Janet Yellen must feel like she’s herding cats. The Federal Reserve is keeping interest rates at zero, thinking the common man and woman will spend money or buy stocks. Dr. Yellen wants us all to get our risk on, continuing Dr. Bernanke’s instructions.
The central bank has quadrupled its balance sheet and can’t generate enough price inflation to make the monetary mandarins happy. (Some of us would say they haven’t looked hard enough.) The PhDs can’t figure it out. They’re getting no bang, for $4.5 trillion. All of those smart people armed with complicated models and the power of the printing press, and nothing’s happening except another Wall Street bubble. Yawn.
A couple of Fed employees toiling out in the hinterlands (St. Louis) think they have the answer. Economist Yi Wen and associate Maria A. Arias pop this question in their St. Louis Fed paper, “So why did the monetary base increase not cause a proportionate increase in either the general price level or (gross domestic product)?â€
Could it be that people sensibly cut back after the crash of 2008 and are doing the wise thing—saving money—no matter what perverse incentives the central bank puts in front of them? Yes, as a matter of fact, according to Wen and Arias: “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money.â€
It turns out the Fed heads should brush up on their praxeology… that being the study of human action, with the basic axiom, as Murray Rothbard explained, “that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals.â€
The problem is, as Rothbard points out, “Praxeology is the distinctive methodology of the Austrian school.†We can count the number of Austrian economists working at the Fed on, well, maybe no hands.
