The Wall Street Journal of 10/29/2021 featured Alexander William Salter’s article “Fed Tapering Won’t Beat Inflation”. Professor Salter is courageously tackling an important issue. We respectfully suggest that he consider the following: Tapering is not reversing. It is a negative acceleration but, still, a positive velocity. The original issues of the bonds took money out of the secondary markets so as to provide money to the real estate market and to the government for its debt-incurring operations. By purchasing the government and mortgage-backed securities the Fed has been pouring money back into the secondary market for stocks and bonds and taking ownership of the government and mortgage-backed securities. Net and all in all, the government borrowed money and poured it into operations and real estate; its annual deficit and total debt increased; the secondary sellers first swapped what they had previously owned for the recent government issues, then received from the Fed cash for the recent government issues, then presumably put that cash into other investments; and finally, on its books the Fed created the new money by a) crediting Money in Circulation, and b) debiting Government and Agency Securities. Bondholders (including unions and political contributors) did a double swap, while the government effectively sold bonds to the Fed for new money in return. Depending on how the money received by the government initially and finally circulated – a) into the basic circuit for intrinsically-inflationary unearned incomes, or b) immediately or eventually back into the stock and bond markets as idle money for inflation of asset prices, or c) into socially or financially beneficial long-term government investments – the short-term net effect is intrinsically inflationary. The inflationary effect may work itself out now or later – depending importantly upon capacity usage and investment prospects – in the market for basic goods or in the stock and bond market for secondary issues.
The Fed has, thus, been effecting more money chasing the same amount or fewer goods. Though it takes time for inflation to work its swindle on holders of cash or receivables, the Fed is supporting an element of swindle. Not that the Fed has much of a choice. The private and government sectors, which produce goods and services and employ workers of all sorts at all levels, don’t know how to manage incomes in the economic process of production, exchange and finance in an equilibrated manner. Focusing solely on what might happen to prices in the secondary markets, they are said to panic at the thought of an intrinsically-harmful continual flood of money tapering to zero. Not that they are to blame. Academe is the real culprit. It does not understand, formulate, and teach the theory of how the dynamic economic process really works, so the students and the operating public jolly along in the macrostatics of the IS-LM and AD-AS models, which say nothing much except that a) products are made and sold at a price, and b) the theoretical interest rate, which is an internal abstract relation to be distinguished from market interest charges, must be understood instead as a supereffective external control-lever, which it is not.
Further, academe –including Fed economists – is mired in its quantity theory of money rather than in a magnitude-and-frequency theory of money; thus it cannot assess how much money is appropriate for expeditiously conducting the economic process, nor can it state the inflationary consequences – whether immediate or delayed, in either the basic circuit or the redistributive function – of an excessive money supply.
Again, Professor Salter is courageously tackling important issues. We encourage him to study Bernard Lonergan’s Macroeconomic Dynamics: An Essay in Circulation Analysis to improve his understanding of how money flows within the economic process, and in particular how money circulates among the basic circuit, the surplus circuit and the redistributive function. Mastery of the double-circuited, credit-centered Diagram of Rates of Flow and of the ideas of concomitance, solidarity, continuity and equilibrium of flows would be beneficial.
… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation. … Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)
Ideally the dummy money would be constant in exchange value.
… the dummy must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services. The alternative to constant value in the dummy is the alternative of inflation and deflation. Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]
It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy. To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)
Mr. Salter is an associate professor of economics in the Rawls College of business at Texas Tech University and is a senior fellow with the Sound Money Project