Posts tagged with: quantitative easing

In response to my post last Thursday on the Fed’s signaling the possibility of more quantitative easing (QE), a commentator using the pseudonym “Milton Friedman” wrote,

have you checked inflation rates lately? they are at historic lows. if the parade of horribles doesn’t happen, shouldn’t that cause you to reconsider your understanding of the economy? economists have learned quite a few things since 1609…

As I responded on that post, I’m not sure what “parade of horribles” he is referring to; my point was simply that the short term gain of inflationary policy now is not worth risking the likely long term disadvantages and need not be taken as apocalyptic.

Furthermore, as a matter of fact, inflation rates do not appear to be at “historic lows” in 2012, especially given the short bout of deflation we experienced from March to October 2009. I’ll let readers make up their own minds on that point, however, since it really doesn’t affect my argument.

What is far more important to me is pseudo-Friedman’s comment that “economists have learned quite a few things since 1609.” The reference to 1609 is due to the fact that I was highlighting the work of Spanish scholastic Juan de Mariana’s analysis of the effects of inflationary policies in medieval Spain. Is pseudo-Friedman right? Is Mariana’s analysis invalid due to its antiquity? (more…)

In today’s Wall Street Journal, Jon Hilsenrath and Kristina Peterson report, “The Federal Reserve is heading toward launching a new round of stimulus to buck up the weak economy, but stopped short of doing so right away.” The predicted means of stimulating the economy is another round of the unconventional policy of quantitative easing (QE), i.e. when a central bank purchases financial assets from the private sector with newly created money in effort to spark economic growth. Thus, the quantity of US dollars would be increased, debasing their value and causing inflation.

The authors note that this strategy has received significant criticism:

Critics say there is little more the Fed can do to help, having already pushed short-term interest rates to near zero. They contend its unconventional actions could do more damage by sparking inflation, and that in the meantime the Fed is punishing savers who are getting little return on their bond investments. (more…)

Blog author: jcouretas
posted by on Tuesday, July 20, 2010

The extent and persistence of the global economic and financial crisis has caused many people to start asking if there is any alternative to the current monetary system of fiat money overseen by central banks which enjoy varying — and apparently diminishing — degrees of independence from politicians who seem unable to resist meddling with monetary policy in pursuit of short-term goals (such as their reelection).

Most arguments about the respective merits of fiat money, private money, or the gold standard are couched almost entirely in terms of economic efficiency. Over at Public Discourse, however, Acton’s Research Director Samuel Gregg has penned an article outlining the principled case for a return to the classical gold standard. Gregg draws upon economic history and ethical analysis to argue that there is a strong more-than-economic case for the classical gold standard that rarely receives much attention. As Gregg writes:

There were several economic advantages to the gold standard. . . . A number of principled considerations were, however, also operative. The gold standard placed a high premium on economic security by reducing the uncertainty and risk that flows from fluctuations in the value of money that have nothing to do with the relative valuation of different goods and services. . . .

Another commitment at stake was the conviction that stable money meant greater economic prosperity for increasing numbers of people. Greater monetary certainty spurred productivity and investment, not least because many long-term contracts benefited from a confidence that prices would remain relatively constant over time. Then there were the ways in which the gold standard bolstered the economic well-being of particular marginalized groups. Monetary stability helps, for example, those who lack the financial sophistication to navigate the shoals of inflation, or who are on fixed incomes (e.g., the elderly and disabled).

At the same time the gold standard also encouraged governments to promote the common good instead of narrow sectional interests. Within nation-states, for instance, the gold standard diminished opportunities for the state to manipulate monetary policy in order to favor those with an interest in inflationist policies.

Likewise, the gold standard also generated a commitment on the part of governments to promoting the international common good. As the German economist Wilhelm Röpke once wrote, the gold standard relied upon the unwritten agreement of central banks and governments “to behave in matters of monetary and credit policy in such a way that this fixed and free coupling remained an undisputed permanent institution, irrespective of trade fluctuations”. This required central banks and governments to prioritize the global economy’s long-terms needs over the short-term exigencies of national economies. It also entailed a willingness to resist popular pressures to revert to a type of monetary nationalism in the face of the fluctuations in employment and growth sometimes generated by the gold standard’s adjustment mechanisms.

There is, Gregg notes, bound to be considerable opposition to any move away from fiat money. It’s hard to imagine, for instance, politicians, central banks, or Keynesian-inclined economists being very willing to give up a tool that — or so they believe — is a vital element of macroeconomic management. Gregg points out that there are also plenty of groups with a vested interest in the type of easy money policies (what’s euphemistically called “quantitative easing” these days) which are always an option under fiat money regimes.

Despite this opposition, Gregg says that going back to gold is certainly worth a second look — if only because no one seems especially satisfied with the present system.

For more from Gregg on this subject, see The Gold Standard: A Principled Case.