Janet Yellin’s Predicted Monetary Policy And The Tragedy Of The Commons

The Monetary Commons Is Being Overgrazed.
The Monetary Commons Is Being Overgrazed.

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.


Garret Hardin’s intellectual popularity was a product of the Malthusian Fallacy. This doesn’t mean that he was analytically unintelligent. Even when Ptolemy argued the world was flat, given his data set he had a mathematical point that had to be systematically refuted by Copernicus, Kepler, Newton et al. Hardin makes the same sort of economic point, in his seminal piece “The Tragedy of The Commons” even if he is has been proven wrong about it with respect to human overpopulation.

Hardin argues that commonly held property will be exploited without conscience because the costs thereof are not directly visible to those who use the property. The end result of this exploitation will be systemic failure as the exploitation is inexorably extended to a logistical limit beyond which a meta-stable economic system can no longer attain sustainable equipoise. Or as Instapundit Blogger-In-Chief Glenn Reynolds puts it, “That which can’t continue will eventually stop.” One example of a commons that is being exploited towards inevitable tragedy is the current monetary system involving fiat currency.

We see everywhere a demand for more easy money, greater quantitative easing, a sub-zero ECB rate; a veritable Visigoth Holiday where credit is on tap like cheap malt liquor. As the time preference of the post-modern consumer approaches infinity, there is no consideration for the synapse-terminating hangover that will occur when the whole calliope crashes over the hard, unyielding cliffs of reality. Forbes Magazine describes the systemic unreality driving The Western world’s badly misguided monetary policies.


The New York Times and the Wall Street Journal ran front-page articles and The Economist a cover story on a topic that is truly bizarre: The world economy is suffering because we don’t have enough inflation. The Journal piece focused on Europe: “Too little inflation will threaten Europe’s fragile recovery. … The latest numbers signal that dangerously low inflation–which Japan struggled with for two decades and the U.S. central bank has labored in recent years to avoid–is at Europe’s front door.” The Times story was equally strange: “There is growing concern inside and outside the Fed that inflation is not rising fast enough. Economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak.”

What inflationary policy does to the value of money can be easily modeled by basic economic theory. Deliberately “goosing”, “Queasing”, “Pumping” or flat-out Benronning the money supply will only reduce the value of each individual unit of currency. This proves disadvantageous to anyone who postpones gratification and attempts to gather piles of said currency for future consumption. This does, however, benefit people who can arbitrage against this falling currency and it also empowers the government to borrow, spend and grow itself larger at the expense of all of these Middle Class families that are losing out. USA Today describes the process by which wealth is taken from the productive Middle Class and given to speculators and bureaucrats instead.


Since the asset purchases began five years ago, the average American family has experienced rising prices and stagnant wages. The resulting decline in living standards explains why voters ranked rising prices nearly tied with unemployment as their top economic concern during the 2012 election. As the middle class struggles, America’s wealthy are benefiting from the Fed-induced rally in asset prices….Worst of all for those focused on limiting the size of government, Yellen’s easy-money policies are encouraging Washington’s continued fiscal irresponsibility. With the Fed as a ready buyer of Treasury debt, even the Tea Party Republicans have not been able to meaningfully shrink the government’s size.

To complicate matters further, the immediate gain is recognized fully by a select group of individuals. The losses are dealt out gradually, over a longer frame of time. Hardin’s paper described the ultimate impact of that on the economic thinking of those who have deciding power over how much credit will be made available in an economy.

“What is the utility to me of adding one more animal to my herd?” This utility has one negative and one positive component. The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1. The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of -1. Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another…. But this is the conclusion reached by each and every rational herdsman sharing a commons.


And eventually the entire infrastructure upon which the bureaucrats and speculators feed is destroyed. This will happen just as every other speculative bubble that was blown has been popped. It will be interesting to see what happens when the bubble known as The Savior State finally pops.


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