Sunday, September 13, 2015

Neutral Monetary Policy?

I read John Mauldin’s weekly missives because he offers great insight into the thinking of some very influential economists.  I also enjoy watching him walk the tightrope – he clearly knows the central planners known as central bankers don’t know and can’t know what they are doing, yet he writes without this reality clouding his views of the power they wield. 

Watching him walk this tightrope occasionally offers up some good material; every once in a while he throws in a real whopper, and it is when the whoppers arrive that I feel compelled to comment, so here goes, from his Thoughts from the Frontline - Needed at the Fed: An Inverse Volcker (PDF); I will start with the whopper:

A properly structured and managed electronic currency – Milton Friedman’s computer running the central bank – would be truly neutral.

There is no such thing as “neutral” anything when it comes to human beings, and this therefore applies to economics.  The closest thing to “neutral” in economics is the market.  The market is “properly structured” on its own and without any guidance from on high, but it is not properly “managed” in the context that the term is used by those who are influenced by those aforementioned influential economists.

Why does an obviously intelligent person believe a computer program can be “neutral”?  Does he think the programmers will be neutral?  How about the economists telling the programmers what to program, will they be neutral?  What about the other economists gathering the nonsensical macro-economic data that measures everything worth ignoring while ignoring everything worth measuring but that can never be measured because value is subjective?

What about the politicians via whom those economists have and keep their powerful and lucrative positions, will they be neutral?

Anything centrally managed will never be neutral.  Why does an otherwise intelligent man pretend otherwise?

OK, that was the whopper, but while I am at it I will deal with a few other misperceptions and misconceptions.  Writing of price deflation:

Deflation would be as “normal,” as we currently perceive inflation to be, if we had a fixed money supply. Each currency unit (gold or anything else) would naturally buy more as people produced more goods and more offspring.

Why does he assume the money supply would be “fixed” with gold?  Has gold mining stopped and nobody told me?

Seriously, let’s assume the gold supply is – for a time at least – fixed.  Over time, it becomes more valuable relative to many other goods and services.  Eventually it becomes so much more valuable that someone decides “Hey, I think I will go look for some gold.”  And guess what, they find some, and bring it to market!  Someone else says “You know, grandma’s gold jewelry has just been sitting in a box in the attic ever since she died forty years ago.  Maybe I will sell it.”

Or how about this (and something that some of my Austrian friends will frown upon but which cannot be avoided in a free market): why must it be assumed that in a gold standard world only gold coins (or notes 100% backed by gold coins) will be accepted as a medium of exchange?  A simple (and non-controversial) example would be silver. 

Another (not as non-controversial) example would be gold notes backed fractionally by gold (as I have defined fractional reserve banking).  Credit can come in many forms – it only requires real savings of something (as someone must defer consumption to provide credit).  This is one reason I have come to terms with the idea of Real Bills.

Returning to this deflationary (supposedly) fixed quantity of gold (or anything else):

It heavily favors incumbents and the rich.

Here again, why does an obviously intelligent person write such things?  If a gold standard heavily favored the rich, we would have a gold standard.  I cannot even think of any way to elaborate on this – I am dumbfounded.

What Gary [Shilling] shows us is that, other than for nations in debt, [price] deflation is not only a natural state but is something to be desired. (Emphasis added)

Price deflation – a reasonable outcome from a gold standard – is a good thing for pretty much everyone “other than for nations in debt” (arguably anyone in debt).  Is there any wonder that governments everywhere have moved away from the discipline of gold?

There have been periods of “good [i.e. price] deflation” throughout history. The “bad [i.e. monetary] deflation” that we especially associate with the 1930s comes from the twin evils of too much debt and leverage plus monetary policy mistakes. 

There is a third evil behind the episode in the 1930s: the government tried to do too much to “solve” the problem.  All three evils are thriving globally today like never before in history.

The bursting of a debt bubble always and everywhere produces “bad deflation.” Bad deflation is monetary deflation, and it is devoutly to be avoided. When economists and central bankers talk about their worries over deflation, they are referring to monetary deflation, not price deflation. Just for the record, I concur with their worries.

Devout: devoted to divine worship or service; pious; religious.

In a free market economy, the “bursting of a debt bubble” would be called bankruptcy.  In a free market economy, it would be a micro event – localized, affecting small regions, a handful of companies, the customers of the wrong bank, or the creditors of the wrong company.

A “bursting of a debt bubble” is a concern to “economists and central bankers” today only because there are economists and central bankers today.  In other words, economists and central bankers – having been afforded a monopoly position over the single most important commodity in the market – have turned the localized bursting of a debt bubble into a national if not international bursting of a debt bubble.

Get rid of “economists and central bankers” and we will no longer have to worry about the “bursting of a debt bubble” because there will never again be a debt bubble large enough to worry about.

But the Fed’s method of avoiding monetary deflation does not address the central problem that is created by our government and banking system: too much leverage accumulating in a system without adequate systemic safeguards.

This “central problem” has not been addressed because it cannot be addressed.  To be clear, this “central problem” is the purpose, the raison d'être, of central banking.  The only way to address it is to end central banking.

As Irving Fisher, one of the greatest economists of the Depression era, wrote to Franklin Roosevelt late in his life, reflecting upon the lessons he had learned over the previous 30 years, the only way to truly prevent another Great Depression is to control debt leverage and the level of fractional reserve banking. (Emphasis in original)

Allow me to translate what Irving Fisher said: As long as we have a central bank, we will not avoid another great depression.


If there is to be “neutral” found anywhere, it is in the market.  If there is to be meaningful regulation found anywhere, it is in the market.  If there is to be meaningful governance found anywhere, it is in the market.  Prices freely arrived at coupled with profit and loss offer the closest things man can create toward neutral and toward meaningful regulation and governance. 

Central planning doesn’t work and cannot work.  Central banking is central planning.  It cannot work – at least not if neutrality and meaningful regulation and governance is the objective.

Mauldin knows all of this – of this I am certain.  How do I know?

My first economics mentor, Dr. Gary North….


  1. I used to subscribe to Dr. North's fine service. I was always baffled by why he read John Mauldin. I found his material to be not worth my time -- not insightful, no unique angle, even a bit maudlin (ha, ha), etc. -- so I quit following him. Thank you for confirming my read from some time ago.

    1. My point is that Mauldin knows all about Austrian economics and the certain failures of central banking, due to his early affiliation with Dr. North. In no way was my comment intended to disparage North.

    2. JOHN G,

      I may have misread your meaning. If you are referring to Mauldin's writing, in many ways I agree with you. I think his writing is a bit confused because somewhere inside he is very conflicted - I believe that he believes that the Austrian position is the only one that properly explains today's events, yet he dares not say so.

      I read Mauldin for the reasons mentioned - he talks to many influential people. It is worth understanding what they think.

    3. Dr. North is a very clear, logical, and insightful writer. John Maudlin is not. My deprecating remarks were about Mr. Maudlin. My mistake for not being clear about who I was referring to.

  2. "Or how about this (and something that some of my Austrian friends will frown upon but which cannot be avoided in a free market): why must it be assumed that in a gold standard world only gold coins (or notes 100% backed by gold coins) will be accepted as a medium of exchange? A simple (and non-controversial) example would be silver. "

    I'd be surprised to see an Austrian frown at that.

    Good piece.

    1. I was thinking of real bills and FRB when I was writing that - and tried to wordsmith around it with the "non-controversial" qualifier. In hindsight, I could have been more clear.

      Yet... it isn't gold...

  3. Mauldin is a commercial success because he understands the tastes of his clients and readers. He is the middle-of-the-road guy, the muddle through guy. I don't know how he can write some of the things he writes with a straight face.