Loose money no way out
By W. James Antle III
Before the Federal Reserve acted last week to cut interest rates, it was listed among the culprits behind the slowing economy. Even on the right, the likes of Jack Kemp, Lawrence Kudlow, James Glassman and voices from the Wall Street Journal op-ed page were chiding Alan Greenspan and company for "tight money" strangling the economy.
"Tight money" may be blamed for the cooling off as plausibly as George W. Bush can be said to have "talked down" an otherwise sound economy. In fact, since the mid-1990s money and credit have been growing at a feverish clip, as measured by M2 and M3. With each hiccup in the conventionally accepted economic models, particularly during 1999's Asian contraction, more liquidity and growth has been added to the money supply. Throughout the Clinton years, easy credit has been portrayed as the path to prosperity. Remember: The entire case for the Clinton tax increase somehow perversely being able to stimulate growth rests on the assumption that it closed the budget deficits, lowered interest rates and boosted consumer spending and investment through the greater availability of credit.
On the contrary, rapid disinflation acted in much the same way as a tax cut for accelerated depreciation and offset the Clinton tax hike, which never actually was able to generate enough revenue from upper-income taxpayers to balance the budget. Economic growth was finally able to increase revenues enough to generate the current surplus projections. Greenspan and some able Clinton Treasury secretaries, such as Lloyd Bentsen and Robert Rubin, did generally promote a strong dollar to the benefit of the US economy. But none of them ever really understood how spurts of excessive monetary growth and lax credit were not creating real wealth, but were instead distorting the economy.
This is because the economy did generally enjoy price stability, especially as measured by the Consumer Price Index (the value of which can be debated, though it is worth noting if for no other reason than it is commonly cited). This is because most of this excess fiat money found its way into asset prices rather than prices for consumer goods and services. This has triggered a speculative boom that exaggerated many stock prices, something that is now being corrected for.
What is so "excessive" about excessive money and credit? First, it distorts the market prices that inform business decision-making, causing them to make incorrect decisions on the basis of government manipulation rather than market realities. Second, it causes banks to loan absurd amounts of money to businesses that aren't going to make money. The result is vast amounts of savings being wasted on that which is unprofitable, and a Keynesian reliance on consumer spending rather than the creation of real wealth. Hence, we have the highest debt to GDP ratio in history, amidst a massive build-up of personal debt under the reign of those who volubly criticized the national public debt during the Reagan years.
In other words, money can be loaned to all kinds of dot.com companies, causing them to expand and inflating their stock prices. But simply printing more money doesn't make these businesses profitable. Money is a means of exchange, not wealth itself. You can't eat money.
Only loose money and credit can create an economic environment in which businesses with absolutely no profit can see their stock prices soar to unprecedented levels. But that can't last forever. And when investors realize the dot.com emperor, in some cases at least, has no clothes, the boom ends. Unfortunately, it does not end before a whole lot of bad investments were made and a whole lot of capital and labor resources were misallocated.
Supply-siders are correct to recommend tax cuts, especially reductions in marginal rates, and deregulation to promote economic growth. These policies are our best hope of averting a recession in the short term and the best way to encourage innovation, production and wealth creation in the long term. But they are foolish to advise us to inflate our way out of an economic slowdown. Monetary expansion, even in the absence of rising consumer prices, will only prolong the bad investments now being washed out of our economy. As Ronald Reagan once said of big government, easy money is the problem rather than the solution.
America cannot inflate its way to prosperity anymore than the vaunted Asian powerhouses could. The bad investments such policies encourage will and have come home to roost. We can however alleviate the tax and regulatory burden on productive Americans, thus enabling the free market that is truly our engine of prosperity. Nobody is smart enough to accurately manage a $10 trillion economy for a population of 280 million people. Not even Alan Greenspan.
W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. You can e-mail comments to email@example.com.
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