Positive Economic Commentary
Let's All Hold Hands and Reflate
ntrs.com
August 24, 2001
The central banks of the US, the Euroland, and Japan are all under political pressure to crank up their respective printing presses and flood the world with fiat money. And the charts below show that they are complying with their political masters' wishes. In the 12 months ended July 2001, the US M2 money supply increased 9.0% -- more than three percentage points faster than its year-over-year July 2000 growth. Euroland's M2 in the 12 months ended June increased by 7.4% -- almost three percentage points faster than its June 2000 year-over-year growth. And even in Japan, the M2 (+CDs) money supply is growing faster. In the 12 months ended July, Japanese M2 has increased 3.3%. This compares with its 2.0% growth in the 12 months ended July 2000. Is the Fed, the ECB, or the BOJ likely to change their policies in the near term to rein in this faster money growth? Hardly. The Fed just this past week cut the funds rate another 25 basis points and indicated that it stood ready to do it again. The BOJ in the past two weeks has upped the ante on its "quantitative" easing policy. It's just speculation on my part, but my Euros are on the ECB cutting its policy rate before the end of September.
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Does Greenspan want to get Volckered? Kudlow and his ilk have never forgiven former Fed Chairman Paul Volcker for breaking the back of inflation. Why should that have upset Kudlowsians? Because in the process of slaying the inflation dragon, St. Paul also damped federal tax revenues, which put a spanner in the spokes of the supply-siders' claim that lower tax rates would increase total tax revenues. So, the federal budget deficit, rather than stabilizing or falling in the wake of the Reagan tax rate cuts, as promised by some of the more extreme supply-siders, increased instead. To be sure, the increase in the deficits back then were not due solely to slower growth in revenues, but to much faster growth in outlays. Don't get me wrong, I've never met a tax rate cut I didn't like. On the other hand, I've never liked anyone I met who blamed Volcker for the tarnished reputation of supply-siders who over-promised.
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There's another reason for political pressure to be put on the Fed to keep inflating. The US is a debtor nation, in fact, the largest debtor nation in the world. Moreover, the bulk of America's external debt just happens to be denominated in US dollars. Unlike other countries whose external debt also is denominated in US dollars, our central bank can print the dollars. When debt servicing becomes burdensome, inflation can relieve the burdens by lowering the real debt servicing costs. Now, the debtors of America are not going to directly petition Alan Greenspan to speed up the printing presses. But they are going to press their senators and representatives to do something to relieve their economic pain. And because Alan has done nothing to disabuse Congress and the administration of the notion that he is the global economic kingpin, some chips are going to be called. |
