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Suasion, Sure, But Is It Really Moral?

Summary:
One of the concepts educators sort of snuck into the curriculum was something they called “moral suasion.” This term has meanings outside of Economics, but within the discipline it refers to one key element to the monetary policies of central banks. Basically, persuading markets or economic groups to act in the way officials want using rhetoric or threats without having to resort to overt and explicit means. If central bankers have walked softly all these years, the so-called big stick they told you they carried with them was what Ben Bernanke had openly talked about the government’s “printing press” all the way back in November 2002. People took him literally when he was really doing this as a way to more forcefully back up the rhetorical method of moral suasion. If you fight the Fed,

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One of the concepts educators sort of snuck into the curriculum was something they called “moral suasion.” This term has meanings outside of Economics, but within the discipline it refers to one key element to the monetary policies of central banks. Basically, persuading markets or economic groups to act in the way officials want using rhetoric or threats without having to resort to overt and explicit means.

If central bankers have walked softly all these years, the so-called big stick they told you they carried with them was what Ben Bernanke had openly talked about the government’s “printing press” all the way back in November 2002. People took him literally when he was really doing this as a way to more forcefully back up the rhetorical method of moral suasion. If you fight the Fed, he was saying, then you’ll be sorry.

So don’t fight. Please.

This thing is powerful that it can conjure the exact mode necessary at just the right time. Under threat of deflation, the very subject of his talk, that would mean a forcefully inflationary path back to growth and health; and if it gets to that, you better get out of the press’ way. As Bernanke put it:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. [emphasis added]

You no doubt recognize Jay Powell’s “digital money printing” and “flood” in what his predecessor’s predecessor was claiming.

The question, therefore, is why go through all the mess and bother? Why the need for this convoluted game of trying to get everyone to act on its behalf? If it’s so easy, then just use the thing, do it yourself!

Proponents argue that this is needed to keep things within respectable tolerances. At some point, though, people have to wonder: OK, if it’s so simple and easy, what do you need everyone else for?

Because, paraphrasing Mark Twain (or Abe Lincoln), better to keep the government’s printing press in its back pocket and be thought powerless by some than to actually turn the thing on and remove all doubt from everyone.

In the monetary policy sense, that’s really all the first Global Financial Crisis (GFC1) had been: put up, or shut up. Ben had the printing press, the government needed only the will to use it which first Bear then Lehman/AIG gave authorities. That’s what he’d said in 2002, and then subprime mortgages gave monetary policy its out within the largely apathetic and uninterested public.

For those paying attention, however, it was already a definite sign something was amiss in the conventional explanation beginning with moral suasion. Besides the presumed power of, ahem, speeches and words, where’s all this money printing! Instead, by its end, thoroughly bested in every possible fashion, central bankers would declare, hey, at least it wasn’t worse; they’d “saved” “jobs” supposedly.

This wasn’t what the future crisis Chairman had said to expect of it six years before.

Merely the warmup act, according to the mainstream. The era of QE would begin under those financial ashes and this time it was going to put printed cash where Bernanke’s pressed mouth had been years earlier. Except, in the US as Japan, the Federal Reserve had to keep repeating the program; time and again (and again, and again, and again, and not-again, and again).

In 2020, on the sixth version of QE “money printing”, the excessiveness has been, we’ve been told, even more excessive. Huge. Monumental. A truly biblical flood of digital bacchanalia. Inflation sure to follow, if it doesn’t already spiral out of control right out of the gates.

“Out of the gates”, though, that was three-quarters of a year ago. Nine months since the upsized renewal of Bernanke ‘02.

Suasion, Sure, But Is It Really Moral?

For the trillions in bank reserves, there has been and is no inflation. In the financial media, it’s everywhere; in data, it’s not just absent, rarely has it ever been this absent. The calculation is and always has been simple enough: money printing, real money printing, actually does lead to sustained rises throughout a broad, widespread swath of consumer prices. Therefore, if there is no inflation, there can’t have been any money printed.

According to the BLS, using the CPI, which is more inflation-y than the Fed’s preferred PCE Deflator, the headline index rose 1.36% year-over-year during December 2020, up from 1.17% in November on the strength of the crude price rebound feeding somewhat into gasoline (just as TIPS investors have bet). Other than that, core consumer prices (excluding food and energy) rose 1.62% last month.

Just how bad is that for Chairman Powell’s overly-phrased case? Going back fifty years, to 1959 and the beginning of the data series, 1.62% puts core December 2020 into the 14th percentile. There has only been less inflation than last month in 14% of the months contained in all those five decades. And these are his good numbers.

In the CPI services bucket, excluding rent, December’s 1.42% annual increase here drops last month into the 3rd percentile (data dating back to 1984). Third.

Suasion, Sure, But Is It Really Moral? Suasion, Sure, But Is It Really Moral? Suasion, Sure, But Is It Really Moral?


But it’s not just that the latest figure is a product of its time; as you can plainly see above, core service inflation pressure (which is right where money printing would hit first and hardest, if it was actually happening) has been ridiculously, conspicuously subdued consistently throughout the last twelve years. Yet, even December 2020 stands out among the lowest (10th percentile) of this lowest dozen!

How is that possible given the trillions in money printing? A government which wants inflation gets inflation, that’s what Bernanke said and what everyone believed – and many, if not most, still do today.

If there is a single positive to take from 2020, it’s that when it comes to QE and the Federal Reserve, they’ve since opened their “press” and laid it bare for the world to see. It can’t be a money printer (which we already knew from Japan). It might spit out trillions in bank reserves, but this obviously cannot be the same thing as effective, functional money (same thing goes for M1 and M2).

Suasion, Sure, But Is It Really Moral? Suasion, Sure, But Is It Really Moral?


What’s now driving people crazy at the beginning of 2021 is the other piece; rather than more QE and Fed intervention there is the fiscal stuff. If the central bank can’t get it done – and it can’t – then move over because here comes Treasury and its bulging TGA.

But just as the Japanese experience had conclusively demonstrated beforehand of what little monetary inflation to truly expect from modern money-less monetary policy of the kind practiced worldwide, Japan equally offers the same caution as to “out of control” fiscal tendencies, too. The government’s willingness is not the conclusive, and concluding, variable. They just want you to think this way and believe yourself moral for doing so.

Under the umbrella spelled with an “L”, inflation is entirely out of the hands of either central banks or central governments. It is still in their speeches, their clenched rhetorical fists grabbed even more tightly upon moral suasion, but, as in Japan, the proof is in, or not in, the CPI.

There’s less consumer price inflation right now than at almost every time in the last half century. And what times have been less, those are clustered during this last dozen years’ repeated sessions of moral suasion. Because even QE has never been anything more than unpersuasive (certainly to bonds) persuasion.


Suasion, Sure, But Is It Really Moral?

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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