Saturday, November 17, 2007

The Editors at National Review Don't Get It

Being worried about Federal Reserve policy and its recent rate cuts, they neglect to understand that this is the problem with the Federal Reserve itself.

The rest of the world saw this capitulation to the market’s nervous Nellies as inflationary, and became less willing to hold dollars. If the Fed had acted correctly, responding to the state of the economy rather than to a state of mind, the dollar would be stronger today, and closer to its intrinsic value.

What does "the intrinsic value" of the dollar mean? The dollar is worth what you can get for it. If the dollar loses value, it loses "intrinsic value." There is no platonic dollar to which our dollar aspires. People often accuse goldbugs of not understanding money and of thinking that gold has some magic value that makes it "real" money (we don't, but that's an issue for another day). Obviously, some fiat-bugs have this problem.

Small deviations from free-market principle can have outsized consequences.

Government-imposed fiat money is a deviation from the free-market. Honestly, I fail to see how one can characterize any of our government's policies as "small deviations" from the free market. Unless one is an anarchist or severe minarchist, one will invariably be offering rather large deviations from the free market. It is ridiculous to portray the free market as delicate and at the same time advocate a large, activist government at any level.

In particular, once you accept a large, ultimately government-controlled bank as the institution which controls the supply of currency, how you can discriminate betwen their policies as free market and non-free market is beyond me. Arguing that its policy should respond "to the state of the economy rather than to a state of mind" is arguing about how it should interfere with the economy, not about whether it should.

That is all.

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