The intellectual framework of The Economist, as far as economics is concerned, has been Keynesian for as long as I can remember. (You may be asking yourself how old I am, which is an excellent question.) Be that as it may, the manner in which it discusses critics of the Federal Reserve in an opinion piece in its May 21, 2016 issue, is at best uncharitable, and at worst dishonest. The first paragraph of the piece begins thus:
Perhaps it was inevitable in the aftermath of the worst financial crisis in almost a century, but America is boiling over with schemes to remake the Federal Reserve. Some Republicans want the central bank’s monetary-policy decisions to be “audited” by the Government Accountability Office, an arm of Congress. Others wish to use a formula to put monetary policy on autopilot and to haul the chairman in front of Congress every time the Fed steps in. The most extreme sceptics peddle conspiracy theories about how the Fed “debases” the dollar. They propose abolishing the central bank entirely.
Conspiracy theories??? Well, if that’s the case, there’s no point in dealing with them.
So what’s so conspiratorial, if that’s a word, about the thought the Fed may be debasing the dollar? To answer that question, let us see how The Economist itself discusses how quantitative easing works in a March 2015 blogpost:
To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment. Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE. If QE convinces markets that the central bank is serious about fighting deflation or high unemployment, then it can also boost economic activity by raising confidence. Several rounds of QE in America have increased the size of the Federal Reserve’s balance sheet—the value of the assets it holds—from less than $1 trillion in 2007 to more than $4 trillion now.
Let me ask a simple question. If a central bank seeks to expand its currency’s money supply by expanding the monetary base and bank credit, wouldn’t it be reasonable to assume that that currency will be weaker compared to other currencies? So how on earth is acknowledging this simple implication a conspiracy theory?
It’s bad enough to deal with horrible thinking when looking at Facebook memes. Part of me is willing to accept the possibility that the creator of a bad meme may not know any better.
That is not the case with The Economist. It’s called The Economist for crying out loud! If anyone ought to know how supply and demand curves work, it’s them. However, to see them equate straightforward economic analysis with conspiracy theories, especially on such an important subject as monetary policy, is shocking.