The Bear’s Lair: Central banks must play Grinch, not Santa Claus

The core imperative for the move to fiat money and then to permanent “stimulus” policies was the urge by central banks to play Santa Claus. By lowering interest rates, they raise asset prices and make everyone feel richer. This is dangerous; it produces asset bubbles, kills productivity and increases inequality, making everybody but the very lucky poorer in the long run. The need therefore is for an institutional framework that will force central bankers to play Grinch.

Back when central banks were run properly, Grinch was their natural role. It would have appalled Montagu Norman, Rowland, Lord Cromer or even Paul Volcker to think that central bankers should seek popularity through printing money. Gold Standard or no Gold Standard, they recognized that a central bank’s primary and indeed only role was to preserve the value of the currency, and that to do so required Grinch-like policies in many cases: “taking away the punchbowl just as the party got going” as William McChesney Martin famously put it in 1955.

The urge for monetary authorities to play Santa Claus stretches back to before the Gold Standard and even before central banks themselves. Roger North’s Life of his brother Sir Dudley North (1640-91) written in the 1720s and published in 1745 tells of his experience as Chairman of the Ways and Means Committee in the High Tory-dominated 1685 Parliament. Dudley North failed to prevent an excessively lucrative arrangement by which the goldsmiths could bring bullion into the Treasury and have it coined into money by weight, which at times of low bullion prices was inflationary. In a meeting with Parliamentarians and Lord Treasurer Rochester:

“Sir Dudley North reasoned with them against it beyond Reply; and then the Argument was “Let there be Money, my Lord, by God let there be Money.” … The Country Gentlemen are commonly full of one profound Mistake, which is that, if a great deal of Money be made, they must have a share of it, such be the supposed consequence of what they call plenty of Money.”

“Let there be Money, my Lord, by God let there be Money” is a refrain constantly heard from Keynesian and Modern Monetary Theory economists today. It is interesting that even in the 1720s, Roger North was fully aware that this desire was economically damaging – thanks to Dudley North and others, understanding of free-market economics was extant in Britain’s Tory party for almost a century before Adam Smith. As for the Country Gentlemen of 1685, they were condemned within four years to seven decades of hostile Whiggery, to which they reacted like Henry Fielding’s Squire Western by drinking themselves into a stupor. Not that even optimal monetary policies could have saved James II!

In the debate on re-adopting the Gold Standard in 1819 Liverpool played the role of the Grinch while Santa Claus was represented by Henry Brougham, christened “Wicked Shifts” not by the Tories but by his Whig colleagues. Brougham was famous for expressing strong, acerbic and apparently authoritative opinions on subjects in which he had absolutely no expertise. For example, by his “Edinburgh Review” tirades he delayed for a decade the acceptance of the wave theory of light, advanced by Thomas Young, and delayed for almost a century acceptance of the theory that sunspot cycles affected climate and crop yields, advanced by no less a figure than Sir William Herschel.

By advocating money printing, paper currency and partial default on the Napoleonic War debt, Brougham demonstrated his ignorance of economics as it was then understood, though today he would find a claque of noisy supporters in the media and Keynesian academia. Fortunately, Liverpool was firmer than Young and the aged Herschel, so steered resumption of gold payments through to a successful if deflationary conclusion. This, although lowering prices by 40% in a decade (thereby increasing the real value of Britain’s debts) proved the foundation for Britain’s position as the indisputable economic and monetary capital of the world for almost a century in the future, even after the country’s economic strength had been sapped by inept Victorian Whiggery.

By acting as the Grinch in the short-term (with the support of substantial majorities of Parliament – the hard-money Bullion Committee of 1810 had been headed by a Whig, Francis Horner) Liverpool produced a massive economic boom that began within a year of his brave stand and led to Britain’s undreamed-of power and prosperity for the remainder of the century. Santa Claus, in the form of Brougham, was distrusted even by his own Whig colleagues, and his policies would have destroyed Britain’s credit and very likely prevented that century of unprecedented economic progress.

In today’s economy, the Santa Claus tendency is far more popular than it was in 1819, or even in 1685, when economic knowledge was not so widespread. This results from a number of factors, brainwashing by the media and educational institutions being the most important. Even when I went through Cambridge in the late 1960s, the professor in our introductory economics course began by claiming that the function of the economist was to assist in the redistribution of wealth. Needless to say, even at that callow, inexperienced age, I profoundly disagreed, and resolved to take no more economics courses in that institution, which was already polluted by Keynesianism and the even worse doctrines of the Marxist Joan Robinson.

Today, with fewer checks on leftist extremism in even the most prestigious colleges, the function of academic economics appears to be to find ever more spurious justifications for the government to play Santa Claus. Ben Bernanke’s promulgation of “helicopter economics” which in practice involved dropping $100 bills only over Wall Street, causing asset prices to soar, the rich to get richer and productivity to stagnate, allowed the Fed to muscle its way onto Santa’s sleigh.

We are now paying the price. The bankruptcy of Sam Bankman-Fried’s FTX is a sign, not of essential rottenness in the entire economy, but that the checks and balances preventing outright fraud from taking over our lives were destroyed by Bernankeism. The rise in short-term interest rates to a current range of 4.25-4.5%, compared with the 1% indicated for today by the Fed’s “dot-plot” last December is an indication that all over the economy, projections for the year, let alone for 2023, have gone horribly wrong. Even without any more Bankman-Frieds (and believe me, there are many other politically connected fraudulent Bankman-Frieds out there) the more leveraged parts of the financial system, however honestly run, are in deep trouble.

Since debt is at record levels in terms of GDP, another effect of a decade of Santa Claus, the collapse will be exceptionally severe. The Fed will reverse course when the first big bankruptcies appear, but by then it will be too late – any further Santa Clausism will stoke inflation and store up even more severe recessions for the future.

Santa Claus isn’t coming to town, he’s been making merry all over town for the last decade and now deserves to be run out of town by a pitchfork-bearing mob whose livelihoods he has destroyed. Now it’s the Grinch’s long-overdue turn. Welcome, Grinch! – green and scaly are the fashion colours for 2023, and probably 2024 as well.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)