Friday, March 4, 2011

Senior Fed Economist Calls Ron Paul a Pinhead

David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis, makes one of the most ludicrous arguments against Ron Paul's attack on the Fed that one could make. I mean even for a Fed apologist, it is off the wall.

He attacks this paragraph in Ron Paul's book End the Fed:
One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy.
What are the details of the attack?

He starts out this way:
The guy can be a real pinhead at times. And this is never so evident as in his persistent “attacks” against the Fed...Now, of course, I work at the Fed, so maybe you think I’m just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed
So what is at the heart of Andolfatto's defense of the Fed destroying 95% of the value of the dollar and calling Ron Paul's argument stupid?  Here it is:
There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).
That's it, the beginning and end of Andolfatto's Fed defense of destroying 95% of the value of the dollar. It all works out in the end, says Andolfatto. But, please, Mr. Andolfatto explain to me how this works out for someone who has been a careful saver of his money and now sees the purchasing power of that money destroyed? Please explain to me how this works out for a retired person on a fixed income who sees the declining purchasing power of that income? Please explain to me how this works out for the rest of the country when Wall Street bankers are the first to get their hands on newly printed Fed money, so that they can bid up all kinds of prices, including rents on apartments, which makes it difficult for anyone but a Wall Streeter to afford to live in Manhattan?

These damages, Mr. Andolfatto, you somehow don't see and even think Ron Paul is stupid and a pinhead for raising questions about them. I would say you are suffering from what I have seen a lot in those working for the government: delusion. Phil Swagel, who was the chief economic advisor to Treasury Secretary Hank Paulson, told me that he didn't even know there was any major decline in  money supply growth during the summer of 2008. To not watch money supply growth when you are the Deputy Treasury Secretary for economic affairs is simply bizzare to me.

That you can't see how a destruction of 95% of the value of the dollar might hurt some people, falls right into that category. You guys really suffer from what Brad DeLong has admitted he has suffered from. It is what he calls, Greenspanism, the absurd belief that whatever the Fed does is right, even if logic suggests the exact opposite.

But, hey, if you think the destruction of a currency is no biggie, here's a job tip for you, call Robert Mugabe in Zimbabwe. He really thinks the same way you do.


  1. From May 17, 2010:

    "Let me come clean: I basically share the man's distrust of heavy concentrations of power. And I think that secular stability in the general level of nominal prices is probably a good idea too. Thus, it appears that we share a number of beliefs. So why does the guy make my eyes roll whenever I hear him speak?

    His problem, in a nutshell, is this: He ascribes too much power to the Fed. The power in the U.S. resides in Congress. It is Congress that spends, taxes, and issues treasury debt. Traditionally, the Fed simply determined the composition of government debt between its interest-bearing (debt) and non-interest-bearing (money) components. What sort of power is this? (Especially in relation to the power of Congress)."

    RP tore apart this argument the other day in front of Bernanke when he pointed out that it is the Fed's willingness to keep borrowing costs artificially low that facilitates Congressional profligacy. At least with respect to Congress, there is some degree of transparency.

    Perhaps if the Fed were willing to open its books, we kooky Fedbashers would stop ascribing so much power to it.

  2. I don't know of any 100 year olds making over $20 an hour, do you?

  3. I love how keynesians always justify their lunacies, like the neutrality of money, with the "everybody thinks like me or is a nut" argument.

  4. The other day a caller on the Peter Schiff Show pointed out the minimum wage was a $1.25/$1.50 in 1960 which was a about an ounce of silver (when our money was loosely backed by precious metals). So would worker today rather make an ounce of silver or 7/8 FRNs per hour? End the Fed!

  5. Don't forget, all this inflation forces us to become part of the investor class just to tread water (sure great for Wall Streeters again). And then, if we're lucky enough to cause our savings to "grow" on par with inflation, we then earn the privilege of having to pay taxes on that so-called "gain" you "received" of merely maintaining the purchasing power of your savings. Thus, if you invested a $1 in 1913 and it were worth $20, the IRS would consider $19 as taxable income.

    Oh, and what about 98 years of gains in production efficiency that money neutrality absolutely ignores? Perhaps if the same 1913 technology (mule, steam engine, manual labor, slide rule) were used today that $1 item might justifiably cost $20, but once you factor in the monumental gains in efficiency over the past century, that item should cost considerably less than the $20. In other words, if there weren't Fed induced inflation, because of the productivity gains, that $1 item might only cost $.05 now.

  6. Here's a question for this clown, since money is neutral, why inflate anyways?

    There must be some reason to go through the effort. The Fed could save a lot of paper by keeping the money level constant. WHY DOES THE FED HATE TREES SO MUCH????

  7. The only way fed apologists will ever see the light about their fiat currency crack will be from a jail cell after a long, long, long sentence.

  8. Academic people tend to think anyone who disagrees with them must be stupid or ignorant. Why? If Ron Paul is right then their careers have been in vain.
    It has happened before. Peter Mitchell was a chemist who "showed up" the most famous biochemist of the day, Albert Lehninger. Naturally many considered Mitchell a kook until he received the Nobel Prize for his work. Unlike Andolfatto, an academic nobody, Lehninger already had a distinguished career. He came around and confirmed Mitchell's work, acting like a true scientist.

  9. If there is such a thing as monetary neutrality, why bother with all the inflation? As the article points out, when the Fed inflates the money supply, certain special interests (the Federal Government, contractors, arms merchants, Wall Street, banks) get a hold of the money before most people and therefore have the opportunity to spend it before it depreciates. Monetary inflation punishes savers and creditors and rewards the profligate and indebted. And what is the most profligate and indebted entity in the universe? If you answered the Federal Government, go to the head of the class.

  10. There's another thing that is never taken into consideration in these arguments. Okay, let's just say for the sake of argument that $5 an hour in 1913 IS equivalent to $20 an hour today. But if I were making the 1913 wage of $10000 a year, how much would the government take of it, thanks to our progressive income tax compared to the $40000 I'd be making today? If you're making $5 an hour how much do you get to spend (take home) compared to making $20 an hour?

  11. What people never comment about is the fact that when we used to make $1.25 an hour our tax bracket was about 5 percent. the real reason for inflation is now that same purchasing amount is taxed a 30 percent. Who wins???who loses??? It is never in the governments best interest to curb inflation.

  12. Here is another question: If money is purely neutral, as the Real Pinhead tells us, then why do we use it at all? Money permits exchanges to occur that would not happen at all under a system of barter, so it is not a neutral good.

    However, there is no overall benefit created when the government expands the amount of money in circulation. Instead, it creates conditions of real wealth transfers from savers to borrowers, and there is no bigger borrower in the world than the U.S. Government.

    If a Fed official cannot see this, then he really is a pinhead.

  13. Let's not forget that the Federal Reserve CAUSED the Great Depression. But no matter-- that was blamed on the "failure of capitalism," and was "solved" by the New Deal power-grab.
    Are you seeing a PATTERN here?

  14. Especially, because (monetary) inflation occurs in a world with a time element, it doesn't just hurt savers at the expense of spenders. It hurts the worst, those who saved before the inflation and use the savings afterwards (i.e. investers and pensioners), and most rewards those who spend before the inflation, and pay it back afterwards (e.g. loan consumers and our biggest loan consumer, the US Government.

    It's the time dependency that most turns the screws, and enhances money's can't-do-it-with-barter quality.

  15. Read this... you might learn something or at least be able to ask a few of the right questions (after reading and pondering a little).

    Then you might ask if the author of the Black Swan (referring to the popular economics book and not a pirate adventure novel or a film) was really someone who really believed in the Lucas critique...

    After that maybe you can move on to some SDGE modelling if interested.

  16. Great insight and comments by all! The banksters are obviously VERY afraid of having their belief system seriously challenged.

    Now, if only Krugman would (was allowed?) to debate Murphy....

  17. 1. Not everyone gets newly created money at the same time. Politically connected get it before prices have risen, therefore they benefit by acquiring goods "under" market price.

    2. I make cars, you make apples. That is what we bring as net wealth in our country. Fed prints money out of nothing and lends it to the Government. Once we are taxed their we return back money that was created out of the air PLUS interest that was real. That interest takes our cars and apples. This is a plain fraud IMHO.

    3. In order to increase wealth of the nation one needs investment in production tools. Therefore one needs capital formation. Therefore one needs savings. FED "money neutrality" policy discourages savings and stimulates spending.

    sapienti sat.

  18. this criticism of "Ron Paul" is absolutely correct. The question of fixed-incomes is relevant and must be answered by the interested parties as they stake their investment position. life is about choices, and grownups who make informed decisions.

    that wall streeters get 1st dibs on new money is a political question, not an economic issue. the mere economic, fact that prices overall are 100 times higher is NEUTRAL. knock a few zero's off and start again. Inflation is the fairest, best tax out there- its is indeed NEUTRAL, formless, paperless, makes no requirements on anyone, and attaches dollar-for-dollar to the object. it is silent, passive, and voluntary. and its is a question of politics, who actually gets what. so what else is new?

  19. @john, who believes "Inflation is the fairest, best tax out there"

    Not only, (a) is new money distributed to some before others, providing the former with price advantage, but (b) inflation rewards debtors at the expense of creditors, and (c) inflation rewards the most financially sophisticated among us (who can take measures to avoid it) at the expense of those on fixed incomes and/or lacking financial expertise or access to it.

    So inflation is a "fair" tax only if one believes that a regressive tax targeted on savers and applied across the economy unequally is "fair".

  20. This guy is just as arrogant as the Richmond Fed economist who said bloggers are stupid and you have to have a PhD in economics to talk about economy.

    I found this snooty comment from his replies on his blog:

    "I just performed a Google search of your name and contributions to monetary theory. I came up empty. Perhaps you'd be kind enough to send me a sample of your work?"

  21. Forget about what you earn, what about the value of your savings?? You should be able to save wealth and pass it to your offspring, inflation makes this impossible, generational familial ties are destroyed.

  22. Savings is the key! I can save an ounce of gold and always have an ounce of gold. But if I save a dollar that dollar dissolves into nothingness.