11 Reasons to Find a Better Source of News Than the Huffington Post

This has probably been done by a hundred economists already, but I felt compelled to address an article I read today, which is probably the most blatant and poorly contrived propaganda piece I’ve ever seen in the mainstream media. The article is “11 Lies about the Fed”, written by one Bonnie Kavoussi in the ever-objective Huffington Post. I should begin by pointing out that economics is and always has been a very complex and rather inexact science with multiple competing explanations for nearly everything, so any serious economist would be rather hesitant to dub an alternative explanation a “lie”. Clearly Ms. Kavoussi understands precious little about economics, and I am addressing each of these alleged “lies” in order that she and anyone else who may be interested might gain some insight.

“Lie” #1: “The Fed actually prints money.”

             

In order to get the article started on the right foot, the first “lie” the author cites is actually a tiny semantic technicality. The Treasury prints money at the Fed’s request, rather than the Fed themselves, and sometimes the Fed creates money by simply adding numbers to a bank account in a computer rather than physically printing it. The Fed is fully responsible for both. No, Ben Bernanke doesn’t load the paper in the printing machines and press the button. But the Fed is entirely responsible for creating new money, and that is usually termed “printing”.

“Lie” #2: “The Federal Reserve is spending money wastefully.”

“Wastefulness” is clearly a subjective judgment, and is pretty absurd to label a “lie”, especially with regard to an institution that has become accustomed to annual spending in the trillions and has never been subject to so much as a single external audit. But it gets much worse. The author’s rational: “The Federal Reserve has actually created new money by expanding its balance sheet. The Fed earned a $77.4 billion profit last year.” This frankly makes me wonder if the author even knows what a balance sheet is, much less the implications of “expanding” it (A balance sheet is the accounting statement that lists a firm’s cash holdings, investments, and debts, among other things—in case you were wondering). As is common knowledge to…well…everyone (or so I thought before reading this article), creating new money devalues the existing money in the marketplace, in savings accounts, and in your wallet; and has myriad other harmful effects on the economy. And the “profit” realized by the Fed is not “earned”, it is printed (or typed into a computer) out of thin air at the expense of everyone else that uses the currency.

“Lie” #3: “The Fed is Causing Hyperinflation.”

The argument is that since current levels of inflation are relatively low, this must be a lie. The three articles linked of “conservatives” claiming that the Fed was causing hyperinflation were nothing of the sort. Two predicted high inflation in the future, and one was Ron Paul arguing that Fed-approved core PCE and CPI measures produced an unrealistically low figure for rate of inflation, and that a more accurate measure would be a few percentage points higher. In not a single one of the links did the “conservative” in question suggest that hyperinflation was already occurring. The Fed has expanded the monetary base exponentially, an action which is unambiguously linked to higher inflation. Even many of the Fed’s own economists are beginning to worry that Bernanke’s policies will cause high inflation in the near future.

“Lie” #4: “The amount of cash available has grown tremendously.”

The argument is that the “amount of currency in circulation has not really changed”. Both the “lie” and the explanation are carefully worded to avoid the real issue. Money, and even cash, can be considered several different ways. The Fed in recent years has increased the monetary base astronomically. This means that the Fed has created a lot of new money. The effect of this new money has been offset, however, by a decline in the money multiplier effect, which is a phenomenon (which I won’t explain in detail here) in which lending by financial institutions effectively increases the total amount of money in circulation. The recession and a high degree of uncertainty in the market place have depressed lending, which has in turn suppressed the money multiplier and offset the enormous increase in new money. We will see the full effect of the expanded monetary base once lending goes back to normal, and total currency in circulation will increase drastically.

“Lie” #5: “The gold standard would make prices more stable.”

The argument is that prices today are more stable than they were under the gold standard in the 19^th century. First of all, this claim is debatable, as 19^th century economic data is incomplete and somewhat difficult to compare to modern data. Some economists, such as Harvard economist Jeff Miron have made the case that prices were actually more stable during that period, even despite the fact that the gold standard was poorly applied and often abused by the government during that time. But now to point out the glaringly obvious: IT WAS THE 19^th ***** CENTURY!! If you wanted to buy stock in that time, you would have had to get on a horse and ride to New York. Now trades are lightning-fast, and the whole world market is accessible at our fingertips. Arbitrage opportunities are recognized and trades executed by computer programs in fractions of a second. Prices should be far more stable today, completely irrespective of the monetary regime. The fact that they are not is a stunning indictment of the Fed’s monetary policy.

“Lie” #6: “The Fed is causing food and gas prices to rise.”

If you were looking for an actual lie, look no further than this line: “there is actually no correlation between the Fed’s stimulus measures and commodity prices.” Actually by this point I suspect that the author doesn’t know what “correlation” means (Google it if you don’t know). A quick look through the links the author was kind enough to include (but apparently not to take the time to understand) shows that there is a significant correlation between Fed stimulus and commodity prices. Whether this correlation is the result of direct causation by stimulus or some other factor or combination of factors is debatable, but this “lie” clearly seems to be a plausible explanation at the very least.

“Lie” #7: “Quantitative easing has not helped job growth.”

The argument is that the Fed’s economists say that QE has “saved or created” a bunch of jobs. In other news, scientists working for Marlboro have determined that cigarettes actually reduce the risk of cancer, heart disease, hemorrhoids, and spontaneous human combustion. Meanwhile Kim Jong-Il has made North Korea the greatest nation on Earth…according to Kim Jong-Il. Of course the Fed claims that it has been successful. What we actually see is the slowest recovery from an economic downturn in more than eighty years. Fed policy over the last five years has been an abject failure, and the Fed’s only defense is to blindly declare that we would be worse off without its interventions.

“Lie” #8: “Tying the U.S. dollar to commodities would solve everything.”

The author attributes this one to Paul Ryan, who apparently advocates some sort of mixed-commodity monetary standard (which neither she nor any of the heavily-biased op-ed articles to which she links bother to identify). I’m going to go out on a limb here and guess that Mr. Ryan never made the statement that his proposal would “solve everything”, whatever that means. I think that’s a pretty safe assumption.

“Lie” #9: “Ending the Fed would make the financial system more stable.”

The rationale: “The US economy actually experienced longer and more frequent financial crises and recessions during the 19^th century, when the US was using the gold standard and did not have the Fed.”I could’ve sworn we just went over this…see #5.

“Lie” #10: “The Fed can’t do anything else to help job growth.”

The rationale: “Some economists have noted that the Fed could target a higher inflation rate to stimulate job growth.” Very debatable claim by “some economists”…and obviously anyone who disagrees is a big mean lying liar sent by Satan himself to fool you poor innocent victims into doubting your Lord and Savior, Ben Bernanke. A higher inflation rate (read: “printing more money and killing your investments”) MIGHT stimulate job growth slightly in the very short-term at enormous expense to the long-term health of the economy, but that can hardly be taken for granted. 

“Lie” #11: “The Fed can’t easily unwind all of this stimulus.”

             

The author’s argument is that the Fed bought a lot (a LOT!) of Treasury bonds and government-backed mortgages, which are easily tradable on the current market, and therefore selling off these assets will be easy once the Fed is satisfied that the economy is back to normal. This absurdly simplistic (surprise!) argument ignores three important points. First is that just because Treasury bonds and government-backed mortgage securities have plenty of potential buyers now doesn’t mean they will once the Fed begins to flood the market with them. Secondly, many of the mortgage securities the Fed bought are not government backed, and will likely never be paid back. These are pure loss on the part of the Fed (and by extension, anyone who holds US dollars). And third, perhaps most importantly, selling off all these assets will result in a contraction of the money supply, a marked increase in interest rates, and most likely a nasty recession. So even if the Fed technically has the ability to sell off its assets, it would wreak havoc on the economy.

Ms. Kavoussi, you’re welcome. I don’t normally do this for free, but for someone as direly in need as you, I figured I’d make an exception. Might I suggest that in the future you refrain from blindly accusing others of lying regarding subject matter that you don’t understand? And perhaps take a couple writing courses at your local community college—for the sake of your readers.

Thoughts on the Paul/Paul Debate

Early today Bloomberg TV hosted a short debate between Ron Paul and economist/political pundit Paul Krugman. The two essentially debated the economic practicality of economic liberty versus central monetary planning. I'm sure every free market economist is doing the same thing, but I'd like to take the opportunity to consider some of Krugman's statements that Ron Paul did not get the chance to properly address.

Krugman: "You can't leave the government out of monetary policy. If you try to think we're just going to let it set itself, it doesn't happen."

Anyone who has taken a couple introductory economics courses can tell you this is simply not the case. Historical examples abound of the free market creating its own currencies and setting its own interest rates. It is only natural for a group of diverse producers in an economy to find one or a few commodities on which to agree as a medium of exchange. And it is only natural for them to borrow at interest rates that satisfy both borrower and lender. Krugman is apparently a pretty poor speaker, and my guess is that he actually meant to say something along the lines of "the government manages monetary policy more effectively than does the free market", a point which we will explore later on.

"Money is the result of a financial system that includes a variety of assets. We're not even sure where the line between money and non-money is. It's kind of a continuum."

Agreed. Ironically though, this is a pretty good reinforcement of what Ron Paul is trying to say: that monetary policy should be left up to individual decisions rather than some central planner. Why would we trust monetary policy to a bureaucracy that can't even define what money is? Money is difficult to define in part because different individuals use different assets as money. What if the residents of one city began exchanging shares of Bloomberg stock for goods and services rather than exchanging dollars? Bloomberg stock shares would then be defined as money for one town, but not for the rest of the country--something that a single, centralized monetary simply cannot account for.

"In fact, history tells us that a completely unmanaged economy is subject to extreme volatility, is subject to extreme downturns."

As opposed to the history of managed economies? This is completely absurd! What did the economies of post-WWI Germany, early 2000's Argentina, late 2000's Zimbabwe, and the Great Depression-era US have in common? They were all managed by central monetary authorities...and they all experienced enormous financial crises. In December of 2008, Zimbabwe faced inflation of 6.5 x 10¹⁰⁸ percent. I can confidently guarantee Mr. Krugman that no unmanaged economy has ever seen anything near that destructive an inflation rate.

"I know there's this legend that people like, probably you, Congressman, that the Great Depression was somehow caused by the government or caused by the Federal Reserve, but it's not true. The reality is that was a market economy run amock."

First: this is a rather ridiculous comparison, since the finance industry has changed drastically since the Great Depression. Asset trades occur lightning-fast, as does transmission of information. Financial and economic understanding is far more advanced (though perhaps often ignored). So to imply that similar monetary conditions to those that caused the Great Depression would have an impact of precisely comparable magnitude today is rather disingenuous. And secondly, the claim is blatantly false. As Ron Paul brings up later on, the (uber-interventionist) Fed chairman openly admitted that the Fed did, in fact, cause the Great Depression. More on this later....

"Depressions are a bad thing for capitalism, and it's the role of the government to make sure that they don't happen, or to make sure that if they do happen they don't last too long."

I'm glad he clarified, because I was given to believe that depressions were a good thing...Anyway, I certainly don't remember our Constitution ever assigning such a role to our government. The truth is, the government cannot prevent depressions; it can only cause them. Of course, history has repeatedly demonstrated this to be the case; and--of course--the US's worst depression happened on the Fed's watch, and didn't clear up quickly.

"I am a defender of the economic policies that we followed after WWII that produced the best generation of economic growth that this country has ever experienced."

That's an awfully subjective statement. The whole period from around 1965 to around 1982 was terrible economically, with high inflation and recurring recessions. The two big market crashes of the last fifteen years haven't been pleasant either (though, in Krugman's defense, he does proceed to blame outside factors for this period, which is a topic for another time).

"(Economist Milton) Friedman's complaint (with which current Fed chairman Bernanke agreed) was that the Federal Reserve did not print enough money."

This is a classic half-truth. The condensed version of Friedman's critique of Fed actions during the Great Depression was that it went suddenly from printing a lot of money and keeping interest rates low to dramatically slowing the rate of money printing and consequently letting interest rates rise. If you ignore the first part of his analysis, perhaps Krugman is correct. But the clear emphasis in Friedman's work is the sudden and unpredictable change in the Fed's monetary policy, not that the Fed was simply "not printing enough money."

"That's not what I've heard (in response to Ron Paul's claim that using competing currencies is against the law)...do you really think that people only use dollar bills because the Federal government doesn't allow them to use other stuff? You can do barter, you can trade all kinds of stuff."

Back to Econ 101. Barter, by definition, is not money. Legal tender laws place stiff penalties on use of any other currency. I remember a few years ago a company began selling gold coins (with Ron Paul's face on some), and the feds raided their facilities and confiscated their entire supply of gold. Yes, Mr. Krugman, issuing a competing currency is illegal. And even if competing currencies were legal, they would be effectively shut out, as Ron Paul points out, by taxes on commodities and capital gains.

"My proposal is to destroy the economy (by cutting government spending) so that we can't in fact afford to carry the debt we already have, that's not a helpful policy."

Is there some evidence that cutting government spending would "destroy the economy"? History tells us the opposite, as do basic economic theory and common sense.

Hypothetical Question

Let’s say some country was faced with the choice, hypothetically speaking, of electing as its leader a multi-millionaire businessman warhawk funded primarily by giant government-bailout-backed financial conglomerates that changes positions on issues like he changes clothes, a multimillionaire lawyer responsible for miring the country in more wars than had any other leader in the past century yet had never held a job not funded by taxpayers, or a veteran and formal medical doctor who spent much of his life offering free health care to underprivileged people, had since spent his years standing up to special interests for the good of the people, often against the wishes of his own party, for the cause of peace and liberty on a partial salary, whose record was so impeccably consistent that lobbyists wouldn't even bother visiting his office, who opposed ever tax increase, bailout, and corporate subsidy ever proposed during his tenure, and who refuses to accept a higher salary as leader than that of the average citizen.

Now let’s say that country had been mired in effective recession for the last four years, the foreign debt of its government had surpassed 100% of its annual output in the last year, its central bank had been keeping interest rates at zero for the past four years and promised to continue for the next two—virtually guaranteeing a severe asset market crash in the future, and its legislature had been churning out encyclopedia-sized tomes of oppressive business regulations steadily over the past five years. If this country, teetering on the fence between bankruptcy and hyperinflation. Let’s say this country spent more than the rest of the world combined on military expenses which it directed primarily toward invading unthreatening third-world nations without economic justification or legal due process. If, perhaps, two of this country’s candidates had little to no understanding of even basic economics, and instead trusted the same elitist commentators whose counsel had brought about the current economic state; and one candidate who possessed a thorough understanding of advanced economic concepts, who correctly predicted all of the country’s economic problems years before they occurred, and who had consistently fought against the bad policy that brought them about……

Which do you think they would choose, and which would they label "unelectable"?

by YourLocalSecurity.com

Hypothetical Question

If some country--say the USA--was faced with the choice, hypothetically speaking, of electing as its leader a multi-millionaire businessman warhawk funded primarily by giant government-bailout-backed financial conglomerates that changes positions on issues like he changes clothes, a multimillionaire lawyer responsible for miring the country in more wars than any other leader in the last century yet had never held a job not funded by taxpayers, or a veteran and formal medical doctor who spent much of his life offering free health care to underprivileged people, had since spent his years standing up to special interests for the good of the people, often against the wishes of his own party, for the cause of peace and liberty on a partial salary, whose record was so impeccably consistent that lobbyists wouldn't even bother visiting his office, who opposed ever tax increase, bailout, and corporate subsidy ever proposed during his tenure, and who refuses to accept a higher salary as leader than that of the average citizen.....

Which do you think they would choose, and which would they label "unelectable"?