July 06, 2013

Saturday Morning Essay: Mr. Krugman's Science, as the Tapir Comes Crashing Out of the Jungle

Brought to you by Trader Joe's Dark Roast...

There were tapirs at Fleishhacker Zoo when I was a kid, as my grandmother took me there during those long weekends to see the same animals I had seen in captivity a few weeks before.  A tapir looked like a Divine lab experiment gone 'orribly wrong, as if God wanted to make a pig, changed His mind, and tried to make it into an anteater.  Two such animals make a bad conjunction of genetics; it would have been better if the same indecision had happened, for example, while mixing an impala with a deer.  He probably did, in fact, and thus the antelope.

However, I think Ben Bernanke was not referring to the genus Tapirus, but to the idea of tapering Quantitative Easing, which is the chief American policy response to the ongoing problem of a slowly sinking economy.  Regular readers already are familiar with the Federal Reserve's program of asset "purchases," where the FOMC engages with its cabal of Primary Dealers in a swap of hallucinated money-like electronic pixels for similarly notional things such as Treasury bonds and mortgage-backed securities which are guaranteed by one of the big government-like housing agencies, which are in turn backstopped by the U.S. Treasury, which is in turn backstopped by the Fed's ability to hallucinate money.

We're all clear on that.  Ben Bernanke has been buying bonds and mortgages at a "pace" (his favorite word, along with "moderate," sometimes conjoining the words and coming up with "moderate pace") of about $1 trillion per year, or $85 billion a month, a number which I'm sure was chosen because 12 x 85 billion gives you just slightly more than $1 trillion a year.  It's neat and tidy that way.

According to the Federal Reserve, inflation has remained "subdued," Ben Bernanke's third favorite word.  All of this "money printing" has not created much inflation at all, let alone "runaway inflation," which was the prognosis of many conservative assholes such as Peter Schiff and Niall Ferguson, whom Paul Krugman skewers relentlessly in his columns and blogs.  When I say "relentlessly," I mean on virtually a daily basis, sometimes more than once a day.  It has, indeed, gotten a little unseemly.  Paul Krugman did not think that QE would cause runaway inflation, and said so in debates as early as 2009.  I think this was because Ben Bernanke, who had been the Chairman of the Economics Department at Princeton University before ascending to the Fed, took the time to explain to Mr. Krugman that the "exchange" of assets held by Primary Dealers for Treasury bonds and MBS would result in the hypertrophy of "reserve accounts" held by the PDs on the books of the Federal Reserve and nothing else, and this indeed is what has happened.  The Fed pays the PDs 1/4 of one percent interest on these gargantuan accounts, which have swelled to well over $2 trillion in the last four years, out of a total Fed balance sheet of $3.4 trillion.

These "excess reserves" (amounts which by definition are more than the PDs need to maintain in their accounts under solvency rules) could be the basis of lending activity, and under rules of "fractional reserve lending," these reserves could result in the unleashing of a ginormous tidal wave of lending, if, you see, the American economy was not such a sick puppy.  If such lending were to start up, then inflation would be the natural result of this vast increase in the money supply.  No one borrows the money because we're all broke-ass to begin with and don't want no more debt, thanks just the same.

Recently, Ben Bernanke made various throat-clearing and harrumphing noises before Congress which suggested that the Taper was at hand: the Fed might ease up on this monthly orgy of electronic account hypertrophy, that the Fed might moderate its pace of purchases to a more subdued level, so to speak.  The stock market reacted hysterically, interest rates shot up, and all Hell broke loose.  Mr. Krugman chastised Ben Bernanke for his premature "tightening," which must have been galling to Mr. Bernanke since it was he, no doubt, who had explained to Mr. Krugman how QE worked in the first place, and corrected Mr. Krugman's idiotic solecism of 2003.  However, I think Ben Bernanke is enough of a mensch to understand that Mr. Krugman needs such grandstanding in order to hold down the fort at the New York Times.  Whatever happened, various Fed officials began recanting almost immediately, assuring us that no one meant anything, that moolah conjuration would continue until the economy continues to fail to improve.

QE forever does seem to have the effect, for now, of holding down interest rates, both for mortgages and for federal financing through Treasury bonds.  It's phony, of course, but so is the American economy, which is based almost entirely on issuing the world's reserve currency.  So why would we ever "taper," when the American economy looks, really, kind of a like a tapir?  Former engineers are becoming bartenders, auto workers are taking jobs as janitors or Wal-Mart greeters, college graduates are moving back home with Mom 'n Dad, and there are vast uncounted millions who are living in tent cities, on the streets, in sewer systems, under bridges, in storage units and who have disappeared from official statistics altogether.  The American standard of living continues to sag, as average compensation drops and the "new jobs" created are always at a lower stratum than those that they replace.  We need the hallucinated money, Benji.  We should keep creating it and adding it to the vast unused stashes on the Fed's reserve accounts.  Which is to say, I agree completely with Mr. Krugman, and his insufferable criticisms.  I disagree only with the thinking that this actually leads anywhere.  It won't, it can't; America is not going to suddenly get "traction," it's not going to be 1964 all over again.  But this at least is something, a silly and a dumb thing, at least QE is something, or we won't have anything at all.  Save the tapir, but let the Taper become an endangered species.

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