Inside the Brain of the Hard-Money Advocate

Hard-money advocates warn darkly of the risks of inflation to the dollar. They believe excessive monetary easing could lead to spiraling inflation and severe recession. One problem with this account is that it's wrong, as you can see from the still-rock-bottom inflation estimates that are implied by bond markets, despite the Federal Reserve's unprecedented easing efforts.

But the even bigger problem is that it does not account for the opposite risk: that insufficient monetary easing can spur an economic crisis. To see that risk, you only have to look to southern Europe, which has been forced into monetary austerity by the European Central Bank.

The New York Times reports today about a trend in Spain, where unemployment exceeds 25 percent: Employees who are no longer getting paid are continuing to work because they think they are more likely to eventually get payment from their current employers than to find a new job.

There is a tendency to think about monetary easing as a naughty, short-sighted solution that puts short-term gain ahead of long-term economic interests. But as Ramesh Ponnuru and David Beckworth have explained, that is wrong. Easing, when deployed at the right times, spurs real economic growth and avoids spikes in unemployment. In other words, it's the medicine that prevents Spain-type disasters.

This leads to two ways to think about the rhetoric of hard-money advocates. What's with Senator-elect Ted Cruz calling quantitative easing "a cruel tax on everyone working" and demanding European-style monetary policy, in spite of the ongoing disaster in southern Europe?

One way to understand this is as an error: Cruz doesn't understand monetary policy, hasn't read (or doesn't believe) the statistics that say inflation trends are stable and below the Fed's 2 percent target, and doesn't realize that too-tight monetary policies prolonged the Great Depression and continue to immiserate southern Europe today.

But another is to see it as reflecting a lack of perspective. Cruz focuses on inflation's effects on savers and their investments. It's true: Unexpected inflation hurts long-term bondholders. But the typical middle-class person holds few (if any) inflation-sensitive investments and might well be advantaged by inflation that reduces the real amount of a mortgage balance.

Meanwhile, if unemployment hits 25 percent in the U.S., Cruz and most of the people he associates with will still be able to get jobs. Politicians' environment tends to lead them to overweigh the concerns of securely employed (or retired) investors and underweigh those of people who are exposed to unemployment risk.

This does not mean there is a plan by the "rentiers" to enrich themselves at the expense of the masses through tight money. While overly tight monetary policy and the high unemployment that ensues is especially bad for the poor, it also holds down real economic growth and is a decidedly negative sum game. If tight money is a conspiracy against the masses, it's not a clever one.

But while tight money isn't good for the rich, it’s not a crisis for them like it is a crisis for the people who are actually unemployed. I was in Spain in June; the wealthy districts of Madrid and Barcelona do not feel like they are in a country brought to its knees by bad economic policy.

Pain is not evident in New York's prosperous districts, either, as you can tell by the wide variety of "pet spas" in Manhattan.

The combination of asymmetric crisis and gut-level suspicions about inflation allow elites to line up behind monetary policies that are bad for everyone, but especially bad for people who aren't them. This is why Cruz can say in a speech that the economy was worse in 1979 than 2009 without the room laughing at him.

Last year, Holman Jenkins wrote in praise of the euro for the Wall Street Journal, saying that hard money is forcing southern Europe to finally face the music and implement structural economic reforms. He has seen that his preferred monetary policies are being implemented in Europe and somehow endorsed the outcome.

Most hard-money advocates don't lay claim to Europe's crisis because it is obviously nothing to be proud of. But whether they know it or not, Spain is proving them wrong. With any luck, Japanese Prime Minister-elect Shinzo Abe will prove them wrong too, by easing his way to recovery. But if the monetary hawks haven't noticed Spain, there is no guarantee they will notice Japan, either.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.