Henry Simons, one of the early pillars of the Chicago School of Economics and a student of Frank Knight’s, emphasised monetary rules as opposed to monetary discretion. Milton Friedman, a more recent Chicago School economist, argued that the Fed would do a better job of managing monetary policy if it were required to increase the money supply by some defined percentage, say 3% per year. Both of these gentlemen feared the power of a central bank being able to act in discretionary fashion.
Friedman expressed the problem thusly:
The power to determine the quantity of money… is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power… Any system which gives so much power and so much discretion to a few men, [so] that mistakes – excusable or not – can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an independent central bank.
Doug Noland writes about this problem in the context of our times (emboldening mine):
Henry Simons Was Right:
“The establishment of definite, stable, legislative rules of the game as to money, or in other words, the creation of a national monetary system, are of paramount importance to the survival of a system based on freedom of enterprise.” Henry Simons, 1936
Listening to Chairman Bernanke’s Wednesday press conference, I was reminded of the long-standing but forgotten “rules vs. discretion” debate with respect to monetary policy. Dr. Bernanke is
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Quantitative Easing is confusing for many people. That, of course, is for the Federal Reserve, the Federal Government and major financial interests. If people knew what was happening and what must result, there would likely be a revolt.
Elsewhere, I have written that QE is nothing more than a euphemism for “money printing.” It is a policy of inflation dressed up with an Orwellian term to hide its purpose which has little to do with politics and more to do with political survival.
A post at Truth Alliance Network deals with QE in a colorful and simple manner. It explains QE and its effects in a manner that the average non-economist can easily understand. For starters, it answers the question whether QE2 will be extended and why:
To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.
The author uses the analogy of keeping a tent inflated to explain QE. It is a brilliant analogy, especially useful for the layman to understand the QE process and why it cannot work.
In conclusion, the author states:
The problems we are experiencing have been a long time in the making. They began in earnest in 1913 with the formation of the Federal Reserve. It’s taken several generations for the Federal government and its central bank to usurp the world’s monetary system and as such few have noticed. But what’s different now is that we have hit the knee in the curve, the point at which events start to accelerate dramatically as we approach the end of the line. Those who understand QE realize that America as we knew it is already gone. Over the next decade the rest of America will become painfully aware of that fact as well.
This short article is recommended reading for all, estpecially the economically impaired (feel free here to think of Congress, although they have other motives in play than proper economics or your well-being).
Fiat currencies around the world are coming under enormous pressure as a result of “printing” money everywhere.
The world is analogous to the story of the little Dutch boy who puts his finger in the dike saving the village from a flood. In the US, the Federal Reserve plays that role, trying to stave off inflation. The analogy is imperfect because the little Dutch boy did not create the problem in the first place.
Unfortunately the analogy fails on another count. The Dutch tale turned out well. The inflation equivalent will not. Pressures are building and the dike is weakening. We are headed for the largest worldwide inflation ever seen. There is nothing the Fed or any other central bank can or will do to prevent the coming flood. They have done all their work in creating this disaster.
The impact will be substantial. According to Sean Corrigan:
… it will not just be the world’s tinpot tyrants and biddable client kings who will pay the price for the Fed’s reprehensible policy of ‘apres moi le deluge’, but it will be the ordinary man and woman who will have occasion to rue a programme so replete with intellectual arrogance, power-worship, and a wilful blindness to its awful, unintended consequences that only a Krugman could approve of it.
An excerpt from a post by Tyler Durden of Zerohedge.com:
Currency debasement on a scale never seen before in modern history continues in the U.S. and other countries. This is leading to a real risk of stagflation and possible even hyperinflation if sane monetary policies are not returned to soon. The fiat currency experiment of the last 40 years (since Nixon came off the Gold Standard in 1971) grows more precarious by the day. Ironically, Alan Greenspan, the central banker most responsible for the cheap money policies and asset bubbles of the last 20 years, has again warned about the euro and dollar being “faulty” fiat currencies. Greenspan again said how gold is the ultimate form of payment and currency (see interview and transcript of interview in News). “What the price of gold is saying is essentially that there are elements within the marketplace which feel very uncomfortable with respect to what’s going on generally,” the former Federal Reserve chairman said. “It’s not an accident that you’re finding that central banks are going in to buy gold.”
This reply from “Retired” was posted on American Thinker in response to an article similar to Mr. Greenspan: Please Go Away. The points are appropriate.
Monty,we are all in for a wild hairraising ride in the next 5-10 years.
Many People may salivate at the idea of $6,300.00 gold but what they may not realize is that Gold did not take off for the stars. Instead the fiat paper, funny money, currency issued by the Fed., which gold is opposed to,has gone off of a cliff & into the pit below. Gold did not go up, Federal Reserve bills went down. What Greenspan say’s at this point means nothing one way or another! Many commenters speak of this regulation or that regulation as though regulation was the answer to the problem. The problem is that the fractional reserve system run by the central bankers is basically fraud & embezzlement. Attempting to regulate the Fed. is akin to regulating the Gambino Mafia crime family;how do you clean up a system that was set up at it’s very inception to be a criminal enterprise? Today we are seeing the return of Irving Fisher & his Reflation Theories, which if carried out, will pauperize mid-America for the benefit of the elite establishment. This is what the Fed. is doing right now with this program of endless monetization ( Quantatative Easing), all of this new money creation will help allow the financial establishment to pay it’s heavily leveraged debts with cheap money. Cheap money which will destroy the equity & savings of working America. Greenspan did not cause the decline that we are seeing today, it’s baked into the system, what he probably did do was to speed up the process.