I have this cousin, let’s call him Giovanni. He is a great guy – industrious, hospitable, great family man. He is my go to source when it comes to information and analysis about sports in general and baseball in particular.
It is an entirely different story when it comes to economics. Oh, he is financially successful, but like most Americans he doesn’t understand how the market works.
Now, I am not talking about the “free” market, just the market, which exists everywhere and in every place. The market is the arena of commerce and whether it is free or not depends on government allowances in the various geographic areas of the world.
So, technology has made it possible for Giovanni and me to rekindle our familial relationship that was forged many years ago through the trading of Matchbox cars. Well, actually, he is so much older than I am that he made and brought them to me when his family visited ours. I told you he was a great guy.
He is also good at chasing me through cyberspace by email, facebook, and on open threads of sites where I post my blog to argue economics with me.
Last Friday, he emailed me an article titled “A Breakthrough Speech on Monetary Policy”. The author, Anatole Kaletsky, is an award-winning journalist. The “Breakthrough Speech” in question was delivered by Adair Turner, Chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers on the planet.
Clearly both men are dyed-in-the-wool Keynesians because Turner’s speech and Kaletsky’s article both recommended that politicians and central bankers print up lots of money and dole it out to consumers in order to stimulate the economy to end the economic stagnation that the West currently finds itself in. Specifically, Kaletsky believes the Fed should take the $85 billion it is currently spending to buy government bonds from banks and instead distribute it to every man, woman, and child in America. He believes, “There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment,” thus ending the West’s economic doldrums. Further, Kaletsky believes this proposal would not cause price inflation because, “links between monetary financing and hyperinflation are theoretically dubious and historically unjustified”.
So, after digesting this economically nonsensical article, I owed Giovanni a response.
Firstly, I indicated to him that monetary inflation does lead to price inflation unless perhaps productivity keeps up with increased money supply. Just in the 20th Century, one could look to the Weimar Republic and many Latin American countries from time to time. Zimbabwe is the most recent example. In fact, all of history is littered with societies that attempted to inflate their way out of depression and instead brought about hyperinflation.
Secondly, I told him that personally I would gain greatly from Kaletsky’s proposal, but that it would harm the economy in the long-run and further destroy an already disappearing middle class. Given many Americans spendthrift mentality, could you imagine what would happen if they received “free” money each month from the government? First off, Uncle Sam would never be able to rescind the policy. It would be like trying to cut Social Security benefits.
Beyond that, there is no doubt, that unlike the banks, leveraged to the hilt American consumers would spend all of their new found riches on a plethora of consumer goods. The economy would experience another phony boom based on monetary inflation. Employment would improve for a while. The new money would bid up the price of goods and services thereby causing domestic price inflation.
Personally, my real estate investments would increase in value allowing me to sell them to some economically naïve person with free government money in his pockets. The value of my gold holdings would increase exponentially. I would be sitting pretty, protected from the impending economic bust that was made inevitable by the phony inflationary boom.
As prices rise, so would interest rates. All the investments begun at lower interest rates would become more expensive. Many would not be sustainable at the higher cost of money. Sound familiar? It should because this is what happen in the 1990s with the dot.com bubble and what also happened in the 2000s with the housing bubble.
As defaults on loans increase, unemployment picks up and the market is thrust into another downturn. I am sure at that point Giovanni and other Keynesians will blame the free market. But, of course, the only thing that was free in all this was the money the Fed gave to consumers.
Predictably, his response to my response was that I am living in a fantasy world. Unfortunately, he is wrong. The devastation that millions of hard-working Americans would experience if the above plan is enacted wouldn’t be a fantasy. It would be a tragedy.
Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina