GETTING RICH #2

Most people don’t really understand where money comes from. In fact, my brain starts to blur when I try to follow the intricacies of some pronouncements from economists. It is truly a “dismal trade.”

I was amused and a little sad watching Ben Bernanke on the McNeil-Lehrer report on PBS. In a series of town hall meetings, Bernanke, assisted by Jim Lehrer, will try to de-mystify the arcane working of the Fed. My amusement came when a woman opening the questioning by asking Bernanke to explain exactly what the Federal Reserve Bank did.
What followed was a longwinded explanation of monetary policy and how the Fed does a better job than Congress of monitoring and controlling inflation, borrowing, and consumer protection. There is really nothing complicated about what a central bank does, but most people still won’t understand.

Why? Very simply, most people do not understand the difference between “fiscal” and “monetary.” (A few years ago on the CBC I heard a reporter refer to Alan Greenspan as the man who ran fiscal policy in the U.S.) What Bernanke doesn’t understand is that when he merely uses the word “monetary” he loses his audience, unless they happen to be economists.

I wrote an article some time ago talking about the easy difference. I remind people that – in broad terms – “monetary” is what you do to money. Fiscal is what you do with money. Without usurping the domain of the learned economists (a position to which I lay no claim) I wish there were more plain talk. Not the gobble-de-gook I heard from a U.S. Treasury department expert who said that money came from government borrowing and selling T bills. (Or something like that.) The general public has no idea what the term “money supply” means. It is too easy to say that it comes from printing presses at the Mint.

Trying to make it simple so that even I understand: there are two ways to make the money supply go up or down (up if you need economic stimulus, down if you are combatting inflation.) Monetary method is to raise interest rates, which reduces the amount of money available by making it more difficult to get. Or opening the gates by lowering the rate to make money more easily available.

But the same thing can be done with fiscal policy. If the government raises taxes it will take money out of circulation. Lowering taxes puts more money into circulation (increases liquidity as the gurus say.) But of course, most politicians know it is political suicide to raise taxes even though it has exactly the same effect as the non-elected central bank raising interest rates.

Any way, I seem to have been even more long-winded than Bernanke. The reality is that however well meaning the Fed chairman may be, his listeners at the town hall meeting simply don’t know what “monetary” implies. From the beginning his explanation was doomed.