Brendan Brown, and The Global Curse Of the Federal Reserve
The great British political economist John Stuart Mill long ago observed that ‘most of the time the machinery of money is unimportant, but when it gets out of control it becomes the monkey wrench in all the other machinery of the economy." Notable about the quote is that Mill uttered it at a time when money, for having a commodity definition, could be considered unimportant.
If alive today in a world of floating money Mill would doubtless amend his quote to say "the machinery of money is always important, and when it begins to float wildly in value it's the monkey wrench in all the other machinery of the economy." Mill's actual quote is the underlying theme in British economist Brendan Brown's new book, The Global Curse of the Federal Reserve: How Investors Can Survive and Profit from Monetary Chaos.
Brown's knowledge of central banks and their history is voluminous, and then about U.S. monetary policy, he's properly a skeptic. As he puts it, U.S. monetary activism "has been the source of periodic bubbles and busts, both domestically and around the globe." So true. Even though President Nixon tragically severed the dollar's link to gold in 1971, the world remains on an implicit dollar standard. As a result, every time the floating dollar moves, prices and the value of investments the world over are distorted. More specifically, the dollar's fall beginning in 2001 led to a run on paper currencies of all shapes and sizes, and with currency weakness always a prelude to what von Mises termed a "flight to the real," dollar weakness stateside fostered a recessionary rush to housing around the world that ended in crisis when central banks shamefully intervened to save the financial institutions tricked by money illusion. As Brown writes early on, each time monetary policy goes awry, "the banking sector becomes fatally drawn into the process." Indeed, it does.
For readers of this column, the theme of Brown's book would give the impression that it's a book right up this reviewer's street. For the central bank history within it certainly is. As for why it's harder to recommend in total, Brown quite simply has a different view from mine on how monetary policy should be conducted. Brown is of the Austrian School, but throughout advocates a return to monetarism. The late Milton Friedman was the most notable modern advocate of quantity money theory, but even he late in life admitted that it wasn't workable. Brown thinks it is.
What's interesting here is that modern Austrians look askance at monetarism, yet to this writer the two schools are increasingly hard to distinguish. Even more interesting is that modern Austrian thinking is seemingly divorced from that of one of its fathers in Ludwig von Mises. In his masterful work The Theory of Money and Credit, von Mises described inflation as "an increase in the quantity of money that is not offset by a corresponding increase in the need for money." Put plainly, von Mises didn't presume to know what the proper rate of money creation was, and for thinking that way he channeled Mill who viewed production as money demand itself. Both saw money supply as something that would increase in concert with rising economic growth, and decline during contractions. Neither knew what the proper quantity was, and this is logical considering the infinite inputs and decisions that comprise what we call an economy.
Fast forward to the present, and modern Austrians seem to have lurched in a more monetarist direction for all the attention they pay to money supply. To modern Austrians an increase in the supply of money is inflation no matter the corresponding increase in the demand for money. Modern Austrians look askance at monetarists for seeking any increase in quantity, but it says here both schools are flawed for presuming to know at all what the proper supply of dollars should be. Better to simply target a market price for gold, and let price of the yellow metal dictate whether dollars in circulation should grow, stay the same, or shrink.
Brown's purpose seems to be one where he'd fuse the two schools. Specifically he seeks a "second monetarist revolution" rooted in the free market. The contradictions begin immediately in that there's nothing free market about a monetary system where alleged wise minds determine the proper growth of the money supply. Money should, however, be stable in value, so the preferred path would be to once again target a market gold price, and then add/subtract dollars in circulation to maintain the price. Let a market price (gold), determine the supply of dollars. Quick and easy.
Beyond that, monetarism was a disaster when it was most famously imposed from 1979-82. As the late Jude Wanniski put it about Friedman's monetarism in the New York Times in 1981, "Milton Friedman is not a big man, but he is very heavy. His monetarist economic ideas are a deadweight burden on the shoulders of Menachem Begin and the Israeli economy. They crush down on Margaret Thatcher as England riots. They are crippling the Nobel Laureate's old friend, Ronald Reagan, the United States economy and indirectly, all of our trading partners. Professor Friedman is barely five feet tall, but his shadow falls across the last decade of global inflation."
Holdouts like to ignore monetarism's stupendous failings, arguing that supply targets weren't adhered to during the time in question. To fix the past failings, Brown calls for monetary base control (MBC) which would require that the "monetary base should grow in the long term at a rate consistent with the economy's productive potential." Two pages later Brown observes that in "drawing up the details of MBC, the designers of the blueprint have to consider over what range of instruments reserve requirements should apply..."
The problems with the above statements are many. For one, no one could possibly know what an economy's productive potential is. Central planners (it says here monetarism is central planning) have tried to know this, and they've failed miserably. Second, not only are the infinite decisions that comprise an economy once again impossible to track (GDP an incredibly flawed measure of ‘growth'), it would be even more difficult to know the proper currency quantity necessary for said economic growth. More to the point, even if central planning worked and one could know an economy's productive potential along with the proper supply of money to facilitate the latter, it would still be impossible for the central bank to control money in circulation as Brown hopes it could or can.
We know this because it was tried before. As Nigel Lawson put it in The View from No. 11 about his time as Margaret Thatcher's Chancellor of the Exchequer, "If mandatory reserves exceeded the amount that banks wanted to hold voluntarily, they would act as a tax on them. But the result would simply have been to redirect the lending via offshore subsidiaries outside the Bank's control." Put plainly, if the Bank of England or the Fed try to slow growth of pounds and dollars in circulation through high rates of interest or reserve requirements, the shortfall will be made up elsewhere by sources of credit not regulated by the central banks.
To sum the above up, not only does monetarism not work in theory or in practice, the underlying assumption on which the theory is based - controlling the supply of money - is impossible to achieve. Money and credit are everywhere, and in places well beyond the control of central banks. As for why monetarism logically doesn't work beyond it being impossible to control the supply of money, it fails for perverting the role of money. The sole purpose of the latter is to facilitate the exchange of goods. That's why classical thinkers all understood that ideal money is money that doesn't change in value. Money is a measure, just like the minute and foot are. Tinker with any of the three, or float them, and you foster chaos. Monetarism fails on its face for taking from money its sole purpose which is stability in value.
About inflation, there's an austere side to the modern Austrians that runs counter to von Mises' claim in Liberalism that the study of economics is a happy one. It seems modern Austrians find inflation lurking behind every instance of happiness. To the "moderns" the Roaring ‘20s were a function of easy money, as were the ‘80s and ‘90s. As Brown puts it, the Fed was responsible for an inflationary credit bubble "which formed from the mid-1920s." The latter fascinates this reader in light of commodity prices during the same decade. Commodities are usually the first to signal monetary error, yet during the ‘20s commodities fell if Shlaes (The Forgotten Man), Ahamed (Lords of Finance) and Johnson/Kelleher (Monetary Policy: A Market Price Approach) are to be believed; the decline signaling if anything monetary tightness.
Also ignored by modern Austrians is the simple truth that policy was very good in the ‘20s. Government spending fell at least in the early years, and then the Mellon Treasury took tax rates down. And far from inflationary as modern Austrians would say, the strong dollar (as evidenced by falling commodities) was a lure for economy enhancing investment. But to Brown and people of the modern Austrian school, the ‘20s boom was built on inflationary sand. Moderns think the same of the ‘80s and ‘90s despite the dollar crushing gold and commodities in both decades.
Ok, so the modern Austrian definition of inflation is seemingly different from that of von Mises. Brown refers to "asset inflation" frequently in The Global Curse, but the proper definition of inflation has always been currency based. If the dollar falls versus an objective measure like gold, that's inflation. Modern Austrians see the rise in stock prices as inflation too. Such an assertion redefines the word, plus it supports this reviewer's belief that to modern Austrian School thinkers, inflation exists when anyone's happy. It's more true to say that stock prices rise (inflate) when the value of the dollar is rising as the '20s, '80s and '90s reveal. Stock prices fall or flatten (deflate) when the value of the dollar declines as it did in the '70s and '00s. It should be stressed here that my definition of inflation (in fairness, the traditional one) is in no way meant to give the impression on my part that I'm for monetary laxity, or a "dove." Quite the opposite. The dollar's stable value in a rational world of monetary policy should be protected at all costs.
But sometimes policy is good. Sometimes (the ‘20s, ‘80s and ‘90s come to mind) taxes are light, currencies stable to strong, and trade largely free such that asset values boom. That Austrians explain good and bad times through the prism of inflation suggests austerity in outlook, but promiscuity in action whereby modern theorists redefine the meaning of a word. Inflation is a devaluation of the unit of account like the dollar. Nothing more, nothing less. And just because a currency like the dollar rises in circulation, that's not, per von Mises' definition of inflation, a certain signal of inflation. If money demand matches new money supply, there's no inflation to speak of.
Considering deflation, and what Brown frequently refers to as "good deflation," he for instance sees "productivity growth" as an example of a "good" decline in the price level. The problem is that the latter is not deflation, nor is there any decline in any price level to speak of. What's interesting here is that Mill plays a prominent role in Brown's thinking, yet it's apparent that he glossed over Mill's point about inflation/deflation. To Mill, were he alive today he would not view the collapse in flat screen television prices as deflation. He wouldn't because as Mill made plain, no act of saving detracts from demand. If flat screens fall in price, the latter merely boosts demand for other goods thus driving up their prices. Inflation and deflation are monetary phenomena, yet Brown seems to want to attach to all price movements the two adjectives.
Considering Japan's deflation, to Brown it's a myth. In truth, Japan's deflation was real. From the late ‘80s through the ‘90s the yen tripled in value versus gold; meaning the yen soared. Returning once again to Mill, he knew that the only way to measure the value of currencies was with precious metals. As he put it, "the precious metals, have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist of which the value cannot be made to conform to theirs."
Just as inflation is a decline in the value of money versus an objective measure like gold, deflation, per Mill's reasoning, is the opposite. The yen crushed gold from the late ‘80s onward, yet Brown, counter to Mill, argues that there was no deflation despite the gold signal screaming the opposite. Worse, Brown uses the wildly inaccurate CPI measure ("Japan's price level (CPI) continued to rise by more than 1 percent per annum from 1991 to 1994") to defend his assertion. By that measure, there's no inflation in the U.S. today despite the dollar's stupendous decline versus gold since 2001, not to mention all the money machinations from Ben Bernanke that Brown properly decries.
Brown's basic thesis is that central banks, and the Fed in particular, are destabilizing forces for bad in the global economy. So while it would be impossible for this writer to disagree with his thesis, his solution is a difficult to countenance. Indeed, monetarism is the fatal conceit that says wise minds should control the economy through the addition and subtraction of dollars. In short, Brown would replace the Fed's present failed policies with other central bank policies that are arguably much worse.
In the above sense it's hard to strongly recommend The Global Curse. Brown is clearly a grand and well informed thinker with a great deal of knowledge about central banking history. The problem (s) is the solutions he offers. He's diagnosed the central banking problem while strangely calling for more of the same problem (central banks) to fix the patient. No thanks, I'll take the Fed's abolishment in concert with a dollar defined by, and its supply regulated by, the price of gold.