Grasping Reality by Brad DeLong

Could the Council on Foreign Relations please, please, please get someone to head up its international economics program who knows how many governors and bank presidents the Federal Reserve has?

And someone who is not a crank?

And who is now claiming that the U.S. is on the verge of a Latin American-style inflationary recession crisis?

Is that too much to ask?

I am begging here.

Alan Blinder, Marty Feldstein, Jacob Frenkel, I am talking to you: get some real economists onto the staff of the CFR. This is not doing anybody any good at all.

This week, Benn Steil of the Council on Foreign Relations predicts that 2010 will see (a) rapidly-rising inflationary pressures, (b) a spike in U.S. Treasury interest rates, and (c) a double-dip recession:

December 28, 2009: In 2008... the Bush administration decided against proposals to sweep out the bad debts from the banking system.... We will pay the price for this decision in 2010.... [T]he Obama administration and the Federal Reserve are plowing forward with Plan B: Nationalize credit creation and "stimulate" the private sector by spending in its stead. Richard Nixon's famous line, "We're all Keynesians now" never seemed more apropos. With the budget deficit at an eye-popping $1.4 trillion, and on track to stay above $1 trillion indefinitely, Berkeley economist Brad DeLong writes breezily in his Nov. 30 blog that "anything that boosts the government's deficit over the next two years passes the benefit-cost test—anything at all." On the monetary side, the fireworks have been even more spectacular... the Fed has flooded the globe with newly conjured dollars in an unprecedented no-holds-barred effort to prod private credit expansion. Watching the booms in the markets... one might be forgiven for concluding that the Fed had succeeded well beyond its expectations, and that the market's flight to safety had given way to a flight to Vegas.... [T]he massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008.... [W]hat we're left with is the type of government-sponsored orgy of spending and money creation that Washington used to condemn with all-knowing righteousness when undertaken south of the border.... As we move into 2010, no doubt the horns will be blowing for the long-awaited U-shaped recovery. I suspect it won't be long before we realize we've drunk too much, and that the second dip of a W-shaped recession awaits us...

When you have a "government-sponsored orgy of spending and money creation" that is going to lead to a Latin American-style populist economic crash, you see it in advance: you see it in high and rising interest rates on long-term government bonds, and in a low and rapidly falling value of the currency to create the export surplus that is the obverse side of capital flight. We don't see any of that right now. But Benn Steil... doesn't see what we don't see.

Let me predict that if we see a double-dip recession in 2010, it won't be accompanied by rising inflationary pressures produced by over-stimulative fiscal and monetary policy.

It's not that Benn Steil's inability to see what is under his nose is any surprise. Ten minutes of hasty googling tells me that he has gone zero-for-five in predictions he has made over the past three years:

1) On October 30, 2007, Benn Steil argued that the Federal Reserve needed not to cut but to raise interest rates to avoid an imminent looming inflationary spiral:

October 30, 2007: The Federal Reserve’s dramatic 0.5 per cent interest rate cut on September 18 was greeted with euphoria in the stock market, which soared 5 per cent in the two weeks that followed. This fact itself was hailed as vindication for a Fed that felt Jim Cramer’s pain, and gave the world the cheaper dollars the market guru shrieked for in CNBC’s (and YouTube’s) most memorable “Mad Money” segment ever.... Nine smart folks at the Fed board have taken over the job of deciding what the price of money should be.... Jacques Rueff pointed out... people react to the “growing insolvency” of a reserve currency, such as the dollar, by acquiring “gold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity”. Sounds familiar? Indeed, this is the story of our present decade.... Between August 2001 and August 2007, the dollar price of gold soared 144 per cent, while the CPI rose only 17 per cent.... [F]rom 1971 to 1975 and from 1977 to 1980. In both, the increase in the price of gold and other commodities presaged substantial increases in CPI inflation as well as significant falls in the international value of the dollar.... [G]old banks have risen in tandem with the dollar’s decline and offer the world a viable private alternative that has permanent intrinsic value. As the Fed debates whether the world is truly crying out for even cheaper dollars, it would be wise to heed the lessons of monetary history.

If you wince at nothing else, wince at the fact that the Federal Reserve Board has seven members, and the FOMC has twelve (voting) members and nineteen (total) members--not nine.

2) On April 23, 2008, Benn Steil demonstrated that he could not read an exchange-rate graph:

April 23, 2008: As the dollar continues its relentless six-year slide against the euro and other main currencies...

Or perhaps he merely demonstrated that he simply had a vocabulary problem: not knowing what "relentless" means.

3) On August 18, 2008, Benn Steil thought that Federal Reserve policy was way too loose--extravagantly overinflationary--and so once again putting us on the verge of an upside inflationary breakout:

August 18, 2008: We'll All Pay For the Fed's Loose Money Follies: [O]ne of the great attractions of inflation targeting was that it only appeared to constrain central bankers' discretion. Other objectives which today's central bankers actually think are far more important--in particular, keeping growth of that great aggregate of aggregates, "gross domestic product," above 0%--can be safely pursued in place of price stability. This is because the inflation target is what's called a "medium-term objective." The Fed is actually free to slash its key interest rate from 5.25% to 2%, stuffing the world with dollars, even as inflation soars past 5.6% (a 17-year high), because the public's inflation expectations will supposedly remain "well anchored"...

4) On February 6, 2009, Benn Steil argued that Jacques Reuff had back in 1947 (without anybody noticing) demolished the foundations of Keynesian economics by proving that there was no such thing as idle cash balances in the economy--a claim that is either (a) completely incomprehensible, or (b) totally false, for the velocity of money is not a constant of nature:

february 6, 2009: [T]he words of Frédéric Bastiat from 1848, "The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen"--in other words, the long run. One of these good economists was... Frenchman Jacques Rueff, who in a 1947 journal article attacking The Fallacies of Lord Keynes's General Theory.... the Keynesian foundations... Rueff demolished.... When Mr Krugman buys his stimulus bonds, I am curious where the "idle" money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system? If it is not to come from a cash box, it is not idle...

5) And on May 15, 2009, Benn Steil argued something that I simply cannot make comprehensible, no matter how hard I try:

May 15, 2009: The Obama administration and Congress have justified the vast new government borrowing and spending by asserting that it constitutes "fiscal stimulus."... A demand for money, in Keynes' thinking, is the equivalent of a demand for nothingness.... But is this true? Does holding money really mean that part of the income required for the absorption of the production associated with it is permanently lost, which is what is required to create a permanent state of under-employment? No. This is most easily seen using the model of a commodity money system, such as one based on gold. When people demand more money, rather than consumer or investment goods, it increases the demand for labor to mine, move and monetize gold.... The argument for the case of money that isn't convertible into gold, such as our own, is analogous. The public sells securities, instead of gold, to the central bank in order to increase their cash holdings. Securities are the counterpart to valuable goods stored or sold on credit.... [T]here is no "ineffective demand": To demand money is to demand real wealth capable of being monetized within the framework of the existing monetary system...

Anyone who has even a hint of understanding as to what this claim that "The argument for the case of money that isn't convertible into gold, such as our own, is analogous..." could possibly mean in any possible world or model whatsoever, please email.