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Response to Adrahil (Reply #5)

Mon Nov 26, 2018, 01:22 AM

7. WaPo: Trump wants to copy Venezuela's biggest economic mistake

So, Nixon and now Trump have famously tried to bully the Fed into keeping interest rates low, yet somehow having a more pro-growth or less independent Fed has somehow been seen as a progressive idea? Sort of how Herbert Hoover, a Republican, pushed for the Smoot-Hawley tariff act, which helped lead to the Great Depression, yet protectionism is still seen as a Democratic/progressive idea.


If you canít remember why the United States made the Federal Reserve independent, take a look at Venezuela. If you canít remember and you happen to be the president of the United States, look twice.

Since the start of 2012, you see, Venezuelaís government has forced its central bank to print so much money that its currency, going by black market rates, has lost 99.9999 percent of its value. In the meantime, the regimeís response has been to lop five zeros off all their money in an attempt to pretend things arenít as bad as they are. Which, of course, doesnít solve anything. Itís like trying to lose weight by changing your clothes. It might make you feel better about yourself for a little while, but itís no substitute for the real solution: not printing any more money.

This, as you can probably tell, is pretty much the worst-case scenario for what can happen when politicians are allowed to make monetary policy decisions. Indeed, it has gotten to the point that the International Monetary Fund has all but admitted that it has no idea how much higher Venezuelaís inflation will go. Thatís what increasing your estimate of it from 12,000 percent to 1 million percent is really saying. Well, that and the fact that this is probably the worst inflation the world has seen since Zimbabwe was reduced to printing 100 trillion dollar bills a decade ago.

You donít have to reach wheelbarrows-full-of-cash levels of inflation, though, for political meddling in central bank decisions to be a problem. Double-digit inflation is more than bad enough, and it can take only a little interference to get there. Thatís something weíve learned firsthand. The stagflation of the 1970s, after all, was in no small part a result of the way President Richard Nixon bullied the Fed into keeping interest rates inappropriately low during his reelection campaign. The simple story, then, is that itís better for central banks to be independent, because easier money is always in a politicianís short-term interest, but isnít always in the economyís long-term one.

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