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According to Forbes, economist Sandeep
Jaitly was forced to resign from his position at the Gold Standard Institute after expressing his views with Max
Keiser.
Said Phillip Barton, president of GSI "Lest there be any
misunderstanding, the views expressed by Sandeep Jaitly in his interview with Max Keiser are not the views
of The Gold Standard Institute. To the contrary, we strongly disagree with
those views. .... Sandeep Jaitly
has resigned from his position as Senior Research Fellow with the Institute
and we sincerely thank him for his past contributions."
Let's Tune Into Max
You can read the interview at Keiser Report: Frankenmarkets
and Austrian Economics.
What appears to have gotten Sandeep in trouble is
his criticism that Mises made "too many
mistakes".
However, Sandeep did say, "He [Mises] was certainly the greatest economists of the
twentieth century. It’s just that he made a slight, few errors of
observation. That’s all."
Errors in Observation
When it comes to errors in observation, Sandeep has
made a few of his own. For example consider these statements from the
interview: "What I want to make very clear Max is that you
don’t need marginal quantitative easing from here for asset prices to
start escalating. You only need what has already been printed to start
spinning more quickly. And once things start spinning, nothing can slow it
down."
Interestingly, the first sentence is true. However, the following sentences
show Sandeep fails to understand the role of
attitudes as well as the fundamental nature credit in a credit-based economy.
The statements imply that printed money may come spinning
into the economy at any time causing massive inflation the Fed could not
stop.
There are two errors in such an analysis. The first error is that banks do
not lend from excess reserves. Rather, banks lend, on two conditions, both of
which need to be true.
1.
Banks are not capital impaired
2.
Banks believe
they have credit-worthy borrowers.
By credit-worthy I mean "lending rates are high enough, or assets
strong enough for banks to believe they will make a profit
commensurate with risk".
Clearly banks made serious mistakes in the housing bubble in regards to the
credit-worthiness of borrowers (primarily based on belief that home prices
would not fall), however, both conditions were met.
Sure, banks can start lending again at any time (which is why Sandeep's first sentence regarding no need for
further QE to ignite a credit boom is true in isolation). However, the idea that excess reserves are about to come spinning
into the economy at any moment is fatally flawed.
For a complete rebuttal to Sandeep's mistaken
observation, please see Can Bernanke
Force Banks to Lend by Halting Interest on Excess Reserves?
Attitudes Have Changed
Note how much attitudes have changed. Banks are not lending now out of
rightful fear of more losses.
Very few Austrian economists seem to understand the nature and role of
attitudes and credit in boom and bust cycles. Most woodenly stick to views
that excess reserves will come pouring into the economy 10 times over causing
massive inflation.
Careful observation would suggest the economy does not act as prevailing
Austrian theory believes it does. Unfortunately, this is why many Austrians
have looked ridiculously silly vs. Paul Krugman
when it comes to inflation predictions.
This is by no means a defense of Bernanke or Krugman,
as Bernanke has created other very serious problems and economic distortions
of all sorts. Moreover, Fed policies and deficit spending have indeed created
boom-bust cycles of ever-increasing amplitude.
Indeed, the policies espoused by Bernanke, forever bailing out banks whenever
they have gotten in trouble is one of the factors driving money and assets to
the 1% vs. the 99%. Clearly, those on fixed income have been destroyed by
Bernanke's policies.
Bernanke Translated
For a short, yet thorough trashing of Bernanke's defense of his policies,
please see Mish Translation of Bernanke's
Statements on the Treasury Carry Trade and the Tax on Savers.
The only way to fix the problem is to end fractional reserve lending and
return to sound money. On this point the Austrians are 100% correct.
Spinning Out of Control?
The second error in observation Sandeep makes is belief
that "once things start spinning, nothing can slow it down."
That is ridiculous.
The Fed could easily rein in inflation by the simple matter of hiking
interest rates. Whether or not the Fed would do so is certainly debatable.
However, please be aware that the Fed in and of itself cannot cause
hyperinflation without purposely trying to do so, and perhaps not even then.
Fed Cannot Realistically Cause Hyperinflation
The Fed cannot force banks to lend. Nor can the Fed force consumers and
businesses to borrow. In a credit-based economy that what matters most.
Once again, my observation is Austrian economists in general have failed to
observe this crucial point. Bear in mind that the Total Credit
Market Debt Owed is over
$50 trillion! From that aspect, the idea that $1.5 trillion in excess
reserves is going to come spinning into the economy causing inflation
the Fed cannot stop, is simply ridiculous.
Sure, in theory, the Fed could print $100 trillion and agree to pay 4%
interest on excess reserves, but the Fed is not out to destroy the banking
system.
Interestingly, if interest on excess reserves was zero, it is debatable
whether printing $100 trillion would do much of anything at all other than
perhaps cause a brief asset bubble and subsequent crash. I actually doubt it
would spur lending or hiring and once again, careful observers will note
lending and credit are what matters most.
Practical Restraints
Remember, the Fed is beholden to bankers. Moreover, the Fed does not want to
wreck the system because to do so would wreck the banks and the Fed's power
along with it.
In a nutshell, hyperinflation fears caused by the Fed are silly.
Hyperinflation fears caused by Congress giving away money are more realistic
in theory. However, such odds are still extremely low because Congress would
not give enough money away in the first place.
With a total credit market exceeding $50 trillion, $1 trillion deficits would
not cause hyperinflation for a long, long time.
That said, a global currency crisis at some point in
the future is unavoidable if countries keep on the path they are on. Deficit
spending and competitive currency debasement globally for the sole benefit of
banks and the wealthy is simply not sustainable. Something has to give
somewhere, and it will, most likely in multiple places, at a very inopportune
time.
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