What I am about to write will sound out of character. In writing, I often try to strike a balance between what should be, and what is possible. In this piece, I am temporarily ignoring what should be, for what could help solve our economic problems at minimum societal cost. Please understand that I am a principled man who hates inflation, but with the doofuses that mismanage the Fed, I am aiming for “second best” policies here.
Al McGuire, past coach of Marquette Basketball, was once asked (something like), “Would you rather have an A student or a C student at the free throw line in a tense situation?” His answer was the C student, because he wouldn’t think about the situation, he would just act, and sink the free throws.
The current Fed is clever. Too clever by half. They have aimed for a trifecta of fixing short-term lending markets, not raising inflation, and stimulating the economy. Though they may have had modest success with the first goal, the second goal has been rendered irrelevant, and the third goal is a failure.
It would have been better if the Fed had simply revved up the printing presses (virtual as most of them are), and began monetizing the government debt. That is too crude of a strategy for our central bankers, who have delicate constitutions, and are fighting a war that ended 20 years ago.
How would higher inflation help the current situation?
- Wages and the nominal value of collateral underlying loans would rise, reducing credit stress.
- People and institutions would stop sitting on their savings waiting for prices to fall further before acting.
- Inflation would cheapen the dollar, making imports more expensive and exports cheaper, stimulating the US economy.
- Inflation would reduce the real value of debts owed to foreigners.
The Fed is wasting its time with its alphabet soup of credit easing programs. They accomplish almost nothing for the real economy, while lavishing liquidity on markets that tangentially help financial institutions. That is a great way to aid average Americans, not.
Far better to fire up the helicopters (that’s a figure of speech), and mail a check for $1000 to every person with a Social Security Number (or their parents if they are in their minority). All of the complexity in the TARP and in the stimulus bills could be dispensed with, if we trusted the American people. Give them the money, not the credit markets. The people know better than the Fed. After all, who is the Fed supposed to serve?
Historically, In times of extreme credit stress, the US has acted in this way, to relieve the stress of an indebted population through inflation. (Think of bimetallism.) Though I am not crazy about inflation (it will hurt me), nonetheless it would be good for the nation as a whole. (Of course, with harm to those on fixed incomes.)
Mortgage rates would rise, and other interest rates would rise, harming economic activity, but the economic tempo would still increase as people would seek to use their money before it declines in value. Inflation is a cost worth paying in order to get the economy moving again, giving debtors some breathing room.