There was considerable discussion at the Rocky Mountain Economic Summit about "tapering", Fed Chairman Ben Bernanke's term for reducing the amount of quantitative easing that it expects to carry out over the next year. As I have posted before (also see the links at the end of this posting), Plosser would like the tapering to begin soon, whereas Bullard would prefer a more wait-and-see position.
Here is someone, nominally qualified, who clearly misunderstands some of the things that are being debated and considered by the Fed (ht MA). In some portions of his piece, he is quite right: the Fed is having an impact on the economies of some emerging markets. I doubt if the Fed is having as big an impact as some people think, however.
But he wants the Fed to return to focussing on monetary aggregates. Actually, so do I, but I'm not sure how or what to do about them.
- Monetary aggregates, such as M1, M2, M3, M4,... M16 (or whatever) do not mean what they used to, 30 years ago. Many, many other assets are so liquid that movement between them is much easier than it used to be.
- So much of global liquidity is created by shadow banks, both in the US and elsewhere, including China. How much? I have no idea, but it seems like a lot to me based on my readings of the role of the shadow banks in creating the housing bubble and the ensuing financial crisis. This liquidity has little to do with US Fed monetary aggregates. Or more precisely the linkages between high-powered money and global liquidity are much less clear than they used to be.
Also, "tapering" means a slowdown in the rate of quantitative easing. It does not mean tightening as he says,
I am surprised that so many economists and market analysts so blithely accept Ben Bernanke's assurance that the tapering of bond purchases by the Fed – and ultimately a halt to QE – is not "tightening". It shows how far monetary analysis has fallen out of fashion in the US and in the City that they fall for such flummery.
It isn't flummery. It is clearly an announcement that at some point in the future, probably before year-end and possibly within the next month or two, the Fed will begin to slow the pace at which it is expanding the monetary base. A slowdow in the rate of expansion is not a tightening even if someone says it is.
When and whether the Fed should begin tapering are legitimate, difficult questions, but let's not confuse things by calling "tapering" tightening. And let's make sure we understand that the monetary mechanisms are much different now than they were 30 years ago.
My attendance at the summit was supported by several sponsors, including the Department of Economics at The University of Regina.