WASHINGTON, D.C. Aug. 3 (DPI) – Retired pol Phil Gramm and another conservative economist penned a WSJ op-ed declaring hopefully that the Federal Reserve is already tamping down inflation pressures by manipulating the money supply – and readers almost universally said they are not impressed.

Gramm and Thomas Saving wrote that the Fed is engaging in so-called “reverse-repo borrowing” to sop up liquidity and thereby reduce inflation pressures, even as it continues its long-established securities-buying scheme known as “Quantitative Easing” – a somewhat conflicting strategy. The conservative economists assert the Fed has “expanded its reverse-repo borrowing to an unprecedented $1.26 trillion at the end of June from $272 billion in April.”

The column seemed intended to provide the US private sector with some reassurance that the Fed is still capable of behaving responsibly and scaling back its emergency intervention during the pandemic.

But readers scoffed, convinced that the Central Bank is still doing nothing but making short-term accommodations to politicians.

The most popular comments:

“The private banking system now holds more interest-bearing reserves than it has outstanding commercial and industrial loans. Remarkably, the Fed is now borrowing more money from the private banking system than all private commercial borrowers combined.”

Isn’t that hard quantitative proof that Gummint borrowing is “crowding out” private borrowing from banks?

If Yes, then this is still just a shell game. In order to avoid creating inflation, the Fed is creating scarcity in the commercial lending business, which is constraining commercial bank lending, which is constraining business sector investment in real productive assets, which is reducing future economic growth.

So, no matter how many shells the Fed puts into the game, and no matter how fast they shuffle them around, there’s still only one pea under there, and that is the US economy’s capacity and propensity to reinvest a lot of its Evil Profits to create the next round of innovation, growth, and true progress.

One of the most prescient inflation fables was in Steinbeck’s “Cannery Row,” when Mac and the boys caught a mass of frogs for Doc to use in his laboratory.  Doc, who was away, guaranteed five cents per frog.  Grocer Lee Chong knew this, so in exchange for store goods, he accepted payment in frogs.  Mac and the boys bought whiskey et cetera using frogs, but they were dismayed because, for example, Lee Chong charged 15 frogs for something that should have only cost nine frogs.  In due course, Mac and the boys spent all of their frogs at Lee Chong’s store for beer, beans, bacon, whiskey and so forth.
In the end, during the party for Doc (who was still away), Lee Chong’s crate of frogs got dropped and smashed in the street, and all the frogs escaped… leaving Lee Chong — understatement here — financially bruised.
“Devastated” or “ripped off” would have been more appropriate.
That’s just what happens when you print a massive amount of frogs.

I would be shocked if there were even a handful in congress that understand how the Feds actions affect money supply and the potential consequences.   Maxine Waters chairs the House Financial Services committee.  Does anyone believe she could describe the mechanics of a reverse repo or what “sterilization” means in the context of the Fed’s asset purchases?  All they know is that the Fed and Treasury working as a team are providing cover for seemingly unlimited spending by giving the illusion that they have inflation under control. Of course it is the banks that have all the power along with a windfall of interest bearing reserves that they have no need or ability to lend. 

Sounds like an awful lot of monkeying with what used to be a much more straightforward market process for determining the cost of money.  With the cost now near all time lows as a result of Fed policy, both government, corporate and certain types of consumer debt (see, e.g., mortgage debt) has positively exploded, as have financial and real estate asset values.

Can all this monkeying really be healthy for the economy in the long run?

‘Course, it is also three monkeys who represent the ‘see no evil hear, no evil, speak no evil’  saying which has come to mean let’s just ignore bad behavior.   But by my lights, if we continue to allow the Fed to engage in what I see as bad behavior then it will be on all of us to acknowledge we’re a  bunch of monkeys.