Forgotten Sadomonetarists

If you favor sound money, you’re a sadomonetarist, according to New York Times columnist Paul Krugman. The Nobel Prize winner says he doesn’t use the term “just to be colorful.” No, he uses the term “advisedly,” and defines it as “an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low.”

Krugman writes as if one favors low interest rates versus high ones in the same way a person supports high taxes versus low, or more government versus less. Interest rates are now government policy to be argued about and decided by government bureaucrats serving at the pleasure of politicians, instead of a reflection of the demand for funds versus the supply.

At what interest rate does a person’s support render him or her the Marquis de Sade?

The columnist says he’s happy that sadomonetarists have little influence at the Federal Reserve, “but they do constantly harass the Fed, demanding that it stop its efforts to boost employment.”

Krugman still buys into the dubious notion that low interest rates lead to more jobs, not to let the facts get in the way of his Keynesian theory.

In the Depression of 1920-‘21, prices of everything plunged. The Fed, only operating since 1914, was, as James Grant says, “not quite out of short pants.” In those days the central bank was run by bankers. When the crisis hit, Chairman William P.G. Harding, a banker from Alabama, and the other sadomonetarists on the board of governors, raised interest rates.

Relating this anecdote to an audience at the Mises Institute in Auburn, Alabama, Grant looked into the camera and wondered, tongue in cheek, “How did we ever recover, Dr. Krugman? I know you’re watching.”

The US economy did recover—powerfully, in fact, and in short order. Benjamin Anderson wrote in Economics and the Public Welfare: “In 1920-‘21, we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921, we started up again. By the spring of 1923, we had reached new highs in industrial production and we had labor shortages in many lines.”

Since then recessions have been lengthened into depressions by the meddling of the PhDs now running the Fed. Interest rates are not supposed to be government policy, but signals to the market. For now the signals are scrambled. Artificially low rates have engendered booms in asset prices and government dependence (food stamps), but not job creation.

The dichotomy between the real economy and financial markets in Europe is even more pronounced. In today’s guest article, Dirk Steinhoff tells us what’s going on across the pond and how US trade policies, exchange rates, and what Janet Yellen does impacts Europe, its economy, and its investment prospects.

Enjoy.

Doug French, Contributing Editor