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 of 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.
- Banks are not capital impaired
- 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.
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 is 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.
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 (the 1%) is simply not sustainable. Something has to give somewhere, and it will, most likely in multiple places, at a very inopportune time.
Max Keiser reports that Professor Antal Fekete Supports Sandeep Jaitly, with Fekete stating “truth can be approximated only through debate and that at no point was GSI envisaged as a ‘thought police’“.
For a brilliant trashing of an article in The Atlantic against the gold standard, please see Pater Tenebrarum’s article The Atlantic Weighs In on the Gold Standard
Mike “Mish” Shedlock
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