Sunday, December 7, 2014

Cato Institute Economist Calls for Federal Reserve Money Manipulation

A new serious break with non-interventionist, laissez faire economics has occurred at the Cato Institute.

 At the Cato online forum, George Selgin, a senior fellow and the director of the Center for Monetary and Financial Alternatives at the Cato Institute, speaks in support of a type of Federal Reserve manipulation of the money supply. He writes:
Limited space prevents me from either rehearsing the arguments or reviewing the evidence favoring monetary rules over discretion, or from considering the many forms such rules might take, from simple base growth-rate rules to sophisticated ones, such as the Taylor Rule, allowing feedback from various policy targets. I must instead settle for adding my voice to those of Scott Sumner, David Beckworth, and other “market monetarists,” by opining that an ideal rule should seek, not to stabilize either output or inflation per se, or some weighted average of both, but to stabilize some measure of total spending such as the growth rate of nominal GDP or domestic final demand.
This flies completely in the face of Austrian School Business Cycle Theory, which considers any money manipulations of a central bank as causing distortions to the economy.

A senior Cato official willing to advocate money manipulation in an attempt to "stabilize nominal GDP"  reveals a lack of understanding of basic economics on many levels.  Not only does such advocacy ignore the distortions of the economy caused by any money printing, it fails to recognize the sloppiness of GDP as a measure of the nature and quality of economic activity (especially given that government spending is considered a part of GDP) and it fails to comprehend the entrepreneurial nature of economic growth and therefore its lack of predictability.

Selgin goes on to suggest that in the future a "monetary rule" Bitdollar could be at the core of money manipulations. That is, he wants to eliminate the central banker and replace it with a new algorithmic manipulation of money supply:
 One development especially, and a very recent one at that, seems to me to hold out the best prospect yet for rendering central bankers obsolete. That development, you’ve probably guessed, is Bitcoin.

Bitcoin itself, I hasten to say, has a long way to go before it can qualify as a serious rival to, let alone a replacement for, the U.S. dollar. But it isn’t Bitcoin itself that I regard as a means for dispensing with the Fed and other central banks. It’s the program that controls the supply of Bitcoins — and controls it in such a way as to practically rule out any tampering with that supply.

The actual Bitcoin program or “protocol” provides for a steady but gradually diminishing output of Bitcoins that will level off as their total quantity approaches 21 million (we are, as of this writing, still shy of the half-way mark). Since this means that the Bitcoin stock will itself one day be “frozen,” this particular protocol, were it used to regulate the supply of base dollars, wouldn’t accomplish anything that simply disbanding the FOMC or shutting down the New York Fed’s open-market desk wouldn’t accomplish.

But one could also design a “Bitdollar” protocol that, while resembling the actual Bitcoin protocol in being tamper-proof, allows, not merely for perpetual growth of the bitdollar base, but for growth that automatically responds to changes in, say, the volume of bitdollar payments. One could, in other words, have a “smart” yet tamper-proof base-money management algorithm — smart enough, for example, to automatically implement an NGDP rule, or something close to it. Such an automatic system, if only politicians would implement it, offers the best hope yet for monetary stability and, hence, for having a monetary arrangement that contributes to economic growth instead of hampering it.
Note well: Central banking isn't being eliminated here, as Selgin suggests, it is merely being replaced by robotic central banking. The "End the Fed" movement is not about replacing the Fed with a robot that manipulates the money supply, it is about halting money manipulations of any sort and returning to a free market in money (which would most likely result in a gold currency).

What we have here, in Selgin's commentary, is a very good example of how the institute has been captured by the D.C. crowd, which results in the institute spewing dressed-up interventionist  policies.


  1. Cato...that bastion of freedom...lulz

    It's almost comical. I think we should start referring to think tanks as either "statist" or not before going on to describe them more.

    The list for "not" should be laughably short and make it easier for those interested in freedom to track organizations that consistently do good work.

  2. Another idiotic 'pipe-dream' anyway. The Fed is going no where and they certainly is not going to give up the reason they are in existence to maintain the establishment kleptocracy. All this bonehead sophistry of Selgin only adds is more confusion of doing anything, let alone the right thing and getting rid of the Fed entirely and retuning to a non-centrally controlled 'free banking' system backed by specie.

    Bitcoin, again, is nothing but a halogram and can never be trusted to exist only as some spurious 'electronic' currency with no value whatsoever except for whatever you can buy with the bitcoins fast enough as you can get rid of them before the music stops. Because the last one holding bicoins, or fiat money for that matter, is going to get the royal 'screw job' and will only further entrench the existence of a monetary system in centrally controlled statist hands.

  3. How Andrew Jackson Killed the Second Bank of the United States

  4. Very Fisher-esq.

    The one thing Bitcoin technology could be used for is, by a private issuer, to represent real physical gold held on deposit, thereby eliminating fractional reserve banking without the use of a coercive state.

  5. The irony of this is that Selgin represented Frederick (pretense of knowledge) Hayek, in the Heyak vs Keynes debate, against Lord Skidelsky.