The Fed and the Euro

Ron Paul has never understood how monetary policy works – why would he now ??

First, it would not change the value of the Euro much, it would only be in terms of the EUR/USD that any significant change would occur. So saying that printing US dollars would increase the value of the Euro would lead to the conclusion that printing US dollars increases the value of everything that is priced in dollars. I will give the benefit of the doubt and assume you meant the nominal exchange ratio and not value.

Also, the FED has a lot to do with the EURO. Central Banks in all countries, especially the US and Europe, frequently cooperate on policy decisions. To deny the FED had something to do with the Euro and troubles it sees is simply wrong, especially giving the dollars world reserve currency status. When Montagu Norman and Benjamin Strong worked together after WW1 in the 1920’s to bring the pound sterling back to gold at the pre-war ratio, did this have no effect on the dollar policy? Of course it had an impact. To what degree, that is another debate.

Bob Murphy: Paul wants to end the Fed, a lot of people consider that to be crazy. Fortunately, I think a lot of people are coming around to Paul’s point of view, not that that will change anything, as politicians no longer care what the plebes think.

Frankly, I don’t think Paul is crazy on monetary or foreign policy, but whatever.

I am a trader and have a CNBC box up on one of my monitors to keep an eye on what might be going on. You cannot trust anything they write in regards to their interviews. They are just trying to create headlines, take things out of context, anything they can really do to make whoever it is seem as interesting as possible while missing any nuance that was actually interesting.

Bloomberg is better, but there is nothing out there all that great.

Ron Paul is kind of a fraud, in that he really doesn’t understand what he’s talking about. I’ve heard him make those types of statements many times. Shocking that so many people take what he says as gospel.

Ron Paul makes a good legislator with the current mix of Republicans we have but would make a horrible president. His ideal government is way to Jeffersonian for my taste, but a lot of the incremental policies he pushes for are actual quite sound. I always love a guy can’t stop saying its all about the constitution stupid even while spouting off a lot of ignorant nonsense. Paul thinks he knows way more than he really does on monetary policy among other things.

Not sure what Ron Paul may have been referring to but a couple of thoughts:

a) excess liquidity in the world’s reserve currency combined with policies that delay the inevitable Austro-Klingian recalculation creates huge volatility in foreign exchange markets;

b) Paul may have been referring to the role of the Fed’s currency swaps in sustaining the currency union during times of stress – he normally takes the view that delaying the final reckoning only makes it worse.

“Can the first two posters elaborate? I understand how someone could think Ron Paul was crazy on foreign policy, but what specifically do you think is his problem on monetary policy?” – Bob Murphy

I know I once saw a clip on Youtube where, at a Republican Presidential debate, Ron Paul claimed that higher oil prices are caused by inflation. That’s the first thing that comes to mind when I think of crazy claims by Ron Paul about monetary policy. I’m at work and Youtube is blocked or else I’d try to find a link. Sadly, he was the only one there who even attempted to answer the question, and, if the others had, they probably would have said drill, baby, drill.

Mayweather

The US Central bank can raise the value of the Euro relative to the dollar by printing dollars and purchasing Euros. This would raise the Euro’s value overall since the supply of Euros on the world market would decrease.

The US bank, though, cannot force the Euro to go down unless it engages in a policy of selling Euros it has in exchange for dollars. This only works to the extent that the US Central bank has a lot of Euros to sell, the Fed doesn’t have a ‘Euro printing press’ after all. I don’t know if it does or doesn’t but I’d imagine the Fed deciding to try to push down the Euro would be pretty newsworthy and would have attracted some serious attention.

In terms of Ron Paul though, his statement makes no sense. If the Fed were selling Euros for dollars that wouldn’t be a looser US monetary policy, that would be a tighter one.

As for everyone else, I think its very clear Ron Paul didn’t know what he was talking about. Let’s not pretend he was talking about some convoluted abstract and subtle but easily overlooked nook of economic theory (ala the way House is with medicine) unless you have some actual evidence of such insight on Paul’s part. Otherwise the simpliest explanation is probably the most true, he simply doesn’t know what he is talking about AND from a political perspective he doesn’t really need to care.

The fed is printing money to give to the IMF to give to Greece. This is an expansion of the money supply i.e. loose monetary policy and will cause inflation. The reason it doesn’t help Greece is because now their economy is backed by US dollars, and the US dollar is weakening. Just look at gold and silver. The Fed is contributing to the inflation of the Euro Zone by buying their debt that is worthless instead of liquidating the debt.

Ron Paul is right.

Smith:

The fed is printing money to give to the IMF to give to Greece. This is an expansion of the money supply i.e. loose monetary policy and will cause inflation.

1. The Fed isn’t doing this.

2. If the Fed did the Euro would be going up. The Fed prints US dollars, at the end of this transaction the demand for Euros would go up as would the supply of US dollars. This would mean a declining dollar and increasing Euro. We see the opposite.

Cleary if this is Ron Paul’s understanding of monetary policy then he doesn’t know what he is talking about.

Expansionary US monetary policy means that other countries also expand their monetary policy. This leads to lower rates on national debt. This leads to higher principal levels of indebtedness. Later when rates rise again, the countries have far more debt than they would have had under reasonable rates. This leads to huge economic problems.

Expansionary US monetary policy means that other countries also expand their monetary policy.

No it doesn’t. The US Fed prints money and buys T-bills. US Money supply increases. What does that do to European money supply? Absolutely nothing. Yes the EU may decide to print money too to prevent the US from boosting exports by devaluing its currency….or it may not but one country expanding money supply doesn’t automatically expand anyone else’s.

What exactly gets deposited into the Euro accounts in Europe? Euros. Where do the Euros come from? From people who have borrowed cheap US dollars who purchase Euros from people holding Euros. European money supply doesn’t increase as the owner of the Euros simply change hands to people playing the carry trade.

The people who sell their Euros for US dollars will presumably either use those dollars to shop in the US or put into US banks for various investment purposes thereby making an increase in US money supply an increase in US money supply.

The increase in demand for Euros raises the value of the Euro making it more expensive relative to the US dollar.

Anyone, whether they know monetary economics or not, who is advocating or even hinting that the US should be adopting a policy of tighter money in this climate is as much a clear and present danger to the US economy as a chain smoker in a mine with a massive methan buildup.