Vatican Bank Chief Condemns Keynesianism

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Current fiscal and monetary policies in the United States and Europe risk increasing government control over national economies, resulting in weakened political strength throughout “the whole of the western world,” the Vatican’s top banking expert said.

Writing in the Jan. 14 edition of the Vatican newspaper, L’Osservatore Romano, Tedeschi warned of the growing influence of “Keynesian” economic theory on both sides of the Atlantic.

Governments on both sides of the Atlantic, he said, are committed to Keynes’ policy of increasing public debt to sustain levels of economic production, consumption, and employment.

He said artificially low interest rates are another key to the strategy of increasing spending and discouraging saving. With no incentive to keep money in the bank, those who would have otherwise been savers are pushed to spend.

“Zero interest rates factually equal a de facto transfer of wealth from he who was a virtuous saver (although not for Keynes) to he who has become virtuously (for Keynes) indebted,” he said. “Practically, it’s about a hidden tax on poor savers, a tax transferred to the wealthy, (that is), over-indebted states, business people and bankers.

More. That sound you hear is Morning’s Minion’s head exploding.

As a conservative leaning libertarian, I am used to Vatican officials making pronouncements about economics with which I disagree. Now, finally, someone at the Vatican is saying what lots of conservatives and libertarians are saying, and I still disagree.

The problem is that Mr. Tedeschi seems to be equating zero interest rates with rates that are artificially low. Zero is a low number, so it might seem obvious that a zero rate is too low, but as Milton Friedman famously noted, low interest rates are a sign that monetary policy has been too tight, not that it has been too looose (in the same way that the fact my car heater is on full blast is a sign not that the car is too hot but that it is too cold). If you look at methods of calculating what interest rate should be such as the Taylor rule, what you find is that negative interest rates are called for, or at least would be called for if they were possible. If rates should ideally be negative but are in fact zero then rates are not artificially low, but artificially high (or too high, at any rate). Since the Fed can’t make interest rates go negative, it has tried to achieve the same result by other methods, but one shouldn’t think of this as pushing rates below where they should be.

Nor is any of this a de facto tax on poor savers. If QEII is successful increases in the money supply will be matched by increases in output (as millions of currently unemployed workers find jobs), so the purchasing power of savings need not be degraded. And if you are one of the millions of unemployed, you will in fact be much much better off.

So I guess I will have to get used to cringing when I hear Vatican officials comment on the economy.

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  1. That sound you hear is Morning’s Minion’s head exploding.

    LOL. Maybe unsurprisingly that’s the first thought I had when I read the title of this post.

  2. “If QEII is successful increases in the money supply will be matched by increases in output (as millions of currently unemployed workers find jobs), so the purchasing power of savings need not be degraded. And if you are one of the millions of unemployed, you will in fact be much much better off.”

    This seems quite problematic to me. Isn’t it somewhat “perfect world” analysis? “If all the money trickles down to the right people, who spend it on the right things, productivity will up, people will be employed” and so on. However, looking at it simplistically, it seems to me that employment is created by others’ need (or, more darkly, desire). If I want a wagon wheel, and I do not have one, I can either make it, or buy it. Therefore, we need wheelwrights (or car makers). If the needs do not exist, trickling down funds will create jobs temporarily, but demand may not necessarily rise.

    Daniel Goldman noted in First Things, here:–depression-1243457089, that the recession we are experiencing is directly related to downfall in demand, especially for housing:

    “Housing prices are collapsing in part because single-person households are replacing families with children. The Virginia Tech economist Arthur C. Nelson has noted that households with children would fall from half to a quarter of all households by 2025. The demand of Americans will then be urban apartments for empty nesters. Demand for large-lot single family homes, Nelson calculated, will slump from 56 million today to 34 million in 2025–a reduction of 40 percent. There never will be a housing price recovery in many parts of the country. Huge tracts will become uninhabited except by vandals and rodents.”

    I would argue that as demand for housing falls and has fallen, so will demand for other material assets. Current fiscal stimulus (soon to be paying for growth in China’s military), combined with our individualistic and obsessive focus on no children / 1 child families, will sink us.

  3. Jonathan,

    1. That is David Goldman, not Daniel Goldman. He is untrustworthy.

    2. Housing prices per the Case-Shiller index are almost precisely what they were in February 2009.

    3. That index has been criticised as exaggerating volatility in housing markets due to its national indices being derived from some of the most overheated markets.

    4. The 30% drop in the Case-Shiller 20-city index during the period running from August 2006 to February 2009 had nothing to do with demographic factors. Family structure was not revolutionized in that 30 month period.

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