Posted by: marcelvotlucka | 30 April, 2009

Feeding Moloch à la Mankiw

Feeeeed me!

Feeeeed me!

Those kooky Keynesians are at it again.  Greg Mankiw’s recent article for the New York Times suggests that the Federal Reserve can stimulate the economy out of recession by putting in place a negative interest rate (he suggests -3%). “At that interest rate,” he says, “you could borrow and spend $100 and repay $97 next year.”  Paying back less money than you borrowed…sounds great, right?

Of course, such a policy translates to effectively giving money away.  This is pretty much what Uncle Sam (and our more distant Uncle Bush for that matter) has been doing and what Uncle Obama will continue doing for the conceivable future.  So it’s no surprise that Mankiw, a former Bush adviser, would suggest this.  But at least he acknowledges in his column the most obvious flaw; who in their right mind would lend money at those rates?  They might as well not lend at all, he says.  “Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress.  Unless, that is, we figure out a way to make holding money less attractive.”

Uh-oh…

Here’s where things start getting ugly.  Here I’ll let Mankiw explain his proposal in his own words:

“Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.  That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.  Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car.”

So in order to get people to spend money again (for indeed the world revolves around mindless consumption and not real growth) we’ll not only practically give it away to Wall Street, the military industrial complex, automakers, and politically connected corporations, nor only create inflation, but we’ll randomly take people‘s money out of circulation to balance out the immense amount of money we’ll be generating to fill rich people’s pockets.

It gets better: 

“The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it. John Maynard Keynes approvingly cited the idea of a carrying tax on money.”

Think something’s fishy here? We have a perfectly comforting explanation:

“The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace. Even children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers.  Maybe some economic problems require the same trick.”

“Tricks” indeed – more like we’re getting suckered by con men.

Here lies the logic behind Keynesian theory – the dominant theory espoused by government economists and advisers, shoved down our collective throats in college classrooms, newspapers, and TV.  Instead of advocating responsible and sustainable practices (i.e common sense), we see them denouncing saving as “hoarding” and coming up with counter-intuitive “tricks” to “stimulate” the economy (at whose expense?).  Well, this isn’t algebra, it’s making the most rational and sustainable use out of scarce resources.

Although Mankiw seems rhetorically limber enough to put his foot inside his own mouth without our assistance, Robert P. Murphy has written an excellent response on the Mises Institute’s website that refutes much of this Keynesian nonsense.  But here’s the critical question about this plan: who would be the most affected by it? It wouldn’t be those who have power and clout; it’d be the working classes, people on fixed incomes like Social Security or pensions, students, the poorest and most disadvantaged among us.

As you increase the money supply, you lower its value, and thus prices for things like housing, gas, food, clothing, etc., have to increase accordingly to make up for that.  Even if you get an increase in wages, you’re just keeping pace with this inflation.  Indeed, real wages have stagnated for three decades (the past couple of years have seen big hits) while the top few percent have dramatically increased their wealth thanks to Uncle Sam’s economic engineering.

source:  Economic Policy Institute

source: Economic Policy Institute

When inflation’s afoot it becomes harder and less worthwhile to save up for a rainy day – or for retirement or for a house, a car, anything.  (Zimbabwe is a particularly extreme example; the country has abandoned its own currency because of its runaway inflation – at one point six months ago it cost 200 million Zimbabwean dollars to buy a loaf of bread!)  Hence working people here have to turn to gambling their money on the stock market, and be subject to its ups and downs that often seem as fickle as the weather. Hence people turn to living on their credit cards (which may already be maxed-out), incurring oppressive debt.  Hence people live a precarious paycheck-to-paycheck existence because they just can’t get ahead.  God help you if you’re a young person just starting out.

And last time I checked, most of us don’t get billion-dollar bailouts to help us out in times of crises.

Politically-connected bankers and industrialists and the military industrial complex take a small hit from inflation’s effects too, but as Murray Rothbard points out in The Case Against The Fed, they get the newly generated money and easy credit/interest rates first, before any other segments of society.  So they are the first to see the benefits, before the larger effects of these manipulations take their toll.  We hear a lot about the gap between rich and poor; those with clout and those without it.  Now you know why.

Keynesian economics pulls the rug out from under the feet of the poor and working class.  This has been obvious for decades now.  Presidents win elections by talking about the poor, even as they take advice from folks with fancy degrees, like Mankiw, who make a living suggesting that we “trick” working people into mindless consumption in order to feed Moloch.

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Responses

  1. Is Mankiw batshit crazy!?

    Seriously, does he not even consider the moral, practical, and legal–let alone economic–implications of randomly declaring that 1/4 of the Federal Reserve-printed money in your wallet is now officially counterfeit? I can imagine innocent people going to jail for “distribution of counterfeit currency” just because they didn’t memorize their money’s serial numbers?

    I work as a teller and sometimes we have customers depositing $10,000+ in cash. I can’t check the serial number of each of those bills (I don’t even count the money by hand, we run it through a machine–and we don’t even run the singles!!). It’s not only impractical–it’s impossible.

    But I guess that would be the upside if this policy were put in place. Even if the government declared certain bills to no longer be legal tender, the fact is that business owners, individuals, and probably even banks will still accept them and put them in circulation. Bernanke will be ignored as the Fed gives money away at negative interest and people continue to spend and “hoard” money like nothing ever happened. And so the central planners will epic fail in the face of free market and individual liberty yet again.

    One thing though. The stock market is actually a great place to put your money (better than a bank CD making 1.5%). But people have to know HOW to invest wisely rather than saying “Oh I’ll buy this stock and hope it just doubles in value randomly”.

  2. “randomly declaring that 1/4 of the Federal Reserve-printed money in your wallet is now officially counterfeit?”

    I totally meant “1/10″.


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