Monday, May 12, 2008
Hanke Spanks Bernanke
"U.S. Treasury Secretary Henry Paulson's blundering is becoming more breathtaking with each passing week. At the end of March he rolled out a grand plan to crown the [Fed] as the nation's new financial stabilizer. The Fed a stabilizer? That's who created the financial mess we're in. ... All the while favoring in this fashion a debasement of the U.S. currency, Paulson proclaimed that we should remain calm and confident because the economic fundamentals are sound. He reminds me of the stockbroker who performed a valuable service to his partners by always being wrong. ... As long as inflation remains at or below its target level, the Fed's modus operandi is to panic at the sight of real or perceived economic trouble and provide emergency relief. It does this by pushing interest rates below where the market would have set them. ... Austrian economists warned that price stability might be inconsistent with economic stability. ... The Austrians concluded that monetary stability should include a dimension extending to asset prices and that changes in relative prices of various groups of goods, services and assets are of utmost importance. For the Austrians a stable economy might be consistent with a monetary policy that had prices gently falling. ... A broad measure of the money supply (MZM) reported by the Federal Reserve Bank of St. Louis increased at an astounding annual rate of 37.7% from the end of January until Mar. 24. ... Until the Fed dumps inflation targeting and the U.S. abandons its weak-dollar policy, inflation will rule the day. Retain (and add to) your gold hedges", my emphasis, Steve Hanke (SH) at Forbes, 5 May 2008.
"On those awkward occasions when he is asked about his nation's currency, President George W. Bush has a simple response. 'We believe in a strong-dollar policy,' he'll say--or words to that effect. For his Treasury Secretary, Hank Paulson, the mantra is 'A strong dollar is in our nation's interest.' ... It should be pretty obvious, then, that the U.S. doesn't have a strong-dollar policy. ... So why do Bush and Paulson keep saying they're in favor of a strong dollar? ... Over time, a currency's value reflects an economy's fundamentals. .. So in that sense, a strong currency is reflective of a strong economy. ... The difficulty is that it's hard to distinguish a cyclical downswing that's clearing the way for good times ahead from the wheezing of a currency and a nation in decline. ... So what should U.S. dollar policy be? ... Menzie Chinn, a University of Wisconsin economist who is one of the nation's leading academic currency watchers [said] 'Because, frankly, I'm confused'," Justin Fox (JF) at Time, 5 May 2008.
I wonder if Steve Forbes read SH's article. If not, I suggest he do. The Los Angeles financial group I was a member of debated including asset prices in "measured inflation" for years. I gave up being a "Friedmanite" when I realized a stable economy is consistent with a falling price level. Why? In a gold-standard economy, gold holders get no "interest". However, by holding gold they forego current consumption, in effect making the rest of society a loan. A non-interest bearing loan. How is the "interest" paid? In falling gold prices of other goods. Think about it. I disagree that Hank Paulson (HP) is "blundering". Mr. "former" Goldman Sachs guy wants to increase the Fed's control over the economy so he can direct it. See my 1 March 2008 post.
JF, like Chinn is confused. I conclude Bush and HP claim to support a strong dollar because they sell dollars and are talking up their product. Would HP, world's largest bond salesman, tell us his product is defective when he has hundreds of billions of dollars of bonds to sell annually? Why care what Bush and HP say? Chinn's being "confused" is no surprise. What does "a currency's value reflects an economy's fundamentals" mean? A currency's quantity controls its value. I have a few years on Chinn and suspect, many more battle scars. Chinn graduated from Harvard in 1984, so I estimate was born in 1962. It's unlikely he remembers the 18 November 1967 British pound devaluation the way I do. See my 27 September 2007 post. Once you've lived through a devaluation like that, you will never again take anything a Finance Minister says at face value. The pound devaluation was typical in that it was done over a weekend to "surprise the speculators".