Every so often, the Minneapolis Fed's Narayana Kocherlakota likes to remind Congress that to the extent America has a problem with subpar economic growth, that problem can be solved with more debt. Of course all problems can be solved with more debt. That, as we put it a few months back, is an immutable truth, as critical to the pseudoscience of economics as Newton’s first law is to physics and we know it to be true because it’s propagated by one of the greatest economic minds in the history of the world: Paul Krugman.
But if the only place this finds expression is on Krugman’s New York Times blog then it won’t be much use when it comes to saving the world. Fortunately, there are central planners like Kocherlakota who are willing to turn Krugman-isms into policy.
Back in July, in remarks ironically prepared for delivery at a conference hosted by the Bundesbank, Kocherlakota noted that in order to lift the neutral rate, US lawmakers might want to consider issuing more debt. Translated from ‘economist’ to layman, that just means this: “we may need to ease again and we’re bumping up against the lower bound on the rate cut side and we’ve run out of monetizable assets on the QE side.”
Kocherlakota was quick to note that he wasn’t attempting to tell Congress what to do, he was only dropping subtle hints about what might happen to still-depressed aggregate demand if the Fed doesn’t have enough rope to do more of the things which have so far failed miserably when it comes to boosting said demand:
“I am not saying that it is appropriate for fiscal policymakers to increase the long-run level of public debt. I am simply pointing to one benefit associated with such an increase: It allows the central bank to be more effective in mitigating the impact of adverse shocks to aggregate demand."
That was in Frankfurt where we can only assume that if Wolfgang Schaeuble was in attendance he may have had a conniption fit and now, exactly two months later, Kocherlakota is at it again, this time in remarks prepared for a speech at Northwestern. Here’s Reuters [9]:
A top U.S. Federal Reserve official on Tuesday floated a potentially controversial proposal to help keep America's economy more stable: The federal government could issue more debt.
Narayana Kocherlakota, president of the Minneapolis Fed, said bond market data suggests that the ideal inflation-adjusted rates of interest in the U.S. economy have fallen in recent decades.
This is important because it means the Fed's own target for interest rate policy will tend to be lower, raising the risk that the Fed finds itself in a situation where it would like to slash rates but can only cut them modestly before hitting the "zero lower bound."
Near-zero rates also raise the risk of encouraging people to over borrow, setting up instability in the form of financial booms and busts.
"Younger workers (and those who are yet to be born) have to pay the taxes to fund this extra debt issuance," he said, adding that "balancing these gains versus losses is clearly a job for the fiscal authority, not for monetary policymakers like me."
"I am simply pointing to two key benefits associated with such an increase," Kocherlakota said, referring to more effective monetary policy and less risk of financial instability.
Got that? We'd me remiss if we didn't spell out precisely why Kocherlakota's argument is so absurd.
It is of course the Fed's misguided attempts to use monetary policy to micromanage economic outcomes (i.e. "smooth out the business cycle") that are leading to the more frequent occurences of spectacular booms and busts. In other words, they aren't smoothing out the business cycle, they're making it immeasurably more unpredictable. The FOMC's latest and greatest foray into central planning the economy has now created what will likely be viewed in hindsight as some of the greatest speculative bubbles ever witnessed, and part and parcel of this monumental folly is ZIRP. Now, Kocherlakota is trying to argue that because the Fed's own policies (which, again, are designed to eliminate instability by smoothing out the business cycle) have put it at the zero lower bound, the US government should print more debt in an effort to boost the neutral rate to give the FOMC more room to do more of the very same things they just did, things which, by Kocherlakota's own admission, have "raised the risk of encouraging people to over borrow, setting up instability in the form of financial booms and busts" and which by virtually any measure one cares to look at, have done a poor job of boosting inflation expectations and aggregate demand.
This is the Einstenian insanity employed by those who control the fate of the financial universe. Be afraid. Be very afraid.
