I couldn't resist posting and responding to this Glenn Beck video (1/29/09) because I know that he has been advised by multiple parties against the arguments that he is pushing. We all should have reason to be worried about the economy, but not for the reasons Beck is trumpeting.
First, I have three fear mongering style criticisms. Note at the beginning of the video how it was not enough to start off with the subtitle for the segment "Economic Apocalypse," but that he also made sure that a missile flies across the bottom of the screen and explodes. Also, I know Mr. Beck got into his glorified forklift at the end mostly to spoof Al Gore's Inconvenient Truth. But come on. He could have pointed to the top of his money chart while standing on the floor instead of climbing into his man-lift and raising up four feet to point down two feet. As the final touch, you might notice that Mr. Beck put a volcano at the top of his graphic to evoke the Pompeian apocalypse that certainly awaits the U.S. economy thanks to our excessive money growth.
Over and over again, Beck uses the phrase "devalued our money" in connection with his graphic of U.S. money supply increasing over time. Real measures of the value of money would be the price level or the exchange rate. The figures below represent the monetary base chart that Beck uses to track the U.S. money supply, the CPI (year over year percent change), and the nominal exchange rate between the U.S. and a broad trade-weighted basket of currencies.
The CPI chart shows that the value of the dollar within the U.S. has actually been rising during the period in question. That is, price levels have been falling, so a given amount of money can actually buy more today than it could a year ago. The exchange rate picture shows the same thing but on an international scale. The value of the dollar relative to a trade-weighted basket of currencies has increased over the last six months. In other words, a dollar can buy more international goods today than it could six months ago. I don't see the "devaluing" that Beck is referring to.
Beck seems worried about what we promise the world about our money supply levels. The international foreign exchange markets are the biggest commodities market in the world. All players know that talk is cheap, and increased money printing can have two effects. Either the nominal exchange rate (the value of the currency relative to other currencies) goes down, or it doesn't.
The exchange rate can hold its value in the face of increases in the money supply for a number of reasons. The reason that jumps out immediately to me is the situation in which the demand for your currency is increasing, as is now the case in the United States. The dollar ironically being the safe haven currency in the current economic downturn results in a situation in which we can print money, and foreigners will buy it. The exchange rate figure above shows the current appreciation of the dollar against other currencies.
I know that Mr. Beck has been shown the following graphic of the $800 billion of excess reserves currently sitting on the balance sheets of America's banks. This graphic alone takes the circulating U.S. money supply nearly back to its 2001 levels. The current excess reserves situation in the United States illustrates the old adage that "You can't push on a string." No matter how much money the Fed injects into the financial system, you can't force the banks to lend in this risky environment--unless, of course, you force the banks to lend in this risky environment. Add to this the increased foreign demand for U.S. currency, and Beck's money picture becomes a lot less breathtaking. Most of the money that the Fed has been printing is not in circulation in the United States and is, therefore, not inflationary... yet.
This brings me to my final point, which is to look at the scenarios in which Beck might be right and how I think those scenarios will be avoided. Beck asks the question at the end of the video, "How is our money not going to be worthless? ...perhaps in the next year." This is a legitimate question.
The excess reserves picture in the U.S. represents a potential tidal wave of money that could be released into the U.S. economy when banks start lending again. This would be inflationary. However, what would be the circumstances in which banks would start lending again? For starters, housing prices need to drop another 10% to 15% in order to bottom out (see Jason's post) and we need to stop bleeding 500,000 jobs a month. When these declines (currently free falls) begin to slow, it will be a sign that the economy is turning around. Furthermore, it is unlikely that all of the excess reserves will be released all at once. But the Federal Reserve will have a tremendous and difficult responsibility of taking money off the table with the right timing in order to avoid inflation from a depletion of excess reserves when the economy turns around.
Lastly, the Fed will have an even more difficult job of taking more money off the table quickly if the international demand for dollars reverses and those dollars come flooding back into the United States. This scenario is a little more risky in that international capital can come and go in tidal waves. Here is where U.S. diplomacy has a role in trying to assure that countries like China don't reverse exchange rate policy in any rapid way (see Mankiw post 1 and post 2).
In summary, I think that the worries about inflation--exemplified by the Glenn Beck video above--do not fully account for the channels through which the money supply affects the price level. Furthermore, I think the probabilities of the events that could lead to an inflationary scenario are not very high in the current situation (see my previous posts about deflation risks). But stay tuned. Again, we should all be worried about what we are seeing in the U.S. and global economy, just not for the reasons that Glenn Beck is giving.
Over and over again, Beck uses the phrase "devalued our money" in connection with his graphic of U.S. money supply increasing over time. Real measures of the value of money would be the price level or the exchange rate. The figures below represent the monetary base chart that Beck uses to track the U.S. money supply, the CPI (year over year percent change), and the nominal exchange rate between the U.S. and a broad trade-weighted basket of currencies.
The CPI chart shows that the value of the dollar within the U.S. has actually been rising during the period in question. That is, price levels have been falling, so a given amount of money can actually buy more today than it could a year ago. The exchange rate picture shows the same thing but on an international scale. The value of the dollar relative to a trade-weighted basket of currencies has increased over the last six months. In other words, a dollar can buy more international goods today than it could six months ago. I don't see the "devaluing" that Beck is referring to.Beck seems worried about what we promise the world about our money supply levels. The international foreign exchange markets are the biggest commodities market in the world. All players know that talk is cheap, and increased money printing can have two effects. Either the nominal exchange rate (the value of the currency relative to other currencies) goes down, or it doesn't.
The exchange rate can hold its value in the face of increases in the money supply for a number of reasons. The reason that jumps out immediately to me is the situation in which the demand for your currency is increasing, as is now the case in the United States. The dollar ironically being the safe haven currency in the current economic downturn results in a situation in which we can print money, and foreigners will buy it. The exchange rate figure above shows the current appreciation of the dollar against other currencies.
I know that Mr. Beck has been shown the following graphic of the $800 billion of excess reserves currently sitting on the balance sheets of America's banks. This graphic alone takes the circulating U.S. money supply nearly back to its 2001 levels. The current excess reserves situation in the United States illustrates the old adage that "You can't push on a string." No matter how much money the Fed injects into the financial system, you can't force the banks to lend in this risky environment--unless, of course, you force the banks to lend in this risky environment. Add to this the increased foreign demand for U.S. currency, and Beck's money picture becomes a lot less breathtaking. Most of the money that the Fed has been printing is not in circulation in the United States and is, therefore, not inflationary... yet.
This brings me to my final point, which is to look at the scenarios in which Beck might be right and how I think those scenarios will be avoided. Beck asks the question at the end of the video, "How is our money not going to be worthless? ...perhaps in the next year." This is a legitimate question.The excess reserves picture in the U.S. represents a potential tidal wave of money that could be released into the U.S. economy when banks start lending again. This would be inflationary. However, what would be the circumstances in which banks would start lending again? For starters, housing prices need to drop another 10% to 15% in order to bottom out (see Jason's post) and we need to stop bleeding 500,000 jobs a month. When these declines (currently free falls) begin to slow, it will be a sign that the economy is turning around. Furthermore, it is unlikely that all of the excess reserves will be released all at once. But the Federal Reserve will have a tremendous and difficult responsibility of taking money off the table with the right timing in order to avoid inflation from a depletion of excess reserves when the economy turns around.
Lastly, the Fed will have an even more difficult job of taking more money off the table quickly if the international demand for dollars reverses and those dollars come flooding back into the United States. This scenario is a little more risky in that international capital can come and go in tidal waves. Here is where U.S. diplomacy has a role in trying to assure that countries like China don't reverse exchange rate policy in any rapid way (see Mankiw post 1 and post 2).
In summary, I think that the worries about inflation--exemplified by the Glenn Beck video above--do not fully account for the channels through which the money supply affects the price level. Furthermore, I think the probabilities of the events that could lead to an inflationary scenario are not very high in the current situation (see my previous posts about deflation risks). But stay tuned. Again, we should all be worried about what we are seeing in the U.S. and global economy, just not for the reasons that Glenn Beck is giving.
