $3 trillion of these deficits by purchasing Treasury bonds and notes. The Fed has also purchased massive amounts of mortgage-backed securities. Today, with more than $2.5 trillion of idle reserves on bank balance sheets, there is enormous fuel for greater inflation once lending and money growth rises.
To avoid the kind of damaging inflation the U.S. experienced in the 1970s and early ’80s, the Fed could raise interest rates, including the interest it pays banks on reserves, inducing banks to hold most of the $2.5 trillion of reserves idle. But interest rates high enough to discourage borrowing and lending would likely send the economy into another damaging recession….
But banks and operating companies are holding those balances idle now. If they start spending, the first thing that will do is restore full employment—and then we won’t have to worry about an economy too weak to withstand interest rate hikes, capisce? And if they do not start spending, well, then there is no inflation, and no need. What part of the pattern of current money demand that has now been present for six years does Allan Meltzer not understand?
Some side effects of the Fed policies have had ugly consequences. One of the worst is that ultralow interest rates induced retired citizens to take substantially greater risk than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do….
Again: I simply do not understand what the point is supposed to be. Bondholders receive capital gains when interest rates fall, and suffer capital losses when interest rates rise. If the Federal Reserve temporarily pushes interest rates down when the economy is depressed and then restores them to normal when the economy recovers, the net effect on bondholders is… zero. Nada. Null. τίποτα. שום דבר.
The Fed years ago should have recognized that the country’s economic problems weren’t arising from monetary factors. Instead of keeping interest rates low to finance deficits, the Fed should have explained that costly regulation, increased health-care costs, wasteful spending and repeated threats to raise tax rates were holding back the recovery….
But the implementation of ObamaCare has been accompanied by a stunning reduction in health-care costs relative to baseline. Does Meltzer not care enough to learn this? Does he know it but not care about misinforming the WSJ’s readers?
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.
How many more years of sub-5%/year inflation will it take before Allan Meltzer will finally wake up and say: “Yeah. I’m sorry. I really guess I should have marked my models to market. Long ago.”?