Thursday, December 07, 2006

The Monetary Policy That Isn't

I like Donald L. Kohn, if I can judge him by this Dec. 1 speech at the International Research Forum on Monetary Policy in Washington.

For the second time, I am impressed with the humility expressed by members of the Federal Reserve. Now I'm really convinced this bureaucracy is trying to turn over a new communication leaf.

But are they turning over a new monetary-policy leaf as well? I don't think so.

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Kohn comes right out and says it:

"What are the basic sorts of uncertainty faced by central banks? In informal terms, we are uncertain about where the economy has been, where it is now, and where it is going."

How's that for honesty? Have they decided to try something different than Greenspan's intriguing Medicine-Man verbal smoke-and-mirrors?

Kohn goes on to tell us that in fact central bankers don't really have a true "Monetary Policy" per se, that they are not only uncertain about the economy, but they are also divided about how to achieve their stated goals of stable prices and employment.

Judging from Kohn's statements, the Fed has taken the present confused state of macroeconomic theory for permission to go into the candy store of conflicting research models and pick-and-choose among them to justify doing what they want, when they want.

These admissions of uncertainty and unstable policy decision-making are refreshing and this new leaf is a more honest one; but this honesty don't reassure us, the public, that central bankers have changed their policy of fickle monetary intervention. Economic policy uncertainty is a good reason for central banks to get out of the money-creation business and get into the money standardization business where they belong; however, central bankers are far from agreeing with me. After all, they'd lose the prestigious part of their job, wouldn't they?

I think an unfettered money market would determine with great precision the amount of money in circulation, when and if monetary policy could confine itself to creating a sound banking environment and a pivotal monetary standard. Stated another way, my confidence in the money-creating capacity of the market is based on TWO CAVEATS. The market will not make a penny more than is dictated by production, assuming there are strictly enforced ((1) banking credit-creation parameters, and (2) currency standardization.

Banking honesty through transparency and wise lending policy are essential, this goes without saying; but standardization of the monetary unit is also essential. Our money should correspond to some kind of asset of stable value, such as gold -- and I hasten to add that gold prices may be wild and speculative now, but as an asset, gold's true and underlying value throughout history has been just about the most stable the world has ever known. (For beginners, keep in mind that the dollar "price" of gold and its true "value" are two different things in these times of fiat, speculative currencies, i.e. unstandardized currencies. See my earliest posts between March 12 and 15, 2005, for an explanation of these differences.)

In order to function properly and to avoid distortions in macroeconomic fluctuations, money must be a unit worth something of relatively constant value. The rest -- including the role of central bankers and their "Monetary Policy" (or lack of same) -- is just froth on the cappuccino.

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