Alan Greenspan’s pronouncements used to be described as ‘Delphic’ because of their rarity and mystery of meaning. So his blunt attack on the monetary policies of his successor, Ben Bernanke, last week on CNBC was quite striking.
“I am ill-aware of anything that really worked. Not only QE2 but QE1” Greenspan said, elaborating “There is no evidence that huge inflow of money into the system basically worked”. No doubt it will come as a shock to hear the man who gave his name to the use of huge inflows of money into the system to combat any downturn – the ‘Greenspan put’ – turning his back on the method. It will likewise surprise some, perhaps, to see the man who presided over a dollar which lost about a quarter of its value against the euro expressing concern about policies which might “continue erosion of the dollar”. That would be the erosion he played a large part in.
It shouldn’t come as a total surprise to anyone familiar with the career of ‘The Maestro’. A man who, in 1966, wrote “that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other” was, by 2002, proclaiming the “evident recent success of fiat money regimes.” Even so, it seems slightly rich for the sorcerer to be criticising the apprentice for doing exactly what he taught him to do.
Greenspan highlighted another effect of the mass money expansion of the Bernanke Federal Reserve and, also, the Bank of England under Mervyn King. “(Quantitative Easing) obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion”, Greenspan said. Indeed, the idea that the devaluations of the dollar or the pound since the onset of the crisis in 2007 have helped exports and, thus, been a good thing, has become fairly standard.
But it falls foul of one of the most famous maxims in economics; there’s no such thing as a free lunch. If the currency is made cheap so that exports might cost less abroad it also makes imports more expensive at home. Devaluations benefit exporters by harming importers.
The current devaluations are showing that. The rising cost of imports is putting pressure on industrial importers in both the US and UK. The effects aren’t limited to commercial importers. Rising food and fuel prices on both sides of the Atlantic are having a disproportionate effect on lower income households in Britain and the US.
Once again we are seeing that creating money out of thin air isn’t the same as creating wealth out of thin air. The money printing of the Federal Reserve and Bank of England might be a boon for exporters but it does not represent a free lunch, or even a lunch bought at the cost of some paper, ink and a few metal strips. It is paid for in the higher prices faced by importers and consumers of imports, notably people on low incomes who spend proportionately more of their income on purchases such as food and fuel whose prices are rising most rapidly.
The central bankers are not creating wealth, they are simply transferring it.