WSJ: Central Bank Treads Into Once-Taboo Realm

The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).


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32 comments on “WSJ: Central Bank Treads Into Once-Taboo Realm

  1. LumenChristie says:

    “Monetizing the debt” is merely a fancy way of saying, “print lots of money” which doesn’t just [i]lead[/i] to inflation, it [i]causes[/] it.

    This is precisely the step that the Weimar Republik took in the 1920s which caused the collapse of the government and the rise of “progressivist” movements such as the Nazis.

    Pray a lot.

  2. NoVA Scout says:

    Inflationary pressures in the economy seem to be virtually non-existent at this point and this measure seems likely to have little impact in that sector. The real challenge is whether Rs and Ds acting together can get the right mix of fiscal restraint and stimulus to address deficits without strangling recovery in the cradle. With the possible exception of the 1982-2000 period, neither Party has provided any evidence in the last 100 years to indicate that they can do this under the most favorable of economic and political conditions. Whether they can do so now, when all politics seems to have become some sort of elementary school street theater, is an open question.

  3. AnglicanFirst says:

    “Inflationary pressures in the economy seem to be virtually non-existent at this point….”
    In old-time radio electronics, regenerative feedback was used to strengthen a weak signal. The trick was to “feed back” just enough of the weak signal to end up with a stronger signal that could could be heard by the listener.

    And it was a “trick” or a matter of manipulation of the apparatus, because if the feedback wasn’t controlled, then the regenerated signal would go strongly out of control and deafen the listener with a loud screeching howl which totally destroyed the incoming radio signal.

    Well, what the Fed is trying to do is sort of like that. If they prime the pump a little bit, then just possibly the economy will be stimulated in a healthy manner. If they overstimulate the economy, then it will go out of control. If it does go out of control, then those who are already suffering will suffer even more and those whose efforts as businessmen could benefit the economy will neutralized in their efforts to do so.

    And, once an economy has gone out of control, how is it brought back under control? Do they have a Plan B? If so, they need to tell us what it is.

    What they are proposing to do is not stimulate the econmomy, but instead ‘jump-start’ the economy by printing huge quantities of paper that they will call ‘money.’

  4. carl+ says:

    The economic/financial ignorance displayed in this latest “policy” is breathtakenly delusional in its denial of the realities of the business cycle, aka as human nature. It is the height of folly – history has spoken to this sort of political expeditence on many occasions.

  5. Bart Hall (Kansas, USA) says:

    This economic crisis has been caused by too much debt.

    You cannot solve a problem of too much debt with even more debt.

    There is no right way to do a wrong thing.

    Can anyone tell me how the Fed’s action is any different than pouring four fingers of whisky to ‘cure’ a bad hangover ?

  6. Creedal Episcopalian says:

    [blockquote] With the possible exception of the 1982-2000 period, neither Party has provided any evidence in the last 100 years to indicate that they can do this under the most favorable of economic and political conditions.[/blockquote]

    You perhaps have overlooked Calvin Coolidge. Ironically, The gains Tuesday are reminiscent of 1924….. which followed the Depression of 1920–21 and the 1923–24 recession.

  7. David Keller says:

    #2–I’m not sure that Ben B. has been going to the grocery store. There are signs of inflationary pressures in the economy reflected in commodities. Several large food companies came out with a report on Monday that they will be having to raise prices. That said, if this trick works, it will make inflation equal 4 to 5% which the Obama adminsitration will tout as a 4 to 5% growth rate. This will occur in late 2011 or early 2012. I think there is an election in 2012. Of cousre, if they screw it up, we will have Jimmy Carter level inflation and Mr. Obama will be toast.

  8. AnglicanFirst says:

    “…it will make inflation equal 4 to 5% which the Obama adminsitration will tout as a 4 to 5% growth rate.”
    I think that main-stream-Americans, Democrats, Republicans and Independents, have shown in this last election that the are becoming increasingly resistant to the ‘smoke and mirrors virus’ that emanates from Washington, DC.

    If the President tries to use 4% to 5% inflation as a sign of growth when that 4% to 5% has resulted in a 4% to 5% decrease in buying power, then I believe that the voters will cry ‘foul.’

  9. Pageantmaster Ù† says:

    I wouldn’t say that having an economics degree gives me any sort of advantage in economic matters but from what I read, quantitative easing and monetising debt sounds awfully like what the Weimar Republic did.

  10. John Wilkins says:

    People have been crying that there’s going to be inflation for years. But there’s no demand. Deflation is the current problem.

    Foreign governments still seem to be buying government bonds.

    Lumen Christi: your conflation of progressivism and the nazis is simply untrue. The Nazis supported race supremacy. In this country, that was the role of cultural conservatives. They supported militarization of the economy – liberals want to build schools. It’s not the liberals carrying semiautomatic guns to rallies.

    There are good reasons to oppose this move, Lumen. There aren’t good reasons to create a culture of fear. That’s what the minister of propaganda did. As it is, the evidence is that inflation will not be a problem because businesses and banks don’t have an incentive to buy or loan.

  11. robroy says:

    I am with david keller (and friedrfich hayek). Trying to eliminate the business cycle is a fool’s game. Eliminating the fed makes much more sense.

  12. David Keller says:

    #8–I didn’t say it was a good idea; I just said that’s what they’re up to. Keep in mind, the Harvard egg-heads who work for the government think we are idiots who need extra parenting by them ’cause we didn’t go to Harvard. Tuesday proves we aren’t quite as stupid as we look. Note to Ben B–I live in SC and believe it or not I wear shoes every day.
    robroy–Thanks! And I agree with your sentiments about the fed.

  13. AnglicanFirst says:

    Reply to #10 who said,
    “People have been crying that there’s going to be inflation for years.”
    Do you remember the “stagflation” of the 1970s?

    Messing with the money supply because somebody thinks ‘its a good idea’ is not a justification for the risks that will be taken by the risk takers.

    Maybe the reason that taking such risks is appealing to some people is that it is only ‘people with money’ and the free enterprise system that will be hurt.

    Then ‘big government’ can ‘step up to the plate’ and ‘take charge of our country’s destiny.’

    ‘Big government’ run by a few ‘smart people’ who ‘know what’s best’ for everyone else.

  14. LumenChristie says:

    # 10. No, John, I am not at all wrong here.

    Read your history.

    Race Supremacy was mostly a sideline for the Nazis. They ran on economics. Lenin had identified [i]national[/i] socialism as the “Right Wing” of the Marxist movement. The Nazis were only slightly “right” of the Marxists who wanted INTER-national rather than national socialism. They were not “Right Wing Conservatives,” they were Progressivists who believed in total governmental control of the economy.

    Socialism/Marxism began under the banner of “Progressivism.” Progressivists — again, read your history — were uniformly racist (e.g. Margaret Sanger who wanted to sterilize non-white races). The Nazis were thoroughgoing Progressivists in every way. For Progressivism to work, you must have a totalitarian government with the teeth to enforce its policies.

    Has anyone noticed that the “buy-outs” and governmental financial interventions amount to the nationalization of much of our industry? Now we are printing massive amounts of money to “monetize” our debts. We are being dragged into becoming a socialist — read Progressivist state. Progressivist states never succeed but sink into generalized poverty

    And # 9. I mentioned Weimar in post #1.

    For those who maybe don’t catch the reference, post WW I Germany did exactly the same thing that the Obama administration is trying to do now — with the result of massive bankruptcy throughout the population, huge suffering in every way and the collapse of the government. This is really serious.

  15. Pageantmaster Ù† says:

    #14 Thank you O LumenChristie – indeed you did.

  16. Bart Hall (Kansas, USA) says:

    I have not yet begun to worry about inflation because the Fed are now pushing on a string. Without descending too far into econo-geekiness, I’ll attempt to explain.

    Growth in the money supply are just not that closely related to either GDP growth or inflation. In the mid-’00s the monetary base was increasing by well into double digits, yet inflation was tame and falling. Back in the ’70s, when I was starting my first businesses, that sort of monetary expansion triggered double-digit inflation.

    Inflation is much more a function of whether government spending is productive (eg the Interstate Highways –> low inflation) or non-productive (eg ‘War on Poverty’ –> high inflation).

    What happens with big monetary expansions when interest rates are low is that there’s no penalty for holding cash, and at low interest people will always prefer to hold cash than somebody else’s debt.

    As people hold more and more cash the “velocity” of money declines, with the result that there is little if any inflationary effect. That’s what happened in Japan and we are most foolishly heading down the exact same road — even with a cogent example of how utterly futile it is.

  17. Ad Orientem says:

    Must reading… [url= of Money.pdf]Dying of Money: Lessons of the Great German and American Inflations[/url]

  18. Ad Orientem says:

    Hmmm the link did not work. This is the link to the book in its entirety. of Money.pdf

  19. Ad Orientem says:

    Apologies. You will need to copy and paste the entire link manually. For some reason the HTML at T:19 is only reading part of the link anc is cutting off the end of it (of Money.pdf).

  20. John Wilkins says:

    “progressivists were uniformly racists”

    This is untrue. Read your history. The IWW was not racist. The Communist party, USA was not racist. MLK was not a racist. Consider the alternative- which conservatives were FOR civil rights?

    The Nazis, in the night of long knives, destroyed their internal socialist groups. They were also opposed to the social democrats and the communists.

    Here is progressivism: against child labor; for a clean agricultural system; fire exits. Conservatives found all these as problematic regulations. You underestimate the capacity of owners for human sin.

  21. IchabodKunkleberry says:

    #20 (John),
    You forgot to include St. Margaret Sanger – that arch-eugenicist to the progressives ! I am shocked – shocked I tell you – that you omitted
    such a luminary ! Had she only been better able to market her ideas
    to the unenlightened masses, that Adolf chappie wouldn’t have gotten
    such bad press.

  22. robroy says:

    It is true that the anarchist trade union IWW wasn’t racist, but it was absolutely the exception:
    [b] Economist Ray Marshall, although a pro-union secretary of labor under President Jimmy Carter, made his academic reputation by documenting how unions excluded blacks from membership in the 1930s and 1940s. Marshall also wrote of incidents in which union members assaulted black workers hired to replace them during strikes. During the 1911 strike against the Illinois Central, noted Marshall, whites killed two black strikebreakers and wounded three others at McComb, Mississippi. He also noted that white strikers killed ten black firemen in 1911 because the New Orleans and Texas Pacific Railroad had granted them equal seniority. Not surprisingly, therefore, black leader Booker T. Washington opposed unions all his life, and W. E. B. DuBois called unions the greatest enemy of the black working class. Another interesting fact: the “union label” was started in the 1880s to proclaim that a product was made by white rather than yellow (Chinese) hands. [/b]

  23. Creedal Episcopalian says:

    [blockquote] Consider the alternative- which conservatives were FOR civil rights?[/blockquote]

    Lemme see, now, who might that be? Would it be the Republicans that ended slavery? How about in the 20th century?

    [blockquote] In the 26 major civil rights votes after 1933, a majority of Democrats opposed civil rights legislation in over 80 percent of the votes. By contrast, the Republican majority favored civil rights in over 96 percent of the votes.[/blockquote]

    Nope. That dog won’t hunt.

  24. Sick & Tired of Nuance says:

    #18 I think this finally explains the whole “pet rock” thing I remember being a craze back in the 70s…well, that and the rampant drug use.

  25. Sick & Tired of Nuance says:

    #23 I don’t think you will ever convince the Liberals. They have a genetic deviation that precludes them from grasping what is so obvious and factual to normal people. They suffer from having a dopamine receptor gene called DRD4. According to the article below, there is “a link between the gene and novelty-seeking behavior and this behavior has been associated with personality traits related to political liberalism”.

    What you are saying is true, but you are fighting a dopamine addiction…as powerful as crack cocaine. Liberals suffering from such will never admit that National Socialists were actually socialists. Many of them are even apologists for Stalin. The appear physiologically incapable of grasping the reality of how socialists/communists caused over 100,000,000 deaths in the 20th Century, and are bent on continuing to press for yet more socialism. I have given them up as a lost cause since the announcement of the DRD4 dopamine receptor gene’s link with liberalism. Only a miracle of God’s grace will open their eyes.

    I cannot help but think of passages in Romans 1 when I ponder this genetic discovery: “…their thinking became futile and their foolish hearts were darkened. Although they claimed to be wise, they became fools…” and, “…received in themselves the due penalty for their error…”

    Who knows…maybe I am wrong…maybe. Maybe not.

  26. John Wilkins says:

    Creedal Episcopalian – you’ve got your sets wrong. Republicans were often liberals (See Teddy Roosevelt, Fiorello LaGuardia) until the Southern Strategy (think Lee Atwater) changed the demographics of the Republican party. Republicans now are more like Bourbon Democrats of old. Nixon himself was far more liberal, in practice, than our current president.

    The logic, however, I’m confronting is like so: Steve wears blue shorts. Nazis wore blue shorts. Thus, Steve must be a nazi.

    There are good reasons to oppose this policy. There are no good reasons to disrespect our president and insinuate he has an agenda that is anti-semitic or totalitarian. If he does, I’ll surely stand by those who would be his victims. Otherwise, it’s just fear mongering.

    [i] Please- no Godwin’s Law [/i]

  27. Sick & Tired of Nuance says:

    #23 See…I told you.

  28. Sick & Tired of Nuance says:

    “Nixon himself was far more liberal, in practice, than our current president. ” Ha ha ha ha.

  29. Creedal Episcopalian says:

    Grandma told me to ” Never argue with a fool”
    But I just can’t help it. It’s too much fun!
    Does that make me a troll?

  30. Sick & Tired of Nuance says:

    #29, No, lol, just an optimist.

  31. Bill Matz says:

    Wow! Talk about a target-rich environment.

    Bart Hall is spot on (as always) in #16. Nearly all of the talk about Fed policy of “printing money” ignores the velocity issue. Just read Dr. John Hussman’s article on the subject this morning. He documents the correlation between easing and cash hoarding, which offsets the inflationary effect.

    A related factor that Bart did not mention is that non-govt borrowing (biz and personal) has been declining. The cumulative effects indicate that the money supply is deflating, not inflating. The current rise in commodity prices may well be just classic demand-pull inflation, as cash hoarders seek new places to park cash. If so, prices could drop quickly. Of course, there are many other factors, especially in the energy area.

    #20 asks which conservatives were FOR civil rights. When #23 answers in detail, #26 shifts and claims Republicans were liberals, which is certainly contrary to his implicit charge in #20 and also smacks of circular reasoning. But let me add an individual example to those in #23:Barry Goldwater.

    When BG voted against the ’64 Civil Rights Act, he was predictably smeared by the left as a racist (as well as a warmonger – unlike LBJ- NOT!). But BG probably did more personally to promote civil rights than any other member of Congress, e.g. he integrated the Arizona Guard before Truman did for the US military.

    BG’s principled opposition arose from his reasonable belief that the Act was not the best way to promote racial reconciliation. Indeed, the fact that the Act had to find its Constitutional justification in the Commerce Clause, rather than the anti-slavery Amendments, could be seen as inherently degrading to black Americans (i.e. “we’re only giving you these rights because not doing so hurts business).

    In fairness, let’s recognize that the smear of BG was a part of an ugly pattern used by both the left and right. Pick out a particular vote and use the vote -without explaining the reasoning- to claim that the target politician is a [pick your label; racist, Communist, anti-labor, anti-Christian]. The national epidemic of ADD seems to preclude any meaningful discussion of issues, leaving us with just 5-10 sec soundbites.

    Finally, to add to the good summary of union racism in #22, let’s add the Davis-Bacon prevailing wage rules. Offered under the pretext of protecting union wages during the Depression, the true motivation was patently racist: preventing loss of “white” jobs to blacks. Co-author Sen. Bacon was such an open racist that his will left property for a park – to be named Baconsfield – to be used only by white people.

    The facts are clear that it was Republicans who led the charge for Civil Rights. In fact the true motivation for the ’64 CRA was political expediency. JFK/LBJ realized that black Americans were waking up to the fact that they had been played by the Democrats and were in danger of returning to the party of Lincoln. Sadly, there are few black leaders who will stand up and contradict the myth that Democrats led the Civil Rights movement, nor will they acknowledge the damage of LBJ’s Great Society programs to the black American family. Politics is an ugly thing when it gets in the way of the truth.

  32. John Wilkins says:

    Alright: Am I to understand that in this current narrative Republican=Conservative and Democrat=Liberal? I don’t think that’s empirically correct. For most of US history, there were multiple strands in each party, often marked by territory. Was Borah a conservative? Javitz? Fenwick? Rockefeller?

    Yes, Republicans were for civil rights, I concede.

    Bill Matz offers a nuanced interpretation that I concur with to a point. I do think, after reading Robert Caro, that LBJ had multiple motivations. I would also point out that Barry Goldwater and Saul Alinsky knew each other and shared some similar concerns.

    But I also think that there was a “nixon to china” moment. Only LBJ had the capital to force the senators to pass the Civil Rights Act.

    Sick and Tired: perhaps you should read Nixon’s 1970 state of the union address.