'Can Do' Money
"As long as you're pumping out money at a faster rate than demand for money is rising, you're going to stimulate spending. I think it would be kind of fun to fight deflation, actually." - Robert "Let's hold hands and buy an SUV" McTeer
Robert McTeer must be something of an amateur magician. His idea of a good time, we guess from his remark from February, is creating money out of thin air.
We are not particularly shocked by this. For it has long been apparent that central bankers everywhere - McTeer is president of the Dallas Fed - must like inflating the currency, during working hours at any rate. We are pleased to see that Mr. McTeer enjoys his work.
What is shocking and new is that he would say so. Clipping coins used to be something bankers did when no one was looking, like going to the bathroom or sneaking into porno shops. John Law - when he still had his wits about him - threatened his subordinates with death...if they printed money without proper backing. He may not have had any particular interest in protecting the public's money. But he knew what was good for him...and if the public ever caught on to the fact that his bank's currency had nothing of value behind it, he would be ruined.
But now, it really must be a new era - of sorts. McTeer and Bernanke openly discuss the methods they intend to use to make sure the dollar does not rise in value. And the capo di tutti capi of central bankers, who is not coincidentally responsible for creating more money out of thin air than any central banker who ever lived - Alan Greenspan - has just been offered a new term at the head of the Fed. At 77 years, all he has to do is to keep breathing...and keep inflating...and he is assured employment.
Fed officials, from Greenspan on down, have made it clear that they will do "whatever is necessary" to avoid a Japan-style deflationary slump, including interfering with interest rates on both ends of the yield curve. If setting very short-term rates does not do the job, the Fed will distort the long rates too. "If asset prices don't adjust sufficiently to stimulate spending," explained Vincent Reinhart, of the Fed's Open Market Committee, "then open market purchases of long-term Treasurys in sizable quantities can more term premiums lower."
Here we yield to James Grant for a translation: "We take that to mean," writes Grant, "that if stock prices (or house prices, or other prices yet to be named) don't do what they're supposed to do, the Fed will cap the yields of longer-dated Treasurys in a bid to depreciate the value of the dollar."
And now one further translation:
"The Fed will keep interest rates low - no matter what it takes."
Meanwhile, half a world away, another government employee brings the same spirit of optimism and determination to the sands of Mesopotamia. Jay Garner, proconsul, says he will stay "as long as necessary" in order to prevent things from regressing to their natural state in Iraq, while his boss, George Bush, affirms that his administration will do "whatever it takes" to bring peace and prosperity to the desert tribes.
In today's letter, we offer no critique of either department - Defense nor Treasury. We merely marvel at the 'can-do' spirit that animates them...in the same way we once admired Evil Knievel for bouncing over the Snake River Canyon on a motorcycle. It was madness, but it was entertaining.
Here in Europe, people do not so much marvel as sneer. Where Americans see benefits, Europeans see problems... risks...dangers...complications. What if the whole Middle East is de-stabilized, they ask? What if more terrorists are incited to action...what if the Americans target us next?!
How the world has changed!
"We had our period of madness too," Sylvie explained during our French lesson. "Oh là là...if you had lived through that period...1914 through 1945...you wouldn't want to do that again."
Sylvie might have gone further. She might have gone back centuries. Every problem...every difference...every border in Europe seemed to lead to war. Catholic or protestant... German or French...Fascist or Communist...no difference was so slight as not to be worth fighting over. It was the period of Machtpolitik...when Europe was strong militarily and every problem was thought to yield to the force of arms. For hundreds of years, armies marched in Europe...getting bigger and bigger, more and more deadly. Then, in the 20th century, Europe's wars seemed to reach a level of such deadliness that it must have felt terminal.
In 1914...and then again in 1939...the Europeans marched readily into battle...each nation sure of itself, with a 'can do' attitude. Americans, meanwhile, hesitated. Not getting involved in foreign wars was thought to be a national virtue. Protected by two oceans, America's military was relatively weak. And so, the nation favored negotiation...hesitation...discussion. In WWI and again in WWII, Americans waited years - until the major combatants had already exhausted themselves, said critics - before getting involved.
During those years...indeed, since the beginnings of the republic...American can-doism was largely focused on commerce, religion and other civil pursuits. Europeans marched...but Americans worked. And American factories from Trenton to San Diego profited by selling shoes, oil, guns...everything the Europeans wanted to buy.
But now it is the Americans who put their faith in machtpolitik and the Europeans - protected by an ocean of U.S. military expenditures - who sell them things. "Negotiate," say the Europeans...rely on the UN...talk... trade. The Europeans no longer have faith in 'can do' foreign policies; they barely have any foreign policies at all.
People learn more from defeat than from victory, we believe. Americans' military interventions have been, largely, successful. Europeans' have been mostly disastrous.
Likewise, too many devaluations...too many 'new' currencies...and too much inflation have squelched the Europeans' can-do spirit in central banking. France has had two currencies and a one 100-to-1 devaluation since WWII. In the '20s, Germany suffered an inflation so severe that a thousand marks in the morning were almost worthless by the day's end. They do not want to do that again.
While the Fed cut rates 12 times - by 525 basis points - since the beginning of the slump, the European central bank has merely jiggled its rates up and down very cautiously. On the first of January 1999, the best ECB lending rate was 3%. Now it is 2.5%.
While the Fed program is aggressive, activist, and forward looking, the European central banker reacts slowly and deliberately, as if were less sure of himself...and more modest. And where Alan Greenspan is known throughout the world - a greater celebrity than Michael Jackson - who can cite the name of the ECB's chief, let alone identify him in a police lineup? Wim Duisenberg is almost a nonentity.
But his currency is rising.