Column : The truth behind Fedspeak

Written by K Vaidya Nathan | Updated: Oct 16 2012, 05:31am hrs
Quantitative Easing will erode US savings and stealthily tax the rest of the world

Novelist and journalist George Orwell, in his 1946 essay Politics and the English Language, wrote, Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. Recently, Federal Reserve Chairman Ben Bernanke and the US Treasury Secretary Timothy Geithner were in India to persuade us to believe that the recent QE3 measures of the Fed will not increase commodity prices worldwide and that it is done in the larger interest of the global economy. The language used was largely Orwellian as the Fedspeak as a matter of course has become. If the Fed Chairman could have his way, he would rather have a lexicon where crisis is stability, fiscal laxity is recovery, poverty is power and printing money is quantitative easing.

Political language functions through euphemism, by employing soft-sounding or simply meaningless words like Quantitative Easing to describe otherwise self-serving policies. In the recent trips of the Fed Chairman to economically important countries trying to explain QE3, language employed was intended to make policies seem like they have the best interests of all these countries in mind. To understand this Orwellian language, one must translate it. This requires the following steps: first, you look at the rhetoric itself as inherently meaningless; second, you examine the policies that are undertaken; third, you look at the effects of the policies. Finally, if the effects do not match the rhetoric, yet the same policies are pursued time and time again, one must translate the effects as the true meaning of the rhetoric. Thus, the rhetoric has meaning, but not at face value.

Well, lets try to do the above steps with quantitative easing, which is a euphemism for printing money. Consider a little maths to understand the rudiments of the policy. If national income consists of R100, and the government takes a third in taxes, government obviously gets to spend R33.33. If the government doesnt tax at all, i.e. imposes zero taxes but instead prints R50, even then the government gets to spend a third. It still has R50 out of R150, i.e. one-third. The total money supply, be it R100 earlier or R150 later, is just a notional value. So, printing money is a kind of tax. Moreover, it is a tax that creates inflation by increasing the notional value. And because the currency that is being printed is the US dollarthe worlds reserve currencythe Fed is stealthily taxing the rest of the world by unfairly using its right to print currency.

Lets stretch the example a little further. Lets say that the R100 economy consisted entirely of three mangoes. If there is only R100 in money and the economy has produced only three mangoes, then each mango would cost R33.33. But if the money supply increases to R150 because of government printing money, each mango would now costs the aam aadmi R50. This is because the act of printing money doesnt create any more mangoes, or other goods and services. It never does.

In actuality, the money printing tax is a stealth tax which eventually steals money from the public through inflation. It is perhaps still okay if the government steals money from its own citizens. However, Quantitative Easing steals money from us Indians too. Let me explain. With the increase in supply of dollars, the price of commodities like crude oil is bound to increase sooner than later. It is a straightforward demand-supply law of economics. However, because the inflation may not come right away and because its stealthy, the average person doesnt understand what is happening. Policymakers do understand but choose to convey this euphemistically, in Orwellian language.

Thats what the Fed Chairman Bernanke chose to do in his latest remarks. He said that printing money in order to buy bonds and keep interest rates well below the rate of recorded inflation is good for the rest of the world. Forget rest of the world, it is not even good for the savers in the US. Only in the Orwellian world, it may be good for savers to find interest rates forced down below the rate of inflation, which makes it impossible to preserve the purchasing power of their money. If Bernanke is taken at face value, their current monetary policy encourages savings when nothing is paid for it! What the Fed has done, especially with QE3, is to stealthily tax the rest of the world and make undeclared war on savers in the US, with Bernanke claiming the opposite in Orwellian language.

It is said that if you tell a lie big enough and keep repeating it, people will eventually come to believe it. Bernanke has recurrently repeated the tall tale that Quantitative Easing is good. And some people have started believing it. Even so, it is difficult to see how printing dollars can be good for the rest of the world as Ben Bernanke claims. It is sad that the Fed Chairman has stooped to telling silly lies. Or, does he really believe in this hot air It is difficult to decide which is worse.

The author, formerly with JP Morgan Chase, is CEO, Quantum Phinance