With the failure of the Federal Reserve to raise interest rates at yesterday's monetary policy meeting, certain so-called Austrians are out cheering that they have been proven correct in their view that the Fed will not raise rates and that the economy is in in terrible shape and that a new round of quantitative easing is just around the corner.
There is so much economic confusion in this view that I am a bit embarrassed to associate it in anyway with very sound Austrian school economics, but yes, there are those out there, who claim they are Austrians, that claim the Fed is never going to raise rates, with the fall back position that: "Well, they might raise rates once but then quickly reverse and launch a new round of QE."
Let me begin by stating clearly that nowhere in Austrian economic theory does it say that starting in late 2008 the Fed would never raise rates again.
Nowhere in Austrian school business cycle theory does it state that the business cycle is actually not a cycle but a permanent bust phase.
These are absolutely absurd beliefs.
To be sure, the Federal Reserve money manipulations do create business cycles. The boom phase is a manipulated boom phase, but it is a boom phase.
Further, to hold the view that the Fed is "out of bullets," and we will never again see full employment, is equally absurd. It is defying the basic laws of supply and demand. Markets clear. including jobs markets. To claim it is otherwise, because of Fed activities, is a failure to understand basic economics.
There is a period, when the economy shifts after a boom phase, when there is transitional unemployment, but that would be quickly resolved in a free market. To the degree there is unemployment beyond that has nothing to do with the Federal Reserve being "out of bullets." It is about, among other things, unemployment insurance, welfare payments and minimum wage laws. None, I repeat, none of this has anything to do with the Fed. To think in terms of a "macro failure " , is to think in Keynesian terms, not Austrian. The great Austrian economist Murray Rothbard knew full well such failures were not caused by Federal Reserve events.
Rothbard made this clear in his important book, America's Great Depression:
Only if there is no interference, direct or threatened, with prices, wage rates, business liquidation will the necessary adjustment proceed with smooth dispatch.Further, to think that the Fed can keep rates extremely low forever while pumping trillions of dollars into the system is more absurdity. The Fed has pumped an enormous amount of money into the system and for various reasons that I have discussed in the EPJ Daily Alert it has not translated, yet, into significant price inflation.
I am now forecasting in the ALERT that this is likely to change soon. With higher price inflation rates, there is no way the Fed is going to keep the top range of the Fed funds rate at 0.25%. The inflation rate, as measured by government statistics, will first climb to 3%, then 5%. There is no way the Fed is going to keep the rates at only the top of the current 0.25% target range, under these conditions. They will raise the target,
It should also be noted that the so-called Austrians talk as if the Fed hasn't raised rates at all since 2009, when in fact we have seen a significant increase in rates.
When the Fed does announce an increase in rates, they are going to be announcing a change in the "target range," but rates have been climbing since 2004 within the current target range, so it is even a myth now that the Fed hasn't raised rates.
The so-called Austrians have also bought into the Bernanke hustle known as Quantitative Easing.
QE is just another way of adding money into the system. As any first year econ student can tell you, there are three ways the Fed can control the money supply, via the reserve requirement, the discount rate and open market operations. In the case of the open market operations, securities are purchased/sold to add/subtract funds from the system.
This is basic.
Paul Krugman even covers it in his text, Macroeconomics (pp 428-31)
QE is just a different kind of asset bought via open market operations. It really doesn't matter what asset is bought by the Fed to conduct its operations.
In his 1983 book, The Mystery of Banking, Rothbard made this clear (italic in original)
From, the point of view of the money supply it doesn't make any difference what asset the Fed buys...Thus, anyone focused on QE, now, is just buying into Bernanke nonsense that some new magic monetary event was going on when it wasn't. It was plain old money printing, The assets bought were different than normal but that is becasue the Fed wanted to bailout the banksters from bad housing paper and mess around with the long end of the yield curve. But the Fed can goose the economy all day without ever doing a QE again. Watching QE is watching the radio, when the Super Bowl is on a big screen in the same room, And, when it comes to monetary policy, the big screen is the money supply itself, and that hasn't exactly been in decline since the Fed announced the end of QE in October 2014.
Bottom line: There is a lot of talk within so-called Austrian circles which is clueless when it comes to fundamental understanding of, and runs counter to, sound Austrian economics:
Among the points that are not supported by sound Austrian economic analysis are the views that:
- The Fed has "run out of bullets"
- The Fed will never raise target interest rate.
- That a minute 25 basis point increase in the Fed funds target rate is going, under current conditions, to crash the economy.
- That the Fed is causing current conditions that are not conducive to market clearing jobs.
- That another round of quantitative easing is by necessity just around the corner.
- That interest rates will never rise again.
- That the unemployment picture has not improved at all in the aftermath of the 2008 financial crisis.
This is not to say that the Federal Reserve has not created a very unstable structure that has many weak points, There are weak points all around, but it is absurd to make simple arguments such as "the Fed will never raise rates" when the economy is extremely complex and the argument ignores the very real possibility that price inflation could accelerate very rapidly and force the Fed to hike rates even when in some metaphysical sense it doesn't want to.
Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics