Fed's Dollar Lie Called Out by Victorious Merkel

June 9 (Bloomberg) — The capitalist U.S. is nationalizing its biggest automaker, even as it pretends not to do so. Europe, for its part, is moving right.

This week's elections for the European Parliament are an example of Europe's new mood. In Germany and France, voters supported incumbent conservative or centrist parties. In Spain and the U.K., they punished center-left parties that are at the helm. All over, the left got trounced.

"Social Democrats get hammered for their belief that the voter honors throwing taxpayer money at failing corporations," Wilfried Prewo told me by e-mail. He is chief executive of the Hannover Chamber of Industry and Commerce, which represents an area of Germany that includes Volkswagen's home.

Days before the vote, German Chancellor Angela Merkel complained publicly that the European Central Bank had bowed to international pressure to buy up assets, mimicking the U.S. She disapproves of the Federal Reserve's dumping of cash into the global economy.

The underlying dynamic here is a little-discussed fiscal/monetary tradeoff. In recent times, Europe's stunning fiscal outlays permitted it to pursue tighter monetary policy, while the U.S. used monetary policy as a substitute for European-scale fiscal spending.

Loose money enabled the U.S. to conceal from itself the extent to which it was buying off citizens. It is easier to tell yourself the value of your home is rising because you live in the Land of the Free than to admit it's rising because of a wrongheaded government policy.

Consider the public perception of Europe and the U.S.

Efficiency of Legoland

Euroland, especially Germany, runs like Legoland, with an efficiency that holds the eye. Its cities dignify retirees. In Berlin, octogenarians ride the train to the cafe where they pay for their lattes with public pension.

In short, Europe is good at being a social-welfare state, good enough to cause a problem. As the Nobel Prize-winning economist Edward Prescott has noted, Europeans work less than Americans. Official Europe actually encourages non-work to the point of parody. As scholar Stefan Theil has pointed out, some French high-school texts even warn young people that, "Economic growth imposes a hectic form of life, producing overwork, stress, nervous depression, cardiovascular disease, and, according to some, even the development of cancer."

Lessons of 1920s

The fiscal outlays in Euroland promise a troubled future for the next generations. But they also distract voters' attention from the relatively tight monetary policy of the European central bank. That tightness stems from a collective memory about how loose money can destroy pensioners and everyone else: the memory of the German hyperinflation of the 1920s.

The U.S., by contrast, is usually good at growing and generating new jobs. However flakey U.S. textbook authors are — and they can be flakey — they don't dare trash growth to the extent that they European counterparts do.

On social services, the U.S. is inconsistent. Being an American retiree is a drag, at least compared with life for retirees in Europe. In the U.S., life takes place on the job, which is why some seniors find consolation in part-time hours in the hardware section of Wal-Mart.

As for our Fed, it has been looser, at least lately. Low interest rates powered a real-estate craze created by sloppy mortgage securitization, federally sponsored entities like Fannie Mae and Freddie Mac, and Chinese cash. Germans got high-speed rail; Americans got home-equity loans.

'Palliative' Policy

The American version of the tradeoff, monetary for fiscal, was rarely noted explicitly. But it existed and consoled those who were least able to take advantage of American economic opportunities. Raghuram Rajan of the University of Chicago Booth School of Business is one of the few who have pointed out the direct relationship. At a recent management conference, he called U.S. monetary policy a "palliative" to offset social pain.

Many of us long have believed that U.S. growth could absorb money creation, or capital inflows. With higher growth, the extra money is put to use. Effectively, that's what happened in the 1980s, during Ronald Reagan's "Morning in America," and the 1990s.

But what about now? Europe is beginning to acknowledge it must curtail fiscal expenditures, whether they involve pensions, health care or bailouts of failing companies. This start probably isn't sufficient to generate the growth necessary to overcome the still-very-heavy entitlement obligations of European governments. Still, the direction of its politics suggests that Europe has a brighter future than it did before.

As for the U.S., it is turning into more of a social-welfare state. This is problematic on a number of levels.

Not Becoming

The first is that social-welfare statehood doesn't become the U.S. Our geography and temperament make it hard for us to deliver social services efficiently. Seniors don't ride trains; they drive around. They spend more — a whole lot more when gas prices soar — getting to their physical therapy or their coffee. Medicare and Medicaid are inefficient to the point of ridicule.

What's more, today's easy-easy framework — heavy fiscal spending, loose monetary policy — puts the U.S. on a slower growth path. The forecasts suggest the U.S. may still grow faster than Europe. But it may not be fast enough to outgrow Medicare Part D and other government payments, nor fast enough to outgrow the spending approved and imposed by the Fed, Congress and the current and preceding presidential administrations.

Denying and Lying

A U.S. that denies this is a U.S. that lies to itself.

A second recession, or a continuation of the current one, is inevitable as the Fed corrects for its past — especially if the U.S. continues to abuse the dollar, at home or abroad, for political purposes.

What Merkel was trying to get at was that monetary policy should be for money, not for the improvement of gross domestic product. That's a point that must be reckoned with before the next "morning in America."

(Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression" is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2009 Bloomberg

Available for order:

To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
Recent Articles
Free Markets Can Appeal to the Working Class
National Review
December 3, 2020
Biden's Dangerous Central-Planning Ambitions
National Review
November 24, 2020
Episode 41: Coolidge Not Silent Any More
National Review
October 28, 2020