Central Banks to the Rescue, Ron Paul Not Running for Reelection in Congress, and Wenzel Tears MMT a New One

In true idiotic Keynesian fashion, Brad Delong has come out and stated that QE3 is a good idea, via Bloomberg:

The Federal Reserve should engage in another round of quantitative easing as growth in the U.S. economy remains slow and inflation concern remains low, according to Bradford DeLong of the University of California at Berkeley.

“I don’t see any argument against QE3,” Delong said during an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “The worry is always that it will destabilize inflation expectations, that they’ll lose their anchor, and yet when you look out as far as you can at the prices of the TIPS and of the 30-year Treasuries, you see no sign at all that there’s been any loss of confidence that the Fed will keep inflation under control.”

So what exactly did QE2 do besides causing a stock market rally Delong?  Did it lower the unemployment rate? Are banks lending?  Is there a massive amount of excess reserves build up that seem to be entering the system, which may cause higher inflation than what we have seen so far?  Do you really want your grandmother on a fixed income to spend more on food and gas?

Delong is painfully blind to the fact that money isn't wealth and we can't just print out way to prosperity.  He misses the point that Treasury rates are probably low due to a loss in Euro-Zone confidence and China trying endlessly to put a stop to their own inflation.  Rather than shove money into the coffers of states, the next stimulus package should pay Delong to bury himself 15 feet below ground and then pay a few hundred workers to dig him up.  At least we will be rid of him for a few days, maybe even more judging by the less-than-stellar record of WPA program efficiency.  He should take Paul Krugman with him too, that way they can giggle with joy thinking about how many jobs the government created.

The sad part about the whole thing is FOMC members are starting to agree with Delong.  From the minutes of the latest FOMC meeting:

"Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation....A few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run."

As the great Gary North says "Like a dog and its vomit, Bernanke can not stay away from monetary inflation."

And wouldn't you know it, just like clockwork the Fed's sister central bank, the European Central Bank, appears to be stepping in to fight the bond crisis in Italy and Spain:

Italian and Spanish bonds rose on speculation the European Central Bank bought the debt of the euro region’s most-indebted nations to stabilize markets amid concern that the debt crisis is worsening.

Replace Bernanke with ECB Prez Jean-Claude Trichet and the quote is still accurate.  The Germans should be up in arms about this.  If not the deliberate expansion of the ECB balance sheet to save Italy and Spain, then they should be pissed about this:

The degree of confusion and desperation among eurozone policymakers is reaching new heights. EU competition commissioner Michel Barnier wants to prohibit ratings for countries which are part of an EFSF rescue program, Frankfurter Allgemeine Zeitung reports. In a speech in Paris he argued that they enjoyed European solidarity and that they were under the watch of the EU and the IMF.

This was most likely in response to Moody's tossing Ireland's credit rating to that of junk:

Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative.

So where is a hero when you need it?

LAKE JACKSON — After serving almost 24 years in the U.S. House of Representatives, Congressman Ron Paul told The Facts exclusively this morning he will not be seeking another term for the District 14 seat.

It was only a matter of time before the greatest living statesman this country has ever seen in the past 3 decades steps down.  It won't be for another year and half, but this is still a huge disappointment.  At least Rand and Justin Amash (maybe Sen. Mike Lee of Utah, still unsure about him) will be around to carry on the flame.  At least now Dr. Paul will be able to enjoy his grandchildren more.

Robert Koerner has a wonderful article on the Huffington Post today comparing Austrian economics to Modern Monetary Theory.  Never in my life would I ever think to see this kind of brilliance on HuffPo:

"Austrians" point out the critical importance of free markets in which free people can vote with their money for the production of some goods or services over others. They note that in a free market, parties to a trade both benefit since each gets what he or she regards as the greater value in the exchange (usually a product vs. money) -- or else the trade would not occur. (E.g. the shop-keeper would rather have the money while the buyer would rather have the groceries.) Market pricing that is based on supply and demand ensures that resources flow to sectors that most need them. Central planners, on the other hand, can never know the proper price of things and so mis-allocate resources, causing potentially huge problems later. Austrian economists emphasize the dangers of manipulation by central bankers and governments who can cause bad investments to be made by altering the amount and price of money in the economy. Cheap or excess money leads to credit bubbles, asset inflation (e.g. housing in the USA up to 2007) and mal-investments. In such cases, artificial booms occur, and they are inevitably followed by a bust that as the economy re-balances itself and those who made unproductive investments are bankrupted. At least, they should be if a disruptive political class would stop making everything worse by trying to redistribute wealth to make everything better.

Koerner goes on to state that Austrians (which Koerner seems to endorse) could learn a thing or two from MMT:

MMT is relatively new, and some view it as antithetical to the Austrian worldview. But the two paradigms in part describe different aspects of our economic reality: synthesizing them by applying the tools of one to the most important observations of the other could provide something that we desperately need, and so rarely find -- genuinely new insight.

Though Austrians can learn from MMT, namely how trounce many of its ridiculous notions, they shouldn't be synthesized to develop further insights.  Austrian insight already trumps MMT which mainly focuses on accounting identities and macro aggregation without consideration of economic calculation on a micro level or inefficient use of resources by government.

Robert Wenzel takes apart MMT in a great blog post, here are some excerpts (notice who's name he mentions at the end!):

Koerner than goes on to write that:

Critically, all the while there is any money in the economy - all the while there is any economy at all -- the government must be "in debt".

This is simply not true. There is a lot more on the Federal Reserve balance sheet than Treasury debt. For example, there is gold and $43 billion in currency. None of this would disappear if all Treasury debt were to be retired. A proper valuation of the dollar in terms of gold would result in the money supply staying right where it is, even if all Treasury debt was retired.

In short, while the Federal Reserve does use Treasury securities to create money. The Fed need not use Treasury securities to do so and if the Treasury issues debt, which is bought by the private sector, no new money is created. Thus, there is no necessary connection between Treasury debt and money creation. Either can occur without the other. They are not linked at the hip. They can occur separately.

He writes:

...all financial assets in the hands of the non-government sector were originally spent into existence by the government. The sum of all savings in the non-govt. sector equals the sum of all spending by the government. This is an accounting identity. Therefore, in the aggregate, private savings can increase only if government (net) spends more.

This is simply factually wrong. First, note the switch from the dollar to "all financial assets", this switch  is incorrect. Financial assets are different from a currency and most private financial assets have not  been "spent into existence by the government". IBM may issue bonds in terms of the dollar, but the bonds themselves were not "spent into existence by the government". The bonds being a financial asset of the holder and issued by IBM, certainly a member of the private sector. Just because the government issues a fiat money does not mean it creates savings. Savings can be created by those holding dollars, who choose to save them, as opposed to hoarding them or using them for consumption. The Federal Reserve can also create savings by creating money and pumping it into the economy as savings but they are not the sole creator of savings.

I couldn't agree more with Wenzel, but I wish he could have pointed out MMT's lack of consideration for micro calculation.  I have grappled with MMT'ers before, who are genuinely nice about explaining their position.  MMT seems to think that the government and Central Bank are capable of regulating the "correct" amount of money, consumption, and saving to make an economy prosper, as if millions of people are cogs in a machine that need the right amount of oil.  It disregards praxeology which is the first step to disregarding sound economic theory.