We continue to see widespread ignorance of the inner workings of our monetary system from high ranking officials. The latest showing of continuing flawed thinking comes to us courtesy of Richard Fisher who is the President of the Dallas Fed. In a recent speech Mr. Fisher makes an extremely odd comment. In discussing the implementation of QE Mr. Fisher says what I have long said – that QE is pushing on a string:
“What I envision from the current vantage point is an anemic recovery, but not one that slips into reverse gear. Thus, barring an unforeseen shock, I have concerns about the efficacy of further expanding the Fed’s balance sheet until our political authorities better align fiscal and regulatory initiatives with the needs of job creators. Otherwise, further quantitative easing might be pushing on a string.”
So far so good, but then in the next sentence it becomes clear that Mr. Fisher doesn’t exactly understand the monetary system he helps oversee:
“In the worst case, it could flood the engine of the economy with gas that might later ignite inflation.“
These comments baffle me. It is a continuation of the thinking that has guided Bernanke, the Fed, the Treasury and the entire government since this crisis began. What Mr. Fisher is basically implying is that the addition of reserves creates some risk of future inflation. He clearly doesn’t understand that QE is simply an asset swap that does not alter private sector net financial assets. Despite vast evidence showing that QE does little to boost bank lending Mr. Fisher appears to think it’s somehow different this time. Further, he clearly adheres to the textbook money multiplier which has been proven thoroughly wrong in the last few years (see here) and has even been shown to be wrong by some of Mr. Fisher’s co-workers at the Fed. Mr. Fisher thinks that adding more apples to the shelves will help the shopkeeper sell more apples. Of course, the Fed hasn’t failed, they just haven’t tried hard enough….
Comments such as these prove that our most trusted leaders do not understand the most intricate workings of the monetary system we live in. It’s no wonder that we continue to fight these problems with misguided policies such as QE. It would all be humorous if it wasn’t hurting so many millions of people.
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