Leaping Toward the Keynesian Dream
The Fed’s latest inflationary scheme sounds like a technocratic innovation. It lowered the costs of currency swaps between central banks of the world with the idea that the Fed would do for the globe what Europe, England, and China are too shy to do, which is run the printing presses 24/7 to bail out failing institutions and economies. In effect, the Fed has promised to be the lender of last resort for the entire global economy.
It sounds new, but it is not. Following the Second World War, John Maynard Keynes pushed hard for a global paper currency administered by a global central bank. This was his proposed solution to the problem of national currency disputes. Let’s just take the inflation power away from the national state and give it to a world authority. Then we’ll never have to deal with a lack of coordination again.
The idea didn’t fly but the institutions that were supposed to administer such a system were nonetheless created: the International Monetary Fund and the so-called World Bank. It didn’t work out that way. Instead, nation states retained their monetary authority and the new institutions became glorified welfare providers, conduits for transfer payments and loads to developing nations.
The dream lived on, however. The creation of the Euro and its central bank was a step in that direction. So was Nixon’s closing of the gold window. Each new currency crisis has created the excuse for further steps toward what Murray Rothbard calls the Keynesian dream.
Why hasn’t it happened yet? Many reasons. Nation states do not want to give up power. The World Bank and the IMF are institutionally unsuited to the task. Many people in the banking world are also downright squeamish about the idea, with full knowledge of the ravages that unchecked inflationary credit can bring to the world economy. Mostly, there hasn’t been a crisis big enough to warrant such extreme measures.
However, that crisis might have finally arrived. Since 2008, the Fed has demonstrated that among all the world’s central banks, it alone is brave enough to embrace gigantic inflationary measures without wincing. The European Central Bank is under some strictures to not act as a monetary central planner. China is unconverted to the inflationary faith. The same holds true for England.
Ben Bernanke, however, is different: he is revealing himself to be an unreconstructed Keynesian with an unlimited faith in the power of paper money to solve all the world’s problems.
What this means is that it is left to the Fed alone to bail out the world. There is a perverse logic to this. After all, if you are going to be a world empire, operating under the assumption that nothing on the planet is outside your political purview, you bear certain responsibilities as well. Foreign aid and troops in every country are just the beginning. You must eventually embrace your financial responsibilities too. A globalized economy addicted to debt needs an institution willing to step up and guarantee that debt and provide the liquidity necessary to get us through the hard times.
As soon as the announcement of the new Fed measures came, the smart set of the worldwide web lit up with the obvious observations that these measures come with massive risk of setting off a global inflationary crisis. It could lead to the final crack-up boom.
The Fed assures us otherwise. It “bears no exchange risk” in undertaking such actions. But as economist Robert Murphy explains “strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.”
He further states what everyone knows but no one is willing to say: “The current round of interventions will not solve the problem. Down the road — probably much sooner rather than later — the central banks of the world will engage in some further extraordinary measures, again lest the whole world fall apart. Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually the whole financial world will fall apart.”
The speed at which all of this is happening is startling to behold. It was only 36 hours ago that we heard the first public worries about the drying up of credit in Europe. Large corporations were seeing their credit lines tightened. Banks were starting to become more scrupulous in their operations, which is hardly a surprise given that zero interest rates have made it nearly impossible to make a profit in conventional lending operations.
Where in the fall of 2008, the Fed let the worries about tight credit grow to the point of international mania before it acted, this time it jumped in to anticipate the inevitable warnings about the imminent death of civilization. Only trillions in paper money can save us now! The Fed saw what was coming and decided to do the deed even before the demand came.
But rather than settle markets down, the real effect is the opposite. If you go to the doctor with a head cold, and he rushes you to the hospital for surgery, you don’t merely congratulate him for being thorough. You figure that he knows something that you don’t, namely that your condition is way more serious than you thought. Your family is likely to fly into a panic.
For this psychological reason alone, this action is likely to roil markets in crazy ways. The Fed is now paper-money printer for the entire world. It’s a new world, and a brave one. If you think that a new era of prosperity, peace, and stability awaits, you have been living under a rock for at least a century. There’s not a soul alive who will sleep soundly knowing that Ben Bernanke has elected himself the loan officer of the entire globe.