Bryan Caplan  

The Fed and the Euro

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CNBC says that Ron Paul blames the Fed's loose money for the Euro's troubles.  Umm, doesn't expansionary Fed policy raise the value of the Euro?  Is there any mechanism under which this makes sense?  Or is Paul's view being misstated? 

P.S. This interview seems relevant, but not very enlightening.

P.P.S. Is there any transcript available for Paul's CNBC interview?  I listened to almost the whole thing, and if he blamed the Fed's loose money for the Euro's troubles, I must have missed it.

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COMMENTS (29 to date)
Ted writes:

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

jsalvati writes:

Monetary policy is where Ron Paul is the most crazy.

Mayweather writes:

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 writes:

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?

kev writes:

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.

JPIrving writes:

Paul is in favor of doing away with legal tender laws and allowing private currencies to emerge, essentially competing with the dollar. That seems like a reasonable position, if unlikely. Though I imagine the dollar would rapidly lose value without legal tender status, this is the reason paper money has value.

Paul often overstates the extent of money supply growth and inflation. He also opposes QE and other monetary stimulus, and like most Austrians thinks that deflation is appropriate during a recession. I think he gets it wrong here. Still, he is about as good as it gets in U.S. national politics.

Danny Kenny writes:

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.

Peter writes:

Mayweather is on the right track.

The U.S. economy is the largest in the world. All central banks must be very careful of their monetary policy settings vis-a-vis the Fed.

So, when the Fed is overly easy, all other central banks have an incentive to be easy too to prevent their currencies from strengthening versus the US dollar.

The Fed was easy in in early 2000s. The ECB was easy too. There was easy money for homebuilding (Spain, UK, etc.) and easy money for weak European governments.

stan writes:

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.

Pat writes:

All the problems in the world are from loose money according to Paul.

Very frustrating - he ropes you into agreeing with him for a while but then he starts to veer off where the punch line is always the Fed.

Brian Clendinen writes:

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.

Jack writes:

I didn't think people on this website would be part of the cadre of economically-ignorant Paul bashers. Too bad I was wrong.

Ron Paul is right about competing currencies, and right about gold.

Once government controls the money, everything changes.

david writes:

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.

ThomasL writes:

I think david has it in option (b).

If he said anything, I'd imagine it was about the Fed reopening the currency swap lines to the ECB.

They just closed those lines in Feb., since no one on either side could foresee any continuing or future need for them...

I can't understand why they even trust their own predictions, judged by their own standards, much less why anyone else would.

David C writes:

"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.

John writes:

[Comment removed for supplying false email address and for crude language. Email the to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Boonton writes:


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.

Boonton writes:

AND, more importantly, the simpliest explanation for the Euro falling is the desire of the EU to see a looser monetary policy to ease the pressure on their weaker states like Greece and Spain who are already taking massive austerity hits in order to stay in the currency union.

Smith writes:

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.

Bob Layson writes:

Few economists can think other than as wannabe advisors to some government money Tsar. They suppose that streaming, hosing and sluicing new fiat money is the answer to every structural problem (mostly caused by previous government intervention).

State monies have been a slow motion disaster for the working poor and the fixed low income retired of the world.

A world money, without the need for a world government to provide it, would naturally emerge if govenment stood aside and let commerce do the business. The money would almost certainly be a mg of gold, ownership thereof being transferred electronically -by debit card- or in the form of banknotes redeemable on demand for a weight of gold coin of a certain purity.

No need either for a return to the gold standard and governments striving to 'maintain parity' whilst having other policies to make such maintainance impossible. No one need 'strive' to make a weight equal a weight or a certain purity a certain purity.

Boonton writes:


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.

Doc Merlin writes:

@David C.
"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."

If by inflation you mean monetary expansion?

Yes, they often are.

Monetary expansion causes flight to safety in financial assets (which oil has become) as people try to protect the value of their wealth. This is why we saw increasing stockpiles and supply with steady demand at the same time the price was rising.

Monetary contraction reverses this so you get a price crash. This is why housing, gold, and oil all tanked at the same time in 2008.

The simplistic quantity theory of money (and other neoclassical theories) doesn't account for either of these effects unfortunately, as it assumes people always hold money for store of value. I am currently working on a quantitative theory that will. (Wish me luck) :-)

Doc Merlin writes:

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.

David C writes:

I hadn't heard about that before, but I think Ron Paul is pretty clearly arguing something very different from what you're arguing, Doc.

Or, in print, he argues the primary cause is war. He then talks about the effect of inflation, but never mentions oil stockpiling.

Boonton writes:

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.

Doc Merlin writes:


Not quite! If US denominated interests drop because of Fed monetary expansion, the carry trade will deposit the dollar money into EURO accounts in Europe at higher interest. This expands the money supply in Europe in EUR.

Because of the carry trade, its fairly automatic that if one country expands its money supply, the supply in other currencies is also expanded. What matters is the relative real interest rates offered in those countries.

Boonton writes:

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.

floccina writes:

What is great about that is that it does not matter whether or not he understands money and banking because he does not want to run money and banking.

Boonton writes:

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.

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