Ben Bernanke and the Fed
have been "printing money."
That’s supposed to be counterfeiting, according to politician Ron Paul. It’s supposedly treasonous, according to politician Rick Perry (...yes, he actually said that; see this link). But I disagree; I think it’s a laudable, praiseworthy effort in monetary policy by non-politician Ben Bernanke to protect main street from the hardships of stagnation and deflation – in the absence of any help in the way of growth-friendly fiscal leadership from our politicians.
If you have any friends who think printing money is always inflationary, this post is for them. They are only hearing half of the real story from our politicians, and I bet they’d like to hear the other half.
Here are several several facts grouped under the two headings “common knowledge” and “well-kept secrets.”
• The Fed can print money rapidly.
• Inflation is too much money chasing too few goods and services. [Keyword: “chasing.”]
• Unanticipated inflation is bad; it hurts lenders by forcing them to accept money of lower value as payback for previous loans.
• Printing money is the Fed’s tool to fight deflation.
• The Fed can also “unprint” money rapidly.
• Unprinting money is the Fed’s tool to fight inflation.
• Deflation can be triggered or fueled by insufficient money to support the potential production of goods and services.
• When newly-printed money is just sitting there not “chasing” anything, it doesn’t cause inflation or cure deflation.
• Deflation is bad; it hurts borrowers, frequently forcing them to default on their loans – which in turn hurts lenders as well.
How the Fed prints and unprints money
The Fed “prints money” by purchasing U.S. Treasury securities from the public (i.e., from banks) – but instead of printing paper money to buy them, it simply bumps up the balances in the banks’ checking accounts at the Fed. Conversely, it “unprints” money by doing the reverse. The money isn’t “printed” or “unprinted”; the Fed simply changes numbers on a spreadsheet. That’s why “unprinting” money is just as fast and easy as “printing” money.
Wouldn’t it be a big step forward if our politicians started revealing some of the well-kept secrets above? For example, wouldn’t it be nice to hear one of them admit that the Fed’s job is not only to protect bankers from inflation, but also to protect main streeters from deflation? It would lead to a less-dogmatic, more substantive debate about what the Federal Reserve is doing. Hint: The Fed isn’t counterfeiting, it isn’t playing politics, it isn’t committing treason, and (for anyone who defines inflation in terms of the general price level, as opposed to the price of gold) it isn’t inflating the currency.
And if our politicians can’t find the courage to open up the debate like that, our journalists should call them on it instead of continuing to let them get away with it.