Sludge Report #144 - Re: The Morality Of Money

Monday, 2 December 2002, 4:46 pm
Column: C.D. Sludge

In This Edition.... Fed. Governor Ben Bernanke: Is He Barking? - Discussions Re: The Morality Of Money - Eco-Economy: A World Addicted To Genocide – Correspondence With Dr Don Brash

NOTE: Authors of this report will be anonymous and wide ranging, and occasionally finely balanced. Indeed you are invited to contribute: The format is as a reporters notebook. It will be published as and when material is available. C.D. Sludge can be contacted at sludge@scoop.co.nz. The Sludge Report is available as a free email service..Click HERE - http://www.scoop.co.nz/mason/myscoop/ to subscribe...

Fed. Governor Ben Bernanke – Is He Barking?

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Sludge Report #144

Discussions Re: The Morality Of Money

C.D. Sludge has in recent days found himself in correspondence with no less than the grey-eminence himself of NZ monetary policy, National Party Finance spokesman and former Reserve Bank of New Zealand Governor Dr Don Brash.

And the subject of said correspondence hasn’t been the size of his car, the colour of the sky or the cut of his recent jib in the house.

No, Sludge and Dr Don have been discussing some of the finer points of of Monetary Policy – specifically whether some recent unusual statements by Governors of the U.S. Federal Reserve have any implications for New Zealand.

The short version of what follows is that Dr Don apparently thinks not… (as can be seen from the correspondence which is included in full further below).

However C.D. Sludge is not, as readers will know by now, inclined to be so easily dismissed off the trail of a hot Scoop.

Moreover, while Dr Don may ultimately be a little dismissive, it is more than worth noting that Dr Don’s decision to engage in this debate at all has been really rather brave.

His fellow Parliamentary pundits on such matters, Peter Dunne, Rod Donald, Michael Cullen, and the boffins he has left behind at Treasury and The Reserve Bank appear – so far at least - to be loathe to take on such weighty matters. (Winston Peters press officer advised at the time of going to press that he would consider the questions here discussed.)

The genesis of this debate is a speech by U.S. Federal Reserve Board Gov. Ben Bernanke (pictured above) delivered on November 21st.

Entitled: ‘ Deflation: Making Sure "It" Doesn't Happen Here’ Bernanke’s speech has attracted attention particularly because of the following quote.

“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. “

(For the full speech see:
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
or…
http://www.scoop.co.nz/mason/stories/BU0212/S00018.htm

To read a commentary on the speech see…
- Marshall Auerback’s
http://www.scoop.co.nz/mason/stories/HL0211/S00163.htm
Eco-Economy: Helicopter Money
Or…
- NY Post’s -
http://www.nypost.com/business/62893.htm
Using Play Dough Would Be Wrong)

Now to some readers, including apparently Dr Don, this statement will come as no surprise.

To others who have always thought that money is something “real” that is “earned”, which they keep safe in the “bank” and occasionally use to pay “tax” or purchase stuff, the idea that the Government could simply print buckets of it if they wanted to may seem a little novel.

Students of international relations meanwhile might note that the Russian economy through the 1990s - and more recently the Argentinean economy, not to mention those of numerous other nations, Turkey, Indonesia etc. - have essentially suffered very painful economic meltdowns due to a shortage of “money”.

In particular these economies’ problems were created by a shortage of so-called “hard” currency, or U.S. Dollars, a variety of money which is needed to pay debts to U.S. bankers. This sort of money in particular ought, one might think, not simply be printed willy-nilly when central bankers see fit.

I.E. if printing money is really a “valid” option to keep consumers spending money, then when an economy is heading off the rails like Russia, Argentina and Turkey, how come this isn’t part of the IMF prescription to solve their difficulties?

Eco-Economy: A World Addicted To Genocide

The more acute Scoop reader will have noticed a resurgence on Scoop of late of material raising issues which leads to questions about monetary policy.

These items are published under the moniker “Eco-Economy” and like the Sludge Report are available as free news-by-email services (note: This posting has been sent to subscribers of both lists.)

[Readers inclined to read no further at this point – having more than once encountered the phrase “monetary policy” - are EMPHATICALLY ENCOURAGED not to give up as the machinations of money may well be far more important than you think them to be.]

To wit, Scoop’s newest economic sage and Columnist Tomás Smith(who is on the verge of publishing a new book touching on issues related to the morality of our economic system) states the central question thus:

1. Does a system that systematically destroys what is produced and what has been produced in the past have a future?

2. Does a system that cannot embrace the breakthroughs and developments in science and technology to the benefit of humanity have a future?

3. Does a system that embraces death and destruction, not life and creation, have a future?

- http://www.scoop.co.nz/mason/stories/HL0212/S00007.htm
Tomás Smith: Presenting “ The Poverty of Power” - Monday, 2 December 2002

You, dear reader, I am sure would agree that such as system oughtn’t to stand a snowball’s chance in hell.

And yet strangely just such a system not only functions, but reigns supreme, almost unchallenged, and governs seemingly every aspect of human endeavour.

Which begs the question how? Is it rigged?

Fortunately Scoop also has at least part of the answer to this apparently imponderable question, an answer for which is found obliquely in Governor Bernanke’s aforementioned speech about how to print money for the public good.

Tomas Smith’s... "Arresting The U.S. Economy’s Suicidal Trajectory" talks about the historical context of how inflationary and “bubble creating” monetary policies have led to war. (See… http://www.scoop.co.nz/mason/stories/HL0211/S00174.htm)

Meanwhile Hans Schicht’s... "The Long Bond Mystery" discusses empirical evidence that points to how those same “unconventional” monetary policies that Ben Bernanke describes speculatively in his speech may have already been in operation for at least six years. (See… http://www.scoop.co.nz/mason/stories/HL0211/S00142.htm)

All of which may explain in part explain the reluctance of Peter Dunne, Michael Cullen et. al. to comment on this subject. It's all just a bit hard, not to mention deep.

Meanwhile for those of you who remain skeptical about those questions about the fundamental immorality of money raised herein, we do at least have the wisdom of Dr Don. against which to ponder aspects of the Auerback and Smith theses’s veracity.

The correspondence is included below in full for those who care to read it. For those seeking a short version, Dr Don Brash’s response was, “I can certainly see nothing objectionable in principle to the idea of using Bernanke's ‘unconventional’ techniques.”

He goes on to say.

“Would using such techniques be "hypocritical"? I don't see that either. The US is clearly not committed to maintaining any particular exchange rate peg, and is, and should be, free to operate monetary policy in order to keep the purchasing power of the US dollar broadly stable. Far from being undesirable, I see that as being highly desirable, both for the US and for the rest of the world!”

Needless to say, C.D. Sludge remains thus far unconvinced that this is all there is to this debate. And if you eventually reach the end of this posting, you will learn why.

Watch this space.

Correspondence With Dr Don

Dear Don,

Request for comment. I have requested Government, Treasury and Reserve Bank comment on the following. ( Links to - Helicopter Money, Or The Road To Weimar? & The Long Bond Mystery)

They are related, and basically allege that monetary policy is being used in novel ways in the United States to effectively nationalise large chunks of the debt and asset markets by flooding the market with "printed" money (hence the Keynsian helicopter reference).

I raise this again in relation to an earlier question from a reader (angry of Kelburn) which I sent to Paul Jackman at the Reserve Bank of New Zealand after the Monetary Policy Statement..

"Americans can borrow at 1.25% Cash and invest at 5.75% at cash in NZ.... no risk just 450 basis points of free money... off the backs of NZers. Plus if the NZ Dollar goes up - which it will because this is such a transparent trade - then your friendly banker makes even more... You could even buy in and out each MPS if you wanted to and miss out on the dollar correction that comes when the interest rate is finally lowered. Money for jam. "

I would be interested to know from you both officially and unofficially. I.E. I would like your first impressions too if you are willing - plus an official National Party response to this analysis.

Specifically.

1. Is there is anything in the "angry of Kelburn" analysis that is wrong?

2. What is the Government, Treasury & Reserve Bank's official views on the questions for NZ Government and economic policy raised firstly:

- by the speeches of the Federal Reserve Governors,

- and secondly by the allegation that "unusual" or "unconventional" methods of propping up the US economy may already by underway?

Another way of framing this second question is to express views on the desirability, impact and moral clarity of the suggestions made in Alan Greenspan and Federal Reserve governor, Ben S. Bernanke's public statements.

Yours faithfully C.D. Sludge

From: "Don Brash"
To: "Scoop "

I am not quite sure why you sent this to me (and others). Nor can I quite see what all the fuss was about, re Bernanke's speech. He was simply saying, I think, that the Fed has the power to stimulate spending even when the scope to reduce interest rates is gone, and therefore nobody should fear a deflationary spiral.

That seems to me to be a statement of the obvious, and I am glad that Bernanke, as a Fed Board Governor, understands that.

The German hyper-inflation of the post-World-War-I period was a result of the German central bank of that time creating vastly more money than was consistent with price stability, and bears no relationship at all to what Bernanke was talking about.

Best wishes. Don Brash

Thankyou Don,

I will have a brief shot at replying to your questions. As I understand it the problem is that by printing money and purchasing debt the Treasury/Fed Reserve is effectively socialising both national and private wealth (though since the Fed Reserve is a private bank perhaps socialising is not the right expression).

Secondly there appears to be an implicit admission here that supplying liquidity (by printing money) to the US market is an acceptable way to avoid/prevent a U.S. recession. This seems to run directly contrary to IMF and World Bank marketed "Austerity" policies. So there could be something a bit hypocritical here.

Moreover... there is in the other link in my original email to "The Long Bong Mystery". This piece makes a suggestion, on the basis of empirical observation and speculation, that some of these "unusual" or "unconventional" methods of monetary policy may have been being utilised for some time already.

All of these matters would I think have significant policy implications for New Zealand.

And a question. Are you saying below that creative ways of creating liquidity using "unconventional" type techniques as described by Bernanke is ok in the right circumstances? If so what would they look like in New Zealand?

Regards

Dear Don,

Do you have any response to these questions? Marshall Auerback has sent me some more material in response to your skepticism of the potential importance of this... (His note is attached below...)

kind regards

C.D. Sludge

------- Forwarded message follows -------

From: Marshall Auerback

I think you pose all of the right questions, especially in regard to the hypocrisy of these austerity regimes imposed on the emerging world by the IMF/World Bank/US Treasury nexus. As Joseph Stiglitz noted, these are the sorts of policies that the US would never dare enforce upon itself at a time of economic difficulty and this has now been in effect confirmed by both Bernanke and Greenspan.

I am certain that many of these unconventional policy measures are already in operation (I have had as much confirmed to me by former members of the Bank of England and Banque de France, without them going into too many specifics).

Dear Don,

FYI...

Falling Prices Put Fed on Guard Policymakers Talk About Dangerous Dynamic for Economy http://www.washingtonpost.com/wp-dyn/articles/A51992-2002Nov28.html

By Steven Pearlstein
Washington Post Staff Writer
Friday, November 29, 2002; Page A01

After half a century of trying to prevent prices from rising too fast, economic policymakers have a new concern: Prices aren't rising fast enough.

Government statistics show that average prices for products have declined in the past year, including those of cars, clothing, computers, furniture, gasoline and heating oil. So, too, have the prices for services such as telephones, hotel rooms and airplane tickets, even as costs for other services such as health care, housing, education and cable television continued to rise.

The broadest measure of prices in the economy shows they rose less than 1 percent during the 12 months that ended in September, the smallest increase in 50 years.

Regards

C.D. Sludge

From: "Don Brash"
To: "Scoop "

I am not sure that I can add an awful lot.

It seems to me that central banks have a responsibility to protect the value of the money they issue. Normally, that is taken to mean preventing inflation in some measure of consumer price inflation, but at least in inflation targeting countries such as New Zealand, it also means avoiding deflation (hence the inflation target has both a floor and a ceiling). If the central bank can credibly commit to that, then I think the risk of both inflation and deflation is greatly reduced (because of the effect of the commitment on expectations).

Do central banks have the power to avoid deflation in a world with a lot of low-cost capacity (in China for example)? I certainly believe so. They can reduce interest rates, obviously, and at least in small open economies like that of New Zealand that is likely to have quite a significant effect on the inflation rate, both through the "normal" channels and through the effect which the low interest rates can be expected to have on the exchange rate. (The exchange rate channel does not work nearly so well in very large economies where trade is much less important. And I suspect that it does not work at all well in the case of Japan both because trade is relatively unimportant in Japan and because the yen exchange rate seems to be heavily influenced by "geopolitical factors" - in other words, the markets assume that any substantial depreciation of the yen, driven by the near-zero interest rates, would be heavily resisted both by the US and by other Asian countries.)

But what if reducing interest rates does not work well enough to avoid deflation? I can certainly see nothing objectionable in principle to the idea of using Bernanke's "unconventional" techniques, and fail to see the risk that that might generate some kind of market panic. The post-World-War-I German experience of hyper-inflation is clearly not relevant - that was a case where the authorities ran the printing presses without regard for protecting the purchasing power of the currency. By assumption, any use of "unconventional" techniques in the US would be designed merely to prevent deflation, and would presumably stop well short of creating hyper-inflation.

Would using such techniques be "hypocritical"? I don't see that either. The US is clearly not committed to maintaining any particular exchange rate peg, and is, and should be, free to operate monetary policy in order to keep the purchasing power of the US dollar broadly stable. Far from being undesirable, I see that as being highly desirable, both for the US and for the rest of the world!

Best wishes.

Don

Thankyou Don..

Some supplementary questions based on your answer...

You say:

> I can certainly see nothing objectionable in principle to the
> idea of using Bernanke's "unconventional" techniques....

Some people may consider this odd. You appear to be saying that you find nothing objectionable in principle with the central bank printing money and purchasing assets (debt and/or shares, houses etc..) in order to prevent deflation.

Do you find nothing objectionable in the US Federal Reserve doing this only, or would you approve of the RBNZ using such techniques too - if it were faced with deflationary threats?

And, if there is nothing "objectionable in principle" to using such techniques to stave off deflation, would there be any reason why such techniques should not be used also to fund public infrastructure, for care for the elderly and to feed the hungry (assuming this could be done without fuelling inflation).

You say:

> ... I fail to see the risk that that might generate some kind of market panic.

Marshall Auerback's thesis as I understand it is that by propping up an economy (or US "spending power" as you term it) the Federal Reserve prevents necessary structural adjustments being made, and thereby worsens the eventual correction.

This is the reason he expects it to generate some form of market panic, as I understand it. Is this not so?

You conclude saying:

> Would using such techniques be "hypocritical"? I don't see that either.
> The US is clearly not committed to maintaining any particular exchange
> rate peg, and is, and should be, free to operate monetary policy in
> order to keep the purchasing power of the US dollar broadly stable.

Is this the case even if that purchasing power is financed by a wholly unstable system of financial flows... namely a huge U.S. current account deficit and/or "unconventional" anti-deflationary "printed money" asset purchases?

Also... why is it okay for monetary policy to be operated in this way to prevent deflation in the United States, but not in order to stave off hyper-inflation and a recession in Argentina? What is the difference?

>Far from being undesirable, I see that as being highly desirable,
> both for the US and for the rest of the world!

Do you mean that the U.S. Economy because of its importance is a special case. I.E. that it is in all of that nations of the world's interests for the U.S. Economy to be operated in a way that is divergent from the norms?

Best Regards

C.D. Sludge

Anti©opyright Sludge 2002

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Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.

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