Tuesday, October 19, 2010

CounterPunchers Sounding Almost Like Austrians

"By purchasing long-term Treasuries, Bernanke hopes to lower bond yields and force investors into riskier assets," reports Mike Whitney, noting that "Bernanke fails to say why more-of-the-same will produce a different result" — How to Kickstart the Economy. The author continues:
    Unconventional methods of pumping liquidity into the economy can undermine confidence in the dollar and trigger turmoil in the currency markets. Trading partners like Brazil and South Korea are already complaining that the Fed is flooding the markets with money pushing up their currencies and igniting inflation.

    The threat of more cheap capital is causing widespread concern and talk of a currency war. If Bernanke goes ahead with his plan, more countries will implement capital controls and trade barriers. The Fed is clearing the way for a wave of protectionism.
The author continues with the un-Austrian suggestion that "[t]he way to tackle flagging demand is with fiscal stimulus; food stamps, state aid, unemployment benefits, work programs etc." However, "putting money in the hands of the people who will spend it immediately giving the economy the jolt that policymakers seek" is certainly better than putting money into the hands of the bankers who created the mess. And Mr. Whitney is right that "asset inflation to generate more spending... means that we've returned to the Fed's preferred growth formula--bubblenomics."

To the author's assertion that "the remedies are already known (Keynesian stimulus) and have been used many times before with predictable success," I remind him that he "fails to say why more-of-the-same will produce a different result." However, his suggestion of "a two-year suspension of the payroll tax" seems a modest proposal that just might "give the nation's working people a well-deserved raise in pay that they'd use to kick-start the economy."

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Blogger Francis Xavier said...

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9:43 PM  
Blogger Francis Xavier said...

Although this is a great leap forward, looking to leftists for economic advice is as smooth as asking a Carthusian for dating tips. Even here, Counterpunch misses the most salient point: that the Chinese have for years run an economy in which many wages are set by the state (which is NOT free trade,) selling goods to America at prices set by a fixed exchange rate (which again is NOT free trade.) To garner America's acquiescence to this, they and others purchased trillions of US bonds.

Now that this arrangement is becoming increasingly untenable, and the Chinese refuse to mend their ways, Washington has the prerogative of confiscating a large part of the Chinese' savings by the simple expedient of a few keystrokes that would create all the digital cash it can eat, to be distributed at home, in part to those hit by these imbalances. It may be horrible economics, but if the Chinese insist on running a rigged game, they will have to live with what retorsions and counterriggings come their way.

The moral of the story is to never lend money on terms which can be rewritten at the counterparty's pleasure.

10:23 PM  

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