By George P. Brockway, originally published September 12, 1994
WHEN ALAN BLINDER, the new vice-chairman of the Federal Reserve Board, happened to suggest last month that the rate of unemployment was a legitimate concern of public policy, the financial press typically tried to discover a personality clash between him and Chairman Alan Greenspan. Blinder insisted that there was no personality or policy clash. That’s a pity, because Greenspan’s policy has only weak and tangled connections with either experience or theory.
Over a year ago (see “The Reserve Takes Flight Once Again,” NL, August 9-23, 1993) he abandoned his prevailing theory and promised a new one. Since then what we have been given are at least four unoriginal theories that seem to lack any special relationship – except that they are all current notions of the Federal Reserve Board, and that each is to be implemented by fiddling with the interest rate. Maximizing four unrelated programs by a single action might be thought an improbable long shot, if anyone took them seriously.
The oldest of the four is the monetarist scheme of setting a target for the growth of the money supply. Milton Friedman held that the target should be 3 to 5 per cent, and that it did not matter how you measured the supply so long as you were consistent. Greenspan denigrated the concept last year, but went ahead anyhow and set a target for M2 between 1 and 5 per cent. Since M2 is currently growing at the low rate of 0.6 per cent, disciples of Friedman should be worrying about deflation rather than inflation.
The second program calls for a “neutral” rate of interest, which is apparently a rate that will neither heat up the economy nor cool it off. Sometimes the objective is said to be a soft landing. In other times and other metaphors, this was called “fine-tuning.” It has for many years been ridiculed, especially when suspected of being advocated by liberals.
During the summer a TV interviewer tried to get Wayne Angell – until recently a governor of the Reserve, and now an officer of a brokerage house – to say how the Board would know what to do in order to be “monetary neutral.” Were there “indicators” that reliably pointed to increasing or decreasing the rates? “No,” Angell answered. “It’s something you can’t precisely do. It’s a matter of the ‘best guess’ opinion.” He added that it would be a clever idea for the Reserve to overshoot the mark and then bring the rate back down. “That way,” he enthused, “the bond market would really take off!”
For a while after the interview there was talk of investigating the possibility that Angell was leaking information from a crony at the Reserve. My fear is that he was delivering one of the Board’s famous messages, and that the nonsense he divulged will be next month’s official policy. Is what’s good for the bond market necessarily good for America?
The third program we hear a lot about concerns the “real” interest rate – determining what the rate would be if there were no inflation, and allowing banks to compensate accordingly. This, it appears, is a particular pet of Chairman Greenspan’s. As I have said before, adding an inflation premium to the “real” rate amounts to giving lenders a Banker’s COLA that is ipso facto inflationary and already costs the economy upwards of $500 billion a year.
The claim is that bankers must have this COLA or they won’t lend, and the economy will stall for lack of investment. But the supposed shortage of funds to invest is nonsense. The securities markets are awash in money. Why else do they have to invent $41 trillion in “derivatives” in order to have enough stuff to sell to meet the demand?
The fourth and most obvious scheme is analogous to the bombing strategy pursued a quarter century ago under the code name “Rolling Thunder,“ whereby, as Tom Lehrer put it, we “practiced escalation on the Vietnamese.” That is to say, we would bomb a little bit; if they didn’t give up, we would bomb a little bit more; if they still wouldn’t give up, we would go after them again, and again, and again, escalating the attacks so they could see we were serious.
In the same way, the Federal Reserve Board is now engaged in bombing the economy bit by bit in order to send the message that it is serious about inflation. Considering that the message has to be repeated until everyone gets it, I think it a shame that the information highway is not yet in operation. Couldn’t the idea be passed around by e-mail?
In any case, these disparate programs are to be brought to coincidental fruition through the buying and selling of Treasury securities by the Federal Open Market Committee. That is not a coherent policy; it is a four-ring circus of guessing games.
Besides the performances in the main tent, Greenspan has two sideshows. The first, learned years ago from Ayn Rand, is based on the extraordinary notion that speculators in gold are infallible judges of the imminence of inflation. So he keeps his eye out for any increase in the price of gold.
The second, which is brand new, relies on the fact that years with low inflation tend to post high productivity gains, and vice versa. There are said to be some glitches here, and two staff economists have been detailed to fix them. My bet is that they won’t be able to fix them in a way that will give their boss another excuse to raise interest rates, because while years of low inflation are years of high productivity, they are also years of low interest rates.
In 1964, for example, productivity gained 4.3 per cent (its highest record since World War II), while the Consumer Price Index advanced only 1.3 per cent (one of its lowest), and the Federal funds rate was 3.5 per cent (also among the lowest). Ten years later, productivity fell 2.1 per cent (its worst performance), the CPI hit 11.0per cent (its third worst), and the Federal funds rate was 10.5 per cent (its fifth worst). A high interest rate is evidently a guarantee of decreased productivity. As I’ve said before, I don’t subscribe to standard productivity theory, but I do think it only fair that those who live by it should die by it.
Raising the interest rate has an inflationary effect because interest is a universal and inescapable cost of doing business. It is also a universal and inescapable cost of living. It is an explicit cost when you borrow money to run your business or buy your new car; it is an implicit or “opportunity” cost when you use money you have instead of lending it to someone else and earning interest yourself.
People think of the inflation of the ’70s and early’ 80s as having been caused by OPEC price-fixing, but interest then (and always) was a far greater cost to the economy than oil. The Federal Reserve Board, foreseeing inflation (then as now), rushed to head it off (then as now) and raised interest rates. As a consequence, instead of an oil-driven inflation, we got an oil-and-interest-driven inflation, and the prime rate reached 21.5 per cent before it all ended in a recession that the Reserve deliberately sought.
Interest rates must be raised again and again, because with every hike, prices rise to cover costs. The Federal Reserve Board then has actual rather than feared inflation to deal with, and so up go the rates once more. The only end to this game is recession. Just as in Vietnam we destroyed a village in order to save it, so the Federal Reserve is willing to destroy the price system in order to save it.
THE PRICE SYSTEM is far from monolithic. If it were, all prices commodities, wages, interest, taxes, the lot-would go up in lockstep, and no one would be much hurt. The part of the system that the Reserve worries about is a numerically small part of the economy-essentially banks, securities exchanges, and the investors (mostly functionless investors) who exploit them. This part of the economy produces no wealth itself but makes fortunes arranging and rearranging the wealth produced by others. We may call it the Speculating Economy. It is the price system of the Speculating Economy that the Reserve acts to protect.
Now, it is no secret that the cost of labor is several times the cost of interest. Therefore when wages (including multimillion-dollar executive salaries) go up, we might have a wage-price spiral instead of an interest-price leapfrog. But no wage-price spiral has ever spun into recession (except, as in Weimar Germany, when prices and wages are indexed and the nation has massive debts denominated in foreign currencies), whereas every interest-price leapfrog, if not abandoned by the monetary authority, ends in recession.
It is common knowledge, and freely reported by the press, that the Reserve practiced escalatio on the economy this past spring and summer. It really wanted to hurt the housing market, because it wanted to hurt the construction industry, because it wanted employment reduced and wage scales constrained, because it wanted to send a message that it was serious about inflation.
If you are not profoundly shocked by that last sentence, please read it again. It shows the depths of savagery below which we have fallen. I say “below” because even savages tend to share with their fellows in lean times; and those who seek to unload their troubles on a scapegoat usually try to choose one arguably blameworthy. Our behavior is not so civilized. In lean times we become mean, and we boast of it.
Since we are all members one of another, since what we do unto others we do to ourselves, the most important of the costs of production is labor. More people are primarily involved in labor than in any other cost, and more people are arbitrarily excluded.
The arbitrary exclusion is an official act of the Federal Reserve Board, an arm of the United States government, which raises the interest rate with the express intent of restricting the employment of labor and preventing increases in the wage scale. This intent has been formed and announced despite the fact that millions of our fellow citizens are living lives of desperation that is not always quiet. The message they receive is that the society has small concern and less respect for them.
The members of the Federal Reserve Board who have raised the interest rate, and the economists and speculators who have applauded their action, may protest that they intended no such message. But the message certainly has been received, and it certainly is as clear as the message that the Federal Reserve Board is serious about inflation.
It is a mark of strength of the American tradition that in relation to their numbers so few of the rejected have lost respect for themselves, developed what the late Erik Erikson described as a negative identity, and lashed out against the society that rejects them. Some at the bottom, though, are already lashing out. They impose such severe moral, emotional and fiscal costs on society (and on themselves) that one must wonder whether the policy of rejection may not be as imprudent as it is unjust.
The New Leader
 Ed: On the one hand, knowing the author, I’m quite surprised he was aware of the term in 1994. On the other, if he were writing more recently he’d suggest we tweet the info. Plus ça change….