The Fed has been "printing money." So what?

I sure am glad the Fed has been printing lots of money—to prevent a depression. Later, when the economy recovers, I'll be glad when the Fed starts making a lot of that money disappear—to prevent inflation. Reasons: I don't like economic collapses (...based on what I've read of them, partly because they tend to result in political collapses, too); I don't like high inflation, either.

Federal Reserve Chairman Ben Bernanke explains all this a lot better than I do, and I'm glad he decided to make the Fed more transparent by granting 60 Minutes an interview.

In case you missed it, please watch at least all thirteen minutes of the first part:

The Chairman, Part 1

Important excerpt...

60 Minutes:
"You've been printing money."

Chairman Bernanke:
"Well, effectively; and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover, that'll be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

And here's the second thirteen-minute segment:

The Chairman, Part 2

Comments

[David L. Kendall]

If printing additional money is how a government can pull the economy out of a recession, why isn't printing more money the way a government can cause rising prosperity for one and all on a regular basis?

Oh, excuse me; I believe we have already established earlier that printing additional dollars IS the way government can ensure rising prosperity for all. We just never explained how that works.

[Optimist123]

David:

Printing more money *is* required for rising prosperity on a regular basis. "Regular" defined as stable prices for a growing supply of real goods and services. [New money should be printed at about the same rate as the growth of real goods and services.] Otherwise, growth is stifled, and future generations can expect stagnation to be more likely than rising real incomes.

[Mike H]

Luckily, it's starting to work. Money is starting to flow around the economy again and over the next few months it should really pick up. Bernanke will have to start shifting tactics fairly soon. He's been doing well so far, I imagine he's as up to the challenge as anyone.

[beancounter]

So, this is the man who is responsible for the insidious self-serving Federal Reserve. The most evil man in the world according to self-styled libertarians. A math nerd with 1590 SAT score who grew up on a farm, stutters and worked his way through college in a fast food joint. The man who has evil closed door meetings with the other most evil men on the planet scheming the downfall of the American people. Oh, nevermind -- he publishes the minutes to his "closed door" meetings like any swirling moustache cartoon villian announcing his schemes for world domination. The man who deals purely in numbers and not ideology or politics, because of course the American dream is all about ideology, personal responsibility, and never the numbers.

Please.

More evidence exists that Ron Paul is a racist than Bernanke is out for personal profit. If I had to pick one man in the world to handle the nation's money supply it would be the man preparing for this his whole life as 60 puts it rather than people who wish they could hoard money or buy anything and everything under the sun for pennies when a deflationary spiral hits.

[Marty Steinberg]

Personal profits doesn't always have to be monetary. It could be just a few strokes to your ego. Being in power itself is a reward for ambitious egotistic people.

As for priting money and stifling growth, they are just phoney baloney. Between 1901 and 2000, the U.S economy grew 2300% as measured by GDP( not a big fan of that stat ), and it grew 5400% between 1801 and 1900, with the longest depression of that 19th century being come during the Greenback paper standard.

Please go to measuringworth.org for the data. Prices fell for 100 years between 1801 and 1900, except during periods of war.

[beancounter]

Great, you've proven that a nation in the process of industrialisation has tremendous growth. You didn't need to go back to 1800 for that, but 2008 and look at China with double digit growth, huge monetary reserves and a fixed exchange rate (which is the logic behind a gold standard is, fixing currency to a commodity). But for someone who uses an economy before the integrated circuit, before the assembly line and hell even before urbanisation you might pick a proper measure of GDP. The entire purpose of that site is to identify different types of measuring worth and you try and compare apples and oranges. How about this: choose annualized growth rate, and select the *unskilled wage* since its clear the only way to compare 1800 GDP and 2008 GDP with any relevance is unskilled work (a person from 1800 wouldn't last a month in a skilled trade in our society.) What's the unskilled wage annual growth rate from 1800 to 1900? Less than a percent. Meanwhile the unskilled wage increases by nearly 5 percent a year between 1900 and 2007. Even taking into account falling prices 1800-1900 and increasing prices 1900-2007 the unskilled wage growth from 1900-2007 vastly exceeds the unskilled wage growth from 1800-1900. Americans got richer, faster.

In short non-expanding currency definitely stagnates a economy that isn't rapidly industrialising (and before you say what's the problem with industrialisation think hard about what kind of jobs and what products you want Americans to make). Since libertarians are such proponents of "common sense" how about this common sense: let's say the GDP was increasing by 6% every year. What possible reason would an investor whose return would be less than 6% have to risk his money? Then less investment and suddenly that 6% is 2% or nothing... stagnation. Meanwhile inflation forces an individual to invest or lose purchasing power. Perhaps this is why "libertarians" hate inflation -- they hate the idea they're being forced to do something with their money.

[Marty Steinberg]

economy that isn't rapidly industrialising

The old hag economy assertion! Wonderful malthusian assertion. Why should anyone accept it at face value?

[tttar]

Beancounter, isn't fascism, in the economic sense, defined as the state forcing someone to do with "his" money something other than what he wants to do with it?

On the face of it, I just don't see how anything but freedom to do with your property as you please can be more conducive to economic growth.

[Gil]

Maybe economic certain eras should be seen gears in a car, beancounter. Once you approach the diminished returns of 1st gear then you change to 2nd gear, then to 3rd, 4th, etc. Hence what worked in the 18th century wouldn't have necessarily worked too well in the 19th century and what worked in the 19th wouldn't have necessarily worked in the 20th cetury. The 1800s saw the change from agrarian to industrial, the 1900s saw the change from industrial to information, but what the 2000s should be? I'll take a guess it ought to be proper space travel. I believe we pretty much maxed computers out.

[beancounter]

The evidence is right in front of your eyes Marty and has nothing to do with Malthusian fear mongering and everything to do with root curve in demand for infrastructure. You can't build forever and expect the same gains as the current housing crisis shows us. Economies like China and Brazil, rapidly industralising, with double digit growth while mature first world economies are happy with a few percent. You say that this is because the first world is constrained by the dollar, except for the inconvenient fact that all of these rapidly industrialising nations are using fractional reserve banking and not something from the 1800's. For someone who wants us to go back to the 1800's you don't have any right to call anybody's ideas "old."

That is the real problem with a lot of "libertarian" theories, ignoring reality and human desires. Unless an economic theory can be sold to the public and implemented it is useless, ivory tower garbage. Now with a fixed money supply and a growing economy, there will either be stagnation or growth and falling prices followed by falling wages. Now the realitive norm with the unskilled wage example shows there are falling prices and increasing wages, but the increase in wage is microscopic enough so the point is proven: falling prices means falling/close to falling wages, a neverending price war. You will never sell falling wages to a modern educated public.

Or perhaps you are under the delusion it is possible for wages to increase, unemployment rate to decrease and the economy to be growing all under a fixed currency. You'll have to explain how X money with Y value one month, then worth Y+Z value the next month in a growing economy, doesn't force a business to either fire employees or give everybody a pay cut because the same amount of money is now worth more with a fixed amount of currency. Expand the currency however and this problem goes away. Or you could always industrialise some more if you could convince Americans to work in factories and make useless widgets. Good luck with that.

===

tttar,

Look up Simpson's Paradox. It is entirely possible, indeed probable that by ignoring the standard deviation in income aka the evil liberal "gap between rich and poor" that GDP can decrease. A plutocracy would surely decrease economic growth, the result of anybody able to do absolutely anything they want with their money including stuffing it in mattresses, storing it in shiny glittering metal or stashing all profits in offshore accounts immune to taxation. Yes they can do this all now, but they are strongly discouraged not to while with fixed amount of money and a growing economy they are encouraged to hoard (once the hoarding begins, stagnation.)

[Marty Steinberg]

"...The evidence is right in front of your eyes Marty and has nothing to do with Malthusian fear mongering and everything to do with root curve in demand for infrastructure. You can't build forever and expect the same gains as the current housing crisis shows us. Economies like China and Brazil, rapidly industralising, with double digit growth while mature first world economies are happy with a few percent. You say that this is because the first world is constrained by the dollar, except for the inconvenient fact that all of these rapidly industrialising nations are using fractional reserve banking and not something from the 1800's. For someone who wants us to go back to the 1800's you don't have any right to call anybody's ideas "old."..."

beancounter,
I hope you had a lot of fun destroying a dozen strawmen in one paragraph.

[beancounter]

Destroying strawmen? The first part of that paragraph was in response of your request for evidence of what you call my "old hag economy" hypothesis and I give it to you in plain English. You simply don't like the answer. The second part was in rebuttal of your implication that paper standard is responsible for lower growth, again with real world examples in China and Brazil. You didn't like that answer either. I guess you're not a "fan" of many statistics. Well, I don't know about you but I'm thrilled the USA grew its economy between 1900 and 2007 to the most powerful and robust in the world. Mostly under the watchful eye of the Federal Reserve, which must irritate "libertarians" to no end.

[Marty Steinberg]

You provided no proof other than a bunch of assertions that if you have "industrialized" already, they are ripe and about to go into rotten stage as an economy. In term of human history, history of industrialization is just a dot. So your assertion is that our best days are behind us. you have provided no proof for that assertion. It is all in your head.

You say..."The second part was in rebuttal of your implication that paper standard is responsible for lower growth, again with real world examples in China and Brazil. "

I made no such implication. I was just responding to the propaganda that if the money supply didn't expand, we will be in chronic economic stagnation. I was just giving the counterfactual. I didn't say economy can't grow under paper standard.

We had the only peace time depression in history under the watchful eye of the Federal reserve. We also had a decade of peace time high inflation under the federal reserve.

American replaced UK as the world's wealthiest nation at the beginning of the 20th century, precisely because of the massive economic growth of 19th century. I am thankful for the lack of massive federal parasitic structures in 19th century that helped us achieve this.

If anything, America is very likely to be replaced as the world's largest economy in 20th century, thanks to the massive parasitic bureaucracy.

[SkylightMT]

There's printing money to combat deflation, then there's printing money for... well... other reasons.

I think Bernanke's announcement yesterday, to create 1 trillion dollars out of thin air, is rather frightening.

I don't know what to make of this announcement and hope you people can enlighten me, because I've got a ball of anxiety in my stomach right now.

A few days before this last announcement, Bernanke said things were working and its possible the recession could end as early as late 2009. We've already removed a trillion dollars of "toxic" stuff from private balance sheets, we've got a stimulus program going, the car industry is getting help, many bad mortgages are going to be re-written, banks are starting to report profits, etc. It takes about 6 months to see the full effect of all these things. So it seemed the thing to do, a couple days ago, was let things work.

http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm But then the FOMC released the above report and (http://www.nytimes.com/2009/03/19/business/economy/19fed.html?em) "a tactic that amounts to creating vast new sums of money out of thin air" as Fed Plans to Inject Another $1 Trillion to Aid the Economy.

Is it just me, or does it seem like something happened the night before last, or Bernanke got some as-yet unpublished information that made him decide to take such a drastic step?

Maybe the most recent TIC data plus what isn't released yet indicate foreign loans are becoming unlikely? This move to print a trillion dollars seems to be like giving the finger to the Chinese, who just last week expressed concerns about our ability to repay.

If Bernanke really believed his previous statements about possible recovery by 2009, I find it hard to believe he would then do something like this. So he must have new information since the 60 minutes interview.

Will this cause the dollar index to go through the roof, or collapse?

It looks like right now people are pulling out of stocks and getting into bonds. But I wonder if we aren't getting dangerously close to a bond market dislocation.

Somebody please enlighten me out of investing in guns, chickens, goats, and bathtub gin.

[beancounter]

Here's your problem Marty. You start out with an assertion, a non-paper standard is better than a paper standard, and look for evidence to support your claim. I let the evidence speak for itself: China and Brazil, rapidly industralizing economies, under a paper standard while first world nations also under a paper standard have far lower growth. Ergo, rapidly industrializing nations grow faster than mature economies because the other variable is controlled. You say this is all in my head, when the evidence is staring you in the face and you refuse to accept it. You are playing semantic games when you say you never claimed that a paper standard is responsible for lower growth but only claimed a non-paper standard is responsible for higher growth. I clearly state your implication is the paper standard is responsible for lower growth (hint to the language impaired lower growth is still growth and not contraction) while you reply that you never claimed the economy can't grow under the paper standard. Small growth is still growth, and anybody who reads your first post understands your implicit claim that paper standard is responsible for lower growth. If you cannot even understand English there is little point continuing.

You live in a fantasy land where you believe modern man will accept continuously lower wages. You also relish the destruction of Federal "parasitic" structures. I hope you and your kind, who cannot separate politicians from civil servants, never get into power.

[millhead]

"Somebody please enlighten me out of investing in guns, chickens, goats, and bathtub gin."

Quote of the year...

Seriously, $1,000,000,000,000 out of thin air?! You guys can debate fractional reserve banking vs. the gold standard all day long...the ongoing discussion educates me and certainly helps shape my opinion.

But, frankly, the measures Mr. Bernanke and his colleagues took on Wednesday scare the hell out of me too.

[tttar]

Beancounter,

I read about Simpson's Paradox, and it's seems simply a lofty, manufactured expression for simple arithmetic.

I don't agree in the first place that a society in which people could keep what they earn would result in a situation where only a few would benefit at the expense of the vast majority, who would suffer, if that's the way you mean it.

If those evil rich want to get even richer and earn more than a couple percent on their money, they will have to invest it in businesses that employ everyone else. So why is hoarding seen as such a big problem?

Would we really have been in worse financial straits than we are now, had we had such a society all along?

[Marty Steinberg]

beancounter says..." You start out with an assertion, a non-paper standard is better than a paper standard,"

I said no such thing. You have a reading comprehension problem.

beancounter says... "China and Brazil, rapidly industralizing economies, under a paper standard while first world nations also under a paper standard have far lower growth."

Correlation is not causation. China, India & Brazil don't have massive parasitic welfare state. They don't waste a ton of resources maintaining troops in over 100 countries. At least not yet.

Very well industrialized countries like Hong Kong, Singapore, South Korea still grow at an average rate of 6-8% a year.

[beancounter]

Apologies for the late response was out of the country.

===

ttar,

Capitalism's greatest strength is it takes a fundamental human trait, greed, and turns it into the engine of economics. It recognizes human nature. But there is more than one fundamental human trait. Most human beings want to *keep* everything they have and get more. In other words, most human beings are awful entrepreneurs. There is a big difference between an entrepreneur and investor. Many entrepreneurs risk it *all*, mortgaging his house, putting his family and life savings on the line, to open a potential new business. An investor depending on his risk tolerance may create new jobs, but he may not. Rich are not evil, but at the same time most are not entrepreneurs and there is absolutely no reason to guarantee them any sort of rate of return by not expanding the monetary base. If anything, money should inflate so investors are forced to find entrepreneurs so the economy grows and doesn't stagnate because of hoarding.

===

Marty,

True that correlation is not causation, but the burden of proof is on you friend to show modern growth would be better under non-paper standard. There is one thing similar with libertarians and liberals -- both are radicals and want changes to the fundamentals of the economy to achieve their goals. A true conservative would be extremely hesitant to disturb the status quo without significant proof and would know an economy best withstands minor shocks. A single percent difference in real GDP growth from 1800-1900 and 1900-2007 with fundamentally different economies would be insufficient proof for anybody with a brain.

Of course you mention the asian tigers, but none of the G8, the most industrialized. At risk of sounding politically incorrect, Asian attitude on education is primarily responsible for the tiger miracles, in particular their focus on strong mathematics. It has nothing to do with lack of "parasitic" Federal structures, and they do it despite the paper standard.

Face it, around 3 percent average real GDP growth between 1800 and 1900 (your source) is pathetic compared to Asian tigers.

So, will you be calling for expanded Federal scholarships and Federal interference in state education? Probably not, because you warp statistics towards your ideology. A non-biased observer does the opposite: bases ideology on numbers.