Lessons Of The Impending CREmation

Mohamed El-Erian is one of the more sensible Keynesian commentators around town, but he has lately taken to urging the Fed to “pause” its rate-hiking campaign. To be sure, this comes from a position of purported even-handedness—since El-Erian avers that the Fed has been wrong all along, first easing too much and now tightening too fast:

The Federal Reserve’s year-long aggressive monetary tightening efforts could turn out to be one of the most significant policy errors in the last several decades, according to renowned economist Mohamed El-Erian.

He penned an op-ed on MarketWatch on Monday, asserting that the institution “has slipped in its analysis, forecasts, policymaking and communication” and has made “one mistake after another.”

“The Fed’s problems should worry everyone. A loss of credibility directly affects its ability to maintain financial stability and guide markets in a manner consistent with its dual mandate of maintaining price stability and supporting maximum employment,” he wrote.

Well, the bolded sentence is actually the real problem. The failure is not one of execution owing to insufficient skill, judgement or communications at the FOMC.

No, the failure resides in the dual mandate itself: It’s completely unnecessary for stable capitalist prosperity, and it can’t be executed in today’s wide-open $90 trillion global economy anyway.

In point of fact, monetary policy in one country has never been possible in modern times. The pre-1914 gold standard system was thoroughly internationalized, governed as it was by the movement of gold in response to the ebb and flow of 19th century economies linked by trade, capital markets and financial flows among London, Paris, New York and lesser markets.

It was only the folly of state-controlled war finance and massive govenrment debt emissions during the Great War that created an opening for the relic of national money—a retrogression that peaked in the beggar-they-neighbor protectionism and financial autarky of the 1930s Great Depression era.

Ironically, therefore, today’s Keynesian “dual mandate” is grounded in the folly of Professor Keynes’ solution to the Great Depression. As is always obscured by his contemporary acolytes, the great man’s remedy for the disaster of the 1930s was predicated upon “homespun goods (i.e. protectionism), national money (i.e. a re-pegged, inflated pound sterling) and state-management of the business cycle via fiscal and monetary stimulus and restraint.