Great Read: Doesn't Money Growth Produce Inflation? Normally, Yes, But…

Following excerpt explains it all:
But doesn’t money growth produce inflation? Normally, yes, but it has to go somewhere for that to happen. He says, “You miss the circulation effects as the money moves between buyer and seller, saver and spender, three or four times. [Now] it just stays in the bank.”
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Barron’s: Why Milton Friedman Lies Uneasy in His Grave


Economist Allan Meltzer has been criticizing the Federal Reserve for decades, and he continues with the current central-bank policies.

Economist Allan Meltzer has been criticizing the Federal Reserve, its monetary policy, and often its chairman, since Arthur Burns headed the central bank back in the 1970s. A member of the President’s Council of Economic Advisers under Ronald Reagan and also of John F. Kennedy’s Treasury Department, 85-year-old Meltzer co-founded the influential, independent Shadow Open Markets Committee in 1973 with the idea of monitoring and discussing the central bank’s policies and publishing committee findings about growth in the money supply. Meltzer, a free marketer, is also the author of a well-regarded two-volume history of the Federal Reserve.
Forty years later, the peripatetic economist is as determined as ever to set the bank — as well as the country — back on the right course. That task is tougher than ever.
The Carnegie Mellon professor says the father of monetarism, Milton Friedman, would be aghast at the policies of current Fed chairman Ben Bernanke.
“They have just no regard for monetary growth,” Meltzer fumes. Friedman advocated a relatively low, steady growth of money to keep the economy growing and inflation in check. But today’s Fed focuses “far too much on short-term monthly indicators like unemployment, housing starts, and industrial production that swing one way one month, the other the next,” he says. “The trick is to pick one long-range point and then stick with it, rather than being blown by every breeze,” says Meltzer.
THE TROUBLE WITH “data-driven policy” is that it doesn’t have a strategy, says Meltzer, who also works at Stanford University’s Hoover Institution.
The policy that most bothers Meltzer is the Fed’s practice of paying 0.25% for bank deposits held at the central bank. To Meltzer “this is sheer insanity…a scandal,” and one of the key reasons that lending continues to stall. Since the policy was enacted during the financial crisis, the level of excess reserves at banks has risen from virtually nothing to $1.86 trillion.
Meanwhile new business lending has stagnated these past four years. Commercial and industrial loans by U.S.-regulated banks. which topped $1.6 trillion in 2008, fell to $1.2 trillion in 2011, and have only gradually risen to $1.5 trillion in June.
But doesn’t money growth produce inflation? Normally, yes, but it has to go somewhere for that to happen. He says, “You miss the circulation effects as the money moves between buyer and seller, saver and spender, three or four times. [Now] it just stays in the bank.”
Why should banks make “risky loans to first-time homeowners,” notes Meltzer, “when they can make almost a quarter of a percent just holding onto reserves. This amounts to a multibillion-dollar subsidy that goes directly from the U.S. taxpayer to pay the bonuses and dividends of the big banks, both domestic as well as the foreign branches of European banks.”
During the crisis such bold action made sense. The payment of interest on reserves provided much-needed liquidity. But the need for protection has long passed.
Meltzer, who also advises politicians like Louisiana Sen. David Vitter, a conservative Republican who sits on the powerful Senate Banking Committee, doesn’t restrict his criticism to Bernanke. He blames President Obama for antibusiness policies that have heightened uncertainty. Today businessmen and savers rightly feel under attack, so they hold back. He says, “Corporations have more cash than they ever had. They don’t want to invest because the administration looks hostile. Today we hear Obama wanting to tax the rich, even to reach into 401(k) savings plans to cap returns (‘President Obama Thinks Your IRA Is Too Big,’ Barron’s, June 22).”
The historical context reminds him of the late 1930s, when the country was emerging from recession but President Franklin Roosevelt bowed to populist sentiment by toughening antitrust laws, set up a special study on corporate competition, and supported unions when they illegally occupied General Motors during a strike.
At the same time Meltzer worries that a perverse set of incentives has been created that reward speculators over savers. The housing recovery now underway, he says, isn’t being fueled so much by purchases by individual eager new home buyers as by the billions of dollars raised in the capital markets by real-estate investment trusts. Says Meltzer: “It’s not Mr. and Mrs. Homeowner buying the houses. It’s speculators. They’re the ones who are able to get loans in this environment.”
The average American would be much better off if the government ended the subsidies to the banks, and replaced them with higher capital requirements of about 20%. Sensible capital requirements protected the big institutions during the Depression. He believes in limited, sensible regulations that protect big business from itself, along with lower taxes, to get investment going and to get Americans back to work.
Economic research clearly shows that ailing economies get turned around by reducing taxes. “The president is simply wrong. There’s nothing else I can say.”