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John Carney, a Senior Editor over at CNBC.com has picked up the trail
of Vijay Boyapati’s paper that
appeared in Libertarian Papers last year. In his ‘Net Net’ column, Carney writes that hyperinflation
worries are unfounded. In Part II
he points out that the Fed can pump up reserves all it wants, but that
doesn’t necessarily mean bankers will start lending (or regulators
allow them) deposits and thus expand the money supply by a multiple of the
reserves. The reserve requirement ain’t what
it used to be, as Boyapati explains in his paper.
In Part III, Carney
discusses Boyapati’s thesis that bankers
control monetary policy, not politicians. So,
The key difference between the motivation of the banking class and the
political class, which is hinted at by Rothbard, is
that the former prefers a monetary policy that allows them to profit from the
economic activity of the population in a subtle and insidious manner. A
policy of open inflation conducted by the political class is the path to
hyperinflation, the breakdown of the division of labor, and the destruction
of the monetary system itself.
Unlike the political class, the banking class is savvy enough to
recognize policies that will lead to mass inflation and the death of the
monetary system from which it parasitically profits.
Hayek made the case that no one (or group) has the requisite knowledge
to manage monetary matters to make the results turn out the way intended. But
there’s no question at the moment that, while the Fed has pumped up its
balance sheet and will continue to keep it that way, bankers aren’t lending
(although I hear reports that they are starting to). While the Fed does its
thing, commercial banks have been licking their wounds, charging off loans
and raising capital: none of which creates money.
The 800-pound borrower in this room is Uncle Sam. The vast majority of
bank lending capacity is with the top 15 banks. Basel III greatly favors
government debt as a bank asset. So Carmen Reinhart for one, and bond king
Bill Gross for another, believe out-and-out default or “debt with
drama”—is unlikely, writes Megan McArdle
in the Atlantic.
“Instead, she predicts that the United States will engage in
‘financial repression,’ a sort of stealth default. Financial
repression relies on inflation, regulation, and fancy accounting instead of
forced restructurings, or outright refusal to pay.”
“Here and now, she thinks much of the debt will be
‘monetized,’ or inflated away, by means of regulations that
‘encourage’ the financial sector not to sell its government debt
in the face of inflation,” McArdle writes.
In The Mystery
of Banking Murray Rothbard points out that
monetizing the debt, creating new money to pay for new debt, “is inflationary,
and it imposes
future heavy burdens on the taxpayers.”
Hyperinflation? Deflation? A mess, for sure.
Douglas French
Mises.org
Douglas French is president
of the Mises Institute and author of Early Speculative Bubbles &
Increases in the Money Supply. See his tribute to Murray Rothbard.
Article originally published
on www.Mises.org. By authorization of the
author
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