This post is an experiment.? Don’t hold me to high standards here.? I want to explore the area where governments extract value out of their citizens via inflation.

With stagflation, we have high inflation and high unemployment.? Financial Repression has inflation higher than safe interest rates.

In the current situation, we have a lot of discouraged workers.? We also have a government sucking value out of savers because short interest rates are so low.

The main thing to understand here is that the government is not here to help you, but to milk you.? The government does not care about you.? It cares about its survival.? If it can’t get sufficient taxes out of the populace, it will use its financing arm, the central bank, to lend to it at preferential rates, while passing on losses to the populace via inflation.? Also note that inflation tends to hit the poor more than the rich.? Food and energy, two things that can’t be printed, have prices that rise more rapidly.? Food and energy price rises affect the poor more than the rich.? As such, the current Fed policy that tends to raise commodity and asset prices discriminates against the poor and in favor of the rich.? From unelected bureaucrats, it’s hard to think of a more unaccountable policy.

Both policies, stagflation and financial repression, come about because the government and central bank are trying to force the economy to do more than it can do, leading to greater poverty on the low end of society, leaving aside the fine-sounding words of the liberals.? You have to get this: there is no constituency for small business and poor people in Washington, DC.? The policies align with big business and rich individuals.? The purple party reigns, sucking in donations from both sides.? Significant donations only come from big business and rich individuals.? (Purple is significant of Monarchy, aside from being the mix of red and blue.)

My main point is this: it will be difficult for most developed country governments to fulfill all the promises they have made.? The results of this may involve stagflation, financial repression, and/or defaults.

What a world we bequeath to our children and grandchildren.

What I wrote in the prior six pieces were the thoughts of the speakers, mostly.? Now for what I think.

There were a number of free banking advocates at the session today.? I do not favor their views.? Though I am ordinarily libertarian, with finance I believe that depositary institutions must be required to match assets and liabilities, because the losses to society as a whole from financial panics are big, and they can be easily avoided with modest regulation.? This is true whether we are under a gold standard or a fiat money standard, or anything inbetween.

I personally favor a gold standard because it leads to fewer problems than a fiat currency standard.? If you don’t agree with this, wait a few years for the current monetary policy approach to blow up, and you might agree with me.

Does the gold standard burn in my heart?? No, I just think it is a better idea — we could have a fiat currency standard, and constrain the slope of the Treasury yield curve, and that would work also, just not as well.

I agree with most at the meeting today that the Fed was a bad idea, but it will not be easy to eliminate the Fed.? That said, if we have a significant crisis because of Fed policy, it will be time to bring out the long knives and eliminate it — replace it with a gold standard, a commodity standard, or a constrained central bank not allowed to do bailouts, and constrained by yield curve slope.

One thing that most agreed on is the need for a single mandate, not a dual mandate.? Inflation should be the only target of the Fed.? I agree, largely because the ability of monetary policy to affect employment is weak.

Allison’s talk was a highlight of the conference.? His experience with BB&T gives him unique insights into how banking regulation works, really, how it doesn’t work.? is characterization of how bank regulators worked was spot-on.? They exacerbate crises.

The conference had a strong sense that the Fed is creating asset bubbles via QE, and that it discriminated against the poor in favor of the rich.? I agree, as did Ron Paul two years ago at the conference.

As with many at the conference, I agree that the Fed has created most of our problems. Central banks are the problem, not the solution.? Their actions tend to be pro-cyclical, not anti-cyclical.

Finally, Scott Sumner, the most controversial guy of the day.? If I didn’t much care for NGDP targeting before, I care less for it now.? If he can’t see that monetary policy was too loose 2001-7, then to me, he is like Keynes, a man for whom monetary policy could never be too loose.

Final notes:

I care more that we constrain the banks such that they match assets and liabilities, than over the medium of exchange.? Crises happen because illiquid, long-dated assets are financed by short liquid liabilities.? This allows for run on the bank scenarios, which occurred through the repo markets, and portfolio margining in the last crisis.? This was not focused on at today’s meeting, and was an intellectual weakness of the meeting today.

All that said, it was a really good meeting, and I am glad that I went, mostly for the people I met.

CLOSING ADDRESS

Lewis E. Lehrman
Chairman, The Lehrman Institute

Whither the Fed?? (DM: Wither the Fed? 😉 )

Monetizing debt often used to fund wars.

Keynes’ book on India — informal gold exchange standard in India.? Felt it would be a step toward a better currency in the future.? Rueff felt it would lead to greater instability.? Bretton Woods was much the same, and thus collapsed in 1971.? Rueff criticized it in advance.

Rueff restored convertibility after both wars.

The Fed cannot determine the total amount of money on its own. Keynes disagreed and thought it could be centrally planned.? Neoclassical economists still think they can do it, whether Keynesian, Chicago school, etc.? Velocity has dropped like a stone.

Don’t target interest rates, money supply, price levels — proposes targeting excess cash balances.? Rueff reformulated Say’s Law — supply creates it’s own demand.

Argues that a gold standard (not a gold exchange standard) is not costly.? Gold doesn’t manipulate us.? Competitive devaluations don’t add anything — they just create deferred inflation, and enable the government to run larger deficits.

Free trade without a gold standard will fail, in his opinion.? Speculation would be reduced.? Global rebalancing might ensue.

The Federal Reserve has not served us well, even with the good intentions of those who ran it.? We need Congress to revisit the Fed, and give us a better medium of exchange.

He says he will never give up, and neither should we.

Q&A

Q1 — Don’t all gold standards fail?? All human institutions fail.? Don’t we want the least imperfect monetary standard?

Q2 — Article 1 section 10 — Gold and Silver should be the only currency? Constitutionally he thinks so.? Coinage Act of 1792.

Q3 — No inflation now?? There is asset inflation, and QE is pushing it.? QE benefits the rich and hurts the poor.

Panel

Rep. Kevin P. Brady
Chairman, Joint Economic Committee

Gerald P. O?Driscoll Jr.
Senior Fellow, Cato Institute

R. David Ranson
President and Director of Research, Wainwright Economics

Quaint idea that savers should get a return on their money by the moderator, Judy Shelton.

Kevin Brady

Talks about punk GDP growth and employment.? If not now to re-examine the Fed, then when?? The Centennial Monetary Commission might find ways improve matters.

Gerald P. O?Driscoll Jr.

Can we get rid of the Fed?? Politically not possible in the short-run, but in the long run, it is possible.? Thus propose it now, and when the time is right, the knowledge will be there to execute the idea.

The Fed does what is best for the Fed, not necessarily what is best for the country.? There have been eras that had rules.

• ’20s — modified gold standard
• ’50s — era of balanced budgets, Fed never tested (DM: note that even Martin gave in to LBJ at the end)
• early ’80s — Volcker made the rule — control the money supply
• ’90s-’00s — modified Taylor rule

Argues that Fed should follow a rule.? Rules allow the Fed to have independence on a good basis.

How do we get for discussions to action?? More frequent meetings, with a greater focus on action.

R. David Ranson

Is monetary policy helping or hurting us?? “Last call at the bar”? Raising fed funds rates shift growth into the present, and lowers future growth.? Falling fed funds rates shift growth into the future, and lowers present growth.? Volatility of Fed policy is negatively correlated with growth.

Fed policy has gotten weaker over the last 50 years, as the economy has learned to anticipate it.

Compares QE with debt monetization — QE is more explicit and planned.

Easy monetary policy lowers employment, GDP growth, stock prices, raises gold, CPI, PPI

Q&A

Q1 — which is more important to GDP growth, regulation or monetary policy?? Brady says both are important, and monetary policy adds to uncertainty.

Q2 — should the Fed try to manage interest rates? Ranson — they don’t do it well.

Q3 — shouldn’t monetary policy be governed by the Constitution? Brady: Don’t tinker with the Constitution, but hold your congressmen accountable.

Q4 — Selgin suggests Ranson’s work is just correlations.? We need the fed funds rate vs the natural rate to know whether policy is tight or loose.

Q5 — To Brady: Interest on Reserves? No real answer…