Tuesday, August 16, 2011

Things I don't think, but I think many do...

From a populist perspective (on both sides of the political spectrum …) printing money hurts the economy because it looks exactly like a big scam. While they’re like the shackled prisoners in Plato’s cave, what they perceive is:

1. The government is spending at an unsustainable rate and borrowing to do it. Everyone on both sides knows it’s unsustainable, yet the government gets to borrow at shockingly and seductively low rates. How?

2. Well, the Fed, which is owned by its member banks but somehow given nearly omnipotent power by the government, creates new money out of thin air (thereby devaluing all the money in my populist pockets). The member banks buy government debt notes with cash on hand, then sell the notes to the Fed for the newly created cash. Which they then sit on, deposited at the Fed, and collect interest.

3. In looking this over, who are the winners and who are the losers? The winners are the corrupt and interest groups.

  • Well, the Fed banks are winners. They have a license to print money, and coupled with the Fed paying its members interest to sit on the money, have rapidly recovered from the losses they mostly shouldn’t have been allowed to recover from in 2007-2008.
  • The supplicant constituencies of government are winners, because they’ve been allowed first place at the trough on the debt extravaganza.
  • Yes, to the extent this reflated the stock market, it’s good for everyone that has a 401(k), which is most of us, but the average populist understands that this intent is secondary to the borrow/spend-print/stash money laundering scheme, and it’s largely folks with 401(k)s that are gonna pay the price when it ultimately can’t be done anymore.
And the losers are:

  • The vast number of unemployed out there, despite what everyone assures us are gigantic quantitative easing efforts. This is especially true in the private sector.
  • Folks in the private sector who understand that ultimately devaluation hurts everyone with money, but seems to be disproportionately helping the big banks and supplicants of big government.
  • Folks in the private sector who still face tight credit, but also face increasing regulatory and perceived tax burdens and who thus conclude that now is not the time to expand.
Call these crazy populist rantings, but they have import since something like 80% of economists, 98% of politicians, and 99% of the general public don’t understand monetary policy. Thus I find it difficult to get worked up about quotes from one particular politician who doesn’t understand monetary policy. One can bet candidate Barack Obama would say the same in a world where there is a President Rick Perry.

But more importantly, the average left or right populist truly thinks this way, and has very little faith in the current monetary regime because of it. It’s one thing to say they’re totally wrong, but there’s some germs of truth in their too. And worse still, when we’re talking about what 80-99% of people think, it doesn’t much matter whether it’s right or not; it takes on a life of its own, and I seriously question whether even a correct answer from this monetary regime can succeed when the regime itself has come to be seen as so fundamentally illegitimate.

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