Column : The truth behind Fedspeak

Oct 16 2012, 00:01 IST
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SummaryNovelist and journalist George Orwell, in his 1946 essay “Politics and the English Language”, wrote, “Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.”

Quantitative Easing will erode US savings and stealthily tax the rest of the world

Novelist and journalist George Orwell, in his 1946 essay “Politics and the English Language”, wrote, “Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.” Recently, Federal Reserve Chairman Ben Bernanke and the US Treasury Secretary Timothy Geithner were in India to persuade us to believe that the recent QE3 measures of the Fed will not increase commodity prices worldwide and that it is done in the larger interest of the global economy. The language used was largely Orwellian as the ‘Fedspeak’ as a matter of course has become. If the Fed Chairman could have his way, he would rather have a lexicon where crisis is stability, fiscal laxity is recovery, poverty is power and printing money is quantitative easing.

Political language functions through euphemism, by employing soft-sounding or simply meaningless words like Quantitative Easing to describe otherwise self-serving policies. In the recent trips of the Fed Chairman to economically important countries trying to explain QE3, language employed was intended to make policies seem like they have the best interests of all these countries in mind. To understand this Orwellian language, one must translate it. This requires the following steps: first, you look at the rhetoric itself as inherently meaningless; second, you examine the policies that are undertaken; third, you look at the effects of the policies. Finally, if the effects do not match the rhetoric, yet the same policies are pursued time and time again, one must translate the effects as the true meaning of the rhetoric. Thus, the rhetoric has meaning, but not at face value.

Well, let’s try to do the above steps with quantitative easing, which is a euphemism for printing money. Consider a little maths to understand the rudiments of the policy. If national income consists of R100, and the government takes a third in taxes, government obviously gets to spend R33.33. If the government doesn’t tax at all, i.e. imposes zero taxes but instead prints R50, even then the government gets to spend a third. It still has R50 out of R150, i.e. one-third. The total money supply, be it R100 earlier or R150 later, is just a notional value. So, printing money is a kind of tax. Moreover, it is a tax that creates inflation by increasing the notional value.

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