Monday, March 8, 2010
No Fed Exit-2
"Meltzer is writing a two-volume history of the [Fed]. Few people know more about its operations. ... He is an old-timer. He will turn 82 this week. It is quite impressive that he is still writing major books. ... His article is significant because he writes from the perspective of decades of FED-watching. There are few if any FED-watchers with superior credentials, both academic and practical. When he says that the FED policies will eventually produce price inflation, we would be wise to give careful consideration to his views. ... He began by observing that Chairman Bernanke has explained his exit strategy. ... Bernanke has repeatedly said that the FED will unwind, but I am unaware of any explanation of how, exactly, the FED will accomplish this feat. It is the absence of such an explanation that leads me to believe that there is no such plan, and that the FED is unlikely to deflate the monetary base for long. ... An economist normally begins with the concept of supply and demand. In monetary affairs, as in all others, the free market clears by means of prices. The supply of loanable funds and the demand for such funds are balanced in the free market by means of a rate of interest. ... All of the FED's press announcements about setting the fed funds rate is nothing but PR flak. There is no rate to set. Banks are not borrowing, because they are not lending. They are holding excess resrves. ... In the 1970's, the FED's policies produced the worst of both worlds; high unemployment and high price inlfation. Meltzer does not say this, but this unwanted pair of outcomes were what brought Keynesianism into question. ... Meltzer sees that the FED's present policy is not credible. It will produce monetary inflation when banks start lending", Gary North at Lew Rockwell, 2 February 2010, link:
I agree. Zimbabwe Ben is trying to confuse matters as to the inflationary implications of the Fed's actions over the last 18 months.