Paul Gigot: Governor Palin “Leading the Pack” on Monetary Policy
In a Wall Street Journaleditorial yesterday (to which Ian linked), the editors noted the degree of sophistication Governor Palin is bringing to the table as she attempts to focus the nation’s attention on the disastrous repercussions which must result from a further inflating of the currency. Specifically, she referred to QE2, the Fed’s plan to pump another $600 billion to as much as $1 trillion into the economy via the purchase of U.S. government securities. Paul Gigot, editor of the Wall Street Journal editorial page, discusses the editorial and Governor Palin in the video below, courtesy of PalinTV:
And this was before today’s Facebook Note. Gigot is correct when he points out that Governor Palin is practically the only prominent Republican touting the virtues of a sound currency. Palin understands as did Reagan that a sound currency is a prerequisite for real economic growth and rising living standards. Just as you can’t build a house on a weak foundation, you can’t build an economy on the shifting sands of an unstable currency. Paul Volker, an informal advisor to President Obama, is also understandably queasy over this latest gambit by the Fed:
Former U.S. Federal Reserve Chairman Paul Volcker on Friday repeated his skepticism about the benefits of the Fed’s latest quantitative easing, citing concern about long-term inflation.
He told reporters after a lecture in Seoul that short-term U.S. interest rates had almost no room to go down further, while long-term bond prices were under pressure from increasing concern about future inflation.
“It’s hard to have a big impact on the short-term interest rate that is already zero, and on the bond-market … two things are working in opposite ways on the interest rate,” he said, referring to concerns about long-term inflationary pressure.
The Fed controls short-term rates, but the markets control long-term rates. Volker’s concern is two-fold. First, with short term rates already at or near zero, how much lower can they go? Second, long term rates are partially a function of what the markets expect will happen with inflation. Investors in long bonds want to be compensated for inflation risk before risking their capital, and if they believe, as Volker and Governor Palin do, that printing more money via QE2 will increase future inflation expectations, they will demand a higher return in order to be compensated for that risk. So, the question is this: Is a potential miniscule drop in short term rates worth an inflation fueled rise in long term rates?
The answer, of course, is no. Businesses look to the future, and the major, job creating investments they make are not based on short-term rates (which can’t go much lower anyway) but rather long-term rates. QE2 may (or may not) result in a slight drop in short term rates, but will certainly raise long-term rates, making it more costly for businesses to make long-term investments. Businesses crave certainty, and this will only exacerbate the current uncertainty. This is not complicated, and Volker’s concerns are valid.
Volker, though a Democrat, knows a thing or two about the dangers of bad monetary policy. One of the few things (the only thing?) Jimmy Carter got right was his selection of Paul Volker as Fed chairman in 1979. Volker, a Monetarist, reversed the easy money policies of his Keynesian predecessor, Arthur Burns, and put a tight lid on further monetary expansion. The result was a necessary period of historically high interest rates as inflation was painfully wrung out of the economy. Reagan was under pressure to appoint an inflation dove in 1983 but he wisely “stayed the course” with Volker and reappointed him to another four-year term as Fed chairman. In 1984, Reagan was rewarded for his perseverance with a landslide victory, much of it due to a strong economy, which was based at least partially on the foundation of a stable currency.
Unfortunately, Bernanke, Obama, and other Washington policy makers seem intent on re-learning the lessons of the late 70s, a point I made in a post on Monday. In today’s Facebook Note, Governor Palin knowingly pointed out the short term political attraction of printing money despite the long-term futility of such a plan:
As liberal economist Paul Krugman has explained, a little inflation goes a long way towards driving down the value of the enormous national debt Obama has run up. And the higher the inflation, the greater the likelihood he won’t have to take any of the tough decisions needed to bring the deficit back down. In other words, pushing inflation upwards means you can have your cake and eat it too. You can spend all you like and then make the bill disappear by driving down the value of the dollar – buying with one hand the debt your reckless spending is issuing with the other. No need to cut spending, folks, just run the printing presses. It’s a win-win scenario.
Monetizing the debt is attractive to politicians because it allows them to pay for today’s spending and debt with cheaper dollars down the road. But as Milton Friedman noted, inflation is just another, hidden, form of taxation and guarantees lower future living standards for all Americans. Politicians find printing money particularly attractive, not only because the effects aren’t felt immediately, but also because most people don’t understand that inflation is just another form of taxation foisted upon them by their government. This gives political leaders plausible deniability for their disastrous policies. Kudos to Governor Palin for having the foresight to put this issue front and center and making it more difficult for them to get away with it.
Update: Ed Morrissey’s take on Governor Palin’s latest Facebook Note here.