I listened to the debate today on Bloomberg between Ron Paul and Paul Krugman.
Link if video does not play: Krugman Says Fed ‘Reckless’ to Allow High Jobless Rate
I do not feel Ron Paul did a very good job at making his points, and I certainly wish Ron Paul was a more charismatic speaker.
However, Paul Krugman made at least one preposterous statement. In contrast, Ron Paul simply failed to drive home his points clearly and precisely.
Said Krugman “The reckless thing is to allow mass unemployment to continue“.
The statement is absurd. Although the Fed does have a dual mandate on employment and inflation, as I have pointed out on numerous occasions, the Fed’s Dual Mandate Is Mission Impossible
Here’s the deal.
1. The Fed can control money supply but it will have no control over interest rates (or anything else).
2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).
That is the full and complete extent of the Fed’s “control”. Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.
The result of all the recent Fed printing is a big yawn, otherwise known as excessive reserves as the following chart shows.
Excess Reserves of Depository Institutions
Does that chart look like the Fed is in control? If so, control of what?
Excess Reserves Then and Now
The above “Mission Impossible” snip was written August 27, 2009. Excess reserves now look like this.
Printing More Money Likely to Cost Jobs
The Fed could print another $trillion tomorrow and I highly doubt if it would do anything but cost jobs. Yes, that’s right “cost jobs”.
It would likely increase speculation in food and commodity futures, especially energy. It would drive down interest rates on CDs further robbing those on fixed income who would have less to spend.
If commodity prices rose but demand did not (which is what I expect would happen), it would add to cost pressures at businesses which in turn would likely fire workers.
The idea that the Fed can create jobs is ludicrous (the housing bubble and subsequent crash are proof enough) but that does not stop fools from preaching the message.
For more silly debates involving Krugman, please see Bernanke Calls Krugman “Reckless”; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space
Mike “Mish” Shedlock
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