Instant Insanity

. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.

All three methods for eliminating the zlb, although administratively feasible and conceptually simple, are innovative and unorthodox. Central banks are conservative. The mere fact that something has not been done before often is sufficient grounds for not doing it now. The cost of rejecting institutional innovation to remove the zlb could, however, be high: a material risk of continued deficient aggregate demand, persistent deflation and, in the U.S. and the U.K., unnecessary conflict between short-term stabilization and long-term sustainability and rebalancing. Fundamental Flaw

Willem Buiter starts right off the bat with a false premise that “something needs to be done”.

The reality of the matter is that left alone, prices will fall to the point where genuine demand picks up. This is a fatal fundamental flaw at the outset, but one that every Monetarist clown in the world makes.

Sadly, Buiter takes Monetarism to an extreme , yet he cannot see the consequences of what he suggests. To be sure Buiter does say “The mere fact that something has not been done before often is sufficient grounds for not doing it now”, but if that is the best he can come up with he should be fired tomorrow.

Conversion Madness

Take for example the idea that “existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod“.

For starters, that idea would require the retooling of every vending machine and ATM in the country. Is this simple or practical? I think not. However Buiter calls the approach “administratively feasible and conceptually simple“.

The same thing goes for his idea of “doing away with currency completely“.

What about Canada, Europe, Australia, the UK, etc? Is every country supposed to go along with this insane proposal? What happens to foreign accounts? What about capital flight at the mere hint the US were to discuss such a thing?

What is the Goal?

Were the Fed to even openly consider such insanity, the risk is to flight into gold, silver, foreign currencies, or tangible assets. No doubt the dollar would sink and prices would rise but is that the goal?

No! Buiter cannot even figure out what the goal is. Rising prices is not the goal, rising credit is. And with the risk of expiring currencies the last thing we would see is willingness to extend credit, fearful of being paid back in expiring dollars.

Extreme Response

I am 100% sure the market would have an extreme reaction to implementation of any of Buiter’s proposals, in one direction or another, both outcomes horrible. If the goal was to produce hyperinflation and complete loss of faith in the currency, the suggestions of Buiter just might do it.

On the other hand, depending on how the program was structured and which of Buiter’s three alternatives was implemented (and how), I could perceive a mad dash into treasuries, coins, or gold, bringing upon a deflationary collapse.

Either way, there is nothing in Buiter’s proposals that will stimulate lending, small business expansion, or the creation of jobs.

That Buiter cannot figure this out, suggests he is incompetent and should be fired immediately.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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