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Man the Pumps!

Tags The FedMonetary TheoryMoney and Banking

12/23/2002Sean Corrigan

Forget Greenspan's timorous optimism about the economy—after all, ask yourself when, in the course of the whole dirty dozen of futile rate cuts, he last talked its prospects down?

No. Just like the tired old stock promoter he is, Bookie Al always thinks better days are 'round the corner, so puh-leeze, People, let's perform our own analysis instead of relying on the Chairman's CNBC sound bites.

After all, this is a man who incessantly talks about increased productivity, yet understands it so little that he expounds the twisted doctrine that the ability to produce more with less and thus to lessen scarcity and so increase provision for the future—in other words, to build more useful capital—leads to higher real interest rates.

If you don't see the error in that contention, ask yourself why Swiss bond yields are lower than Brazilian ones—with or without the inflation component subtracted.

Worse, he contends that faster productivity growth will necessarily lead to higher nominal wages, missing the point entirely that it tends to increase real wages—more product produced by labour should imply a greater exchange value imputed to the workers—but that it says nothing at all about the direction of nominal wages.  

Just to emphasis the intellectual confusion being suffered, his colleague, Bill Poole of the St Louis Fed, has even popped up since Sir Alan spoke to blame the supposed increase in productivity for costing America an extra 2 million jobs!

This is the oldest of Luddite myths, that capital makes labour—as a whole—redundant. Perhaps Poole would like to throw his sabots at the computer screen and send us back to a handicraft economy, so that there will be work enough for everyone just to ward off starvation!

As if improving living standards—which is what genuine improvements in value productivity, rather than simply BLS-measured material productivity, would bring—could, at the same time, lead to greater poverty!

More important than all this in Greenspan's speech was the grudging admission that there is merit in recent research conducted by the BIS that "price stability"—the nonsensical mantra intoned relentlessly by central bankers everywhere—is no guarantee against financial instability and may even prove conducive to it.

To us Austrians, of course, however heartening it is to see such matters aired in the mainstream at last, this is hardly news. Hayek, for one, wrote nearly seventy years ago:

'The rate of interest in an expanding economy… just sufficient to keep the price level stable, is always lower than the rate which would keep the amount of available loan capital equal to the amount simultaneously saved by the public.'

In other words, trying to keep prices level when output is increasing inevitably implies a hidden--and thus often more insidious--inflation and a distortion of the structure of production away from that able to be sustained by consumer preferences and voluntary savings.

Elsewhere, Hayek underlined the point, by noting that:

'Disturbances described as resulting from changes in the value of money (the obverse of a change in the price level) form only a small part of the much wider category of deviations from the static course of events brought about by changes in the volume of money.'

Greenspan, typically, introduces this whole subject only to absolve himself of all responsibility for taking steps to address the inherent deficiencies of present policy, muttering weakly instead about risks of 'an unacceptable amount of collateral damage to the wider economy' due to Bubble pre-emption and casting doubt on the issue of whether Bubble-popping 'restrictive credit regulations' might prove less 'conducive to wealth creation over time than our current regulatory system.'

Frankly, on that last point, we would doubt whether the events of the past few years leave much doubt that the current system is not, in fact, a positive impediment to genuine wealth creation (as opposed to the mere inflation of asset prices)!

But while poking holes in Greenspan's half-logic offers far too little a challenge to provide much in the way of sport, there was, yet again, a reiteration of the overriding policy directive as well as an intimation that this is a global, not merely a national, imperative.

'The meaning of deflation and the characteristics that differentiate it from the more usual experience of inflation are subjects being actively studied inside and outside of central banks.' (Note the plural.)

'As I testified before the Congress last month, the United States is nowhere close to sliding into a pernicious deflation. Moreover, a major objective of the recent heightened level of scrutiny is to ensure that any latent deflationary pressures are appropriately addressed well before they became a problem.' (Notice we now don't even have to wait for realized deflation, just the latent —i.e. Greenspan-observable—kind.)

'Clearly, it would be desirable to avoid deflation. But if deflation were to develop, options for an aggressive monetary policy response are available.' (As we have long warned.)

Was it just a Freudian slip to start this encomium for Keynesian debasement with a reference to the Gold standard? In all probability it was merely inadvertent, but the contrast suggested between real, hard money, freely chosen by market processes, not arbitrarily by the State and its Financiers, was no less resonant for the fact that it was implicit, rather than as shockingly explicit as in Bernanke's recent speech on the subject.

All you 'Don't Fight the Fed' types should take note: the bank's unequivocal battle cry is 'Man the Pumps!'



Contact Sean Corrigan

Sean Corrigan is the author of 'Money, Macro & Markets' newsletter & Consultant to Hinde Capital.

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