While the economy and financial system chug forward, the idea we have charted a course that will end in ruin remains. Looking down the road the numbers do not work. When they are not jockeyed,
jerked around, and falsified numbers tend to tell the truth. This was the message voiced by the late, Allen Meltzer. Born in 1928, Meltzer was viewed by many
economists as
America’s foremost expert in monetary policy even though he was little known by the
masses.
Recognized for his wisdom and
achievements in economics, Meltzer was a professor of
political economy at Carnegie Mellon University and a visiting fellow at
the Hoover Institution. He authored the three-volume “A History of the
Federal Reserve” and for over 25 years he chaired the Shadow Open Market
Committee, a group that meets regularly to discuss the policy of the
Federal Reserve.
To say Meltzer was not a fan of the economic policies that unfolded since 2008 is an understatement. “We’re
in the biggest mess we’ve been in since the 1930s,” he was quoted as saying, before he went on to claim that, “We’ve
never had a more problematic future.”
In a Wall Street Journal opinion piece on June 30, 2010, titled
"Why Obamanomics Has Failed" Meltzer wrote about some of the biggest enemies facing future
economic growth. He went on to say that the
administration's stimulus program failed. Two overreaching reasons explain the failure of
Obamanomics. First,
administration economists and their outside supporters neglected the
longer-term costs and consequences of their actions. Second, the
administration and Congress have through their deeds and words
heightened uncertainty about the economic future.
A few years later, in May of 2014, Allen Meltzer penned a piece that appeared in the Wall
Street Journal. His opinion was highly valued, not only
because it is based on his long-developed work and studies, but because of his age, he had far less motivation to lie than many of those currently
involved in forming policies today. In the article, which is copied below, Meltzer gave his take on
where the economy was headed. The fact he died in 2017 does not lessen his insight. Meltzer wrote;
The U.S. Department of Agriculture forecasts that food prices will
rise as much as 3.5% this year, the biggest annual increase in three
years. Over the past 12 months from March, the consumer-price index
increased 1.5% before seasonal adjustment. These are warnings. Never in
history has a country that financed big budget deficits with large
amounts of central-bank money avoided inflation. Yet the U.S. has been
printing money—and in a reckless fashion—for years.
The Obama administration has run huge budget deficits every year, which, together with the Bush
administration, amounted to $6.7 trillion from 2006 to 2013. The
Federal Reserve financed almost $3 trillion of these deficits by
purchasing Treasury bonds and notes. The Fed has also purchased massive
amounts of mortgage-backed securities. Today, with more than $2.5
trillion of idle reserves on bank balance sheets, there is enormous fuel
for greater inflation once lending and money growth rise.
To avoid the kind of damaging inflation the U.S. experienced in the
1970s and early '80s, the Fed could raise interest rates, including the
interest it pays banks on reserves, inducing banks to hold most of the
$2.5 trillion of reserves idle. But interest rates high enough to
discourage borrowing and lending would likely send the economy into
another damaging recession.
Fed Chairwoman Janet Yellen recently admitted that the central bank doesn't have a good model of inflation. It relies on the Phillips Curve, which
charts what economist Alban William Phillips in the late 1950s saw as a
tendency for inflation to rise when unemployment is low and to fall when
unemployment is high. Two of the most successful Fed chairmen, Paul Volcker and Alan Greenspan, considered the Phillips Curve unreliable. The Fed's forecasts of inflation ignore Milton
Friedman's dictum that "inflation is always and everywhere" a result of
excessive money growth relative to the growth of real output.
The Fed
focuses far too much attention on distracting monthly and quarterly
data while ignoring the longer-term effects of money growth. The
country's present dilemma originated in 2008 when the Fed properly and
forcefully prevented a collapse of the payments system. But long before
idle reserves reached $2.5 trillion, the Fed didn't ask itself: What
can we do by adding more reserves that banks cannot do by using their
massive idle reserves? The fact that the reserves sat idle to earn
one-quarter of a percent a year should have been a clear signal that
banks didn't see demand to borrow by prudent borrowers.
The
Fed's unprecedented quantitative easing since 2008 failed to lead to a
robust recovery. The unemployment rate has gradually declined, but the
main reason is that workers have withdrawn from the labor force. The
stock market boomed, bringing support from traders, but the rise in
asset prices of equities didn't stimulate growth by inducing investment
in new capital. Investment continues to be sluggish.
And some
side effects of the Fed policies have had ugly consequences. One of the
worst is that ultra-low interest rates induced retired citizens to take
substantially greater risks than the bank CDs that many of them relied on
in the past. Decisions of this kind end in tears. Another is the loss
that bondholders cannot avoid when interest rates rise, as they have
started to do.
Accumulating data from the sluggish loan market
and the weak responses of employment and investment should have alerted
the Fed that the growth of reserves and the low interest rates haven't
been achieving much. Similarly, the Fed should have noticed in recent
years that instead of a strong housing-market recovery, not many
individuals were taking out first mortgages. Many of the sales were to
real-estate speculators who financed their purchases without mortgages
and are now renting the houses, planning to resell them later.
Most
of all the Fed years ago should have recognized that the country's
economic problems weren't arising from monetary factors. Instead of
keeping interest rates low to finance deficits, the Fed should have
explained that costly regulation, increased health-care costs, wasteful
spending, and repeated threats to raise tax rates were holding back the
recovery.
Broadly speaking, the Obama administration has pursued a course the opposite of that taken by the Kennedy and Johnson
administrations in the 1960s (and the Reagan administration in the
1980s). Kennedy-Johnson enacted across-the-board tax cuts: Promoting
growth came first, redistribution later. By putting redistribution first
and sacrificing growth, the Obama administration got neither. Ironically,
despite often repeated demands for increased redistribution to favor
middle- and lower-income groups, the policies pursued by the Obama
administration and supported by the Federal Reserve have accomplished
the opposite.
When the president campaigns in the midterm election, he
will talk about the relative gains by the 1%. Voters should recognize
that goosing the stock market through very low interest rates, not to
mention the subsidies and handouts to cronies, have contributed to that
result. We are now left with the overhang. Inflation is in our
future. Food prices are leading off, as they did in the mid-1960s before
the "stagflation" of the 1970s. Other prices will follow.
The point of this post is to clarify that just because we have muddled
along putting band-aids on our economy does not mean that we have
accomplished a great deal.
The Trump economy was a continuation of
deficit spending and the Biden economy has been even worse. Both have postponed the day of reckoning but most likely
made it far worse. Allen Meltzer was a true old-school economist who understood this. The time the Federal Reserve bought for the country
to come to terms with its many problems post-2008 has been squandered at a great
cost. While many people claim the American economy was great before
covid-19 hit, others like me who work on Main Street beg to differ. For
years, an ugly reality has been masked by easy money and deficit
spending.
Rather than being trapped in the here and now, economists might be wise
to reflect more on history. We can learn much from the failings of those
who lived before us. If Meltzer was still with us it is very likely he
would be appalled at the state of things today.While it is difficult to time when our false economy will
finally give up the ghost, it is clear this will all end badly. Today, the biggest question before us is when.
(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)
