I love reading the normally good blog posts on freebanking.org written by clever economists such as George Selgin and Kurt Schuler. However, the Facebook page of freebanking.org very often fails to live up to the same good standards as the blog. In fact most updates are what I consider to be internet-Austrian nonsense.
Here is the latest example:
“If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation.”
The freebanking facebook page is quoting an article by Lawrence J. Fedewa. I have never heard about him before, but his article is a pretty good example of the kind of “the-world-is-coming-to-an-end” nonsense, which is floating around in cyberspace mostly written by tin foil hat Austrians.
But let me address the quote above.
First of all there are no signs that the dollar in any way is loosing its reserve status. In fact the dollar is more popular than ever. Hence, since the onset of the crisis in 2008 we have seen a massive increase in dollar demand – in fact that was what caused the crisis.
Or just ask yourself what currency is about to replace the dollar as the reserve currency of the world? The euro? I think not? Or the yuan? Think again you silly people.
I am presently vacationing in Thailand and I am pretty sure that if I wanted to pay any local street vendor here with dollars they would be very happy to accept it. But would they accept euros? Probably – there is a lot of German tourists in the area where we are vacationing so the locals are probably familiar with the euro.
But what if I tried to pay with yuan? I doubt the street vendors would accept that. So no the verdict is pretty clear from the Thai street vendors – the US greenback is what they prefer to any other currency (I nonetheless pays in Thai baht).
But lets get back to some more silliness. This is again from Fedewa’s article:
If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation. All the dollars that the Federal Reserve has been creating, at about $85 billion each month, would begin to be dumped right on our heads, and the dollar would become virtually worthless. A loaf of bread could cost $50, a basket of groceries could cost $500. Hyperinflation has happened to many nations, including post WWI Germany, France and Russia, and modern day Greece and Spain.
Note here this is the trick used by the internet-Austrians – “It might be that we do not have hyperinflation yet but it will comes once dollar demand collapses”. Fine, first of all there is unfortunately no real sign that dollar demand is declining and money-velocity in the US is still quite elevated.
Second, if dollar demand where to start declining it would be good news as it would mean that the world would becoming “normal” again. That the excessive demand for dollars driven by deflation fears were easing. That obviously would increase inflationary pressures. And that should be welcomed – after all there is still significant slack in the US economy and inflation continues to be way below the Federal Reserve’s semi-official inflation inflation of 2% and the reason the fed has had to massively expand its balance sheet is exactly the massive demand for dollars.
But ok lets say that out of the blue everybody suddenly did not want to hold US dollars – I still fail to see why that would be the case, but lets for the sake of the argument assume that to be the case. A collapse in dollar demand would of course effectively be massive US monetary easing. The impact of this would likely be a sharp increase in both real and nominal GDP – and inflation.
Would the Fed be helpless in this situation? No not at all. The Fed of course could just tighten monetary policy. It could of course easily shift quantitative easing into reverse by for example announcing that if would cut the money base by 100 or 200bn dollars per months until inflation expectations returned to (just) below 2% and given the fact that the Fed’s balance sheet has never been bigger it could cut the money base a lot. There is not limits to how easing or tightening a central bank can do. Only paleo Keynesians and tin foil Austrians fail to understand this.
It is too bad that there is so much nonsense about monetary policy floating around in cyberspace, but it is unfortunately only getting worse and worse. I don’t know why this is and these views have probably always been around, but I for one is sick and tired of listening to all is nonsense!
And finally, the US government is not about to default. The crackpots on the left are wrong when the claim that the US government would have to default had the debt ceiling not been raised (the US government could just have cut spending) and the crackpots on the right are wrong when they claim that the US government debt is out of control (the budget deficit is declining strongly and public debt levels have stabilized).
But of course that financial markets know that all this is just political hype in Washington. Just look at the S&P500 – it has gone up all though this show of US political dysfunctionality. Why? Because monetary policy dominates fiscal policy. It is the Sumner Critique stupid!
And now back to my vacation…
PS I have no clue whether Fedewa considers himself to be an Austrian. I use the term tin foil hat Austrian to describe a tendency or type of argument used by so many commentators rather than by people who actually read von Mises and Hayek. By the way I bet most of the people in cyberspace making what they believe to be “Austrian” arguments actually found these arguments on Youtube rather than by reading “Human Action” and other must-read Austrian classics. What I don’t understand is why Austrian scholars who actually did study von Mises and Hayek are not coming out much more aggressively and tell people like Peter Schiff that his arguments are nonsense. I would love to see a debate between for example Steve Horwitz and Peter Schiff.
PPS I just came to think of the Austrian version of Godwin’s law. Godwin’s law states that “As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1.” The Austrian version of this should read: “As an online discussion about monetary policy grows longer, the probability that an Austrian will mention Zimbabwe or the Weimar Republic approaches 1.”