Narayana Kocherlakota is the president of the Federal Reserve Bank of Minneapolis. He spoke on September 4 to a meeting of students at the University of Wisconsin at La Crosse.
His speech was summarized by the Wall Street Journal. It was not a dog bites man story. It was more along the lines of a dog bites man, but not nearly hard enough, story.
Dr. Kocherlakota is a Keynesian with a Ph.D. from the University of Chicago. He began, as all Keynesians do, with a description of the benefits of spending on consumer goods — it provides employment — compared to spending on producer goods, which for some reason (the Keynesians never explain why) does not provide employment. He described the Federal Open Market Committee, whose task is to decide whether to create money out of nothing (“stimulate”), or evaporate money back into nothing (“exit”), or create less money than before out of nothing (“taper”).
The FOMC acts to achieve its two mandates—maximum employment and price stability—by influencing interest rates through the purchase and sale of financial assets. When interest rates rise, households and firms tend to spend less and save more. The fall in spending puts downward pressure on both employment and prices. When interest rates fall, households and firms tend to spend more and save less. This puts upward pressure on employment and prices.
The phrase “fall in spending” does not mean fall in spending. It means “fall in spending on retail goods and a simultaneous increase in spending on production goods,” but I have never heard any Keynesian say this in 50 years, and I have been waiting. They do not say this, because this is the sort of thing that Austrian School economists say, and we all know what Keynesians think about Austrian School economics.
With this as background, he went on to say that the FOMC is not counterfeiting money fast enough. He did mot say “counterfeiting.” Keynesians never do. Neither do Chicago School economists. He said “stimulating.”
Is the FOMC’s policy stance providing an appropriate amount of stimulus to the economy? To answer this question, we have to compare the economy’s performance relative to the FOMC’s goals of price stability and maximum employment. In July, the unemployment rate was 7.4 percent—much higher than the FOMC’s current assessment of the longer-run normal unemployment rate, which is between 5.2 percent and 6 percent. At the same time, personal consumption expenditure inflation—including food and energy—is running well below the Fed’s target of 2 percent.
But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the future evolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy.
This statement was Big News. It was such Big News that the Wall Street Journal ran a story on it.
Why? Because when a regional Federal Reserve Bank president says the obvious is Big News, it means that he is opposed to tapering. It means that he thinks the counterfeiting of a trillion dollars of digital money a year is for wimps.
What should the rate of counterfeiting be? He did not say. They never say. Their lips are sealed. This is what is known at the Federal Reserve as transparency.
Opaqueness is when an official says something incoherent, which everyone in the media knows is incoherent, and they dutifully report as meaningful.
A FED official never stonewalls. That might lead to a more detailed investigation.
Think of all this in terms of auditing the FED to find out who owns the gold that is officially owned by the U.S. government. The FED insists on transparency: sealed vaults, not sealed lips. It invokes opaqueness: the need for secrecy. It does not stonewall.
It looks like stonewalling. But, officially, the FED does not stonewall. It just maintains its official position as an independent agency. Not independent like the NSA and the CIA, which are supported by secret budgets. Not at all. The FED is not supported by a secret budget. It is supported by interest generated by its ownership of government IOUs that were bought with counterfeit money. It then turns over to the Treasury any money in excess of its operational expenses.
How much does it spend on operations? Whatever it reports. Who audits this? A private firm hired by the FED. Does the government get to verify this? No. Why not? Because the FED is independent.
Is this transparent? The FED says so.
Does Congress accept this explanation? Of course. Just as it accepts the word of the NSA and the CIA when they say that they never, ever spy on citizens. Especially members of Congress, if you get my drift.