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Bernanke Ignores Basic Economic
by John Tamny, Toreador Research and Trading (VE Guest Contributor)
Much ink is presently being spilled by the economic commentariat concerning soft demand in the economy, and ways to increase it. Lost on the deep thinkers that presume to know what makes us prosperous is the greater truth that demand is the last thing governments would ever need to stimulate.
As humans, our demand for what we lack is unceasing, by definition. That's why we work. If this is doubted, one need only camp out an Apple store the next time our leading technology innovator releases its next must-have product.
But what the average consumer knows that the fine tuners in Washington apparently don't is that in order to buy an iPad, consumers must produce something of similar value first, exchange it for dollars, then purchase the Apple product. And if they've not created value that is exchangeable for the iPad, they must find someone who has produced the iPad's cost in dollars, and who is willing to delay near-term consumption on the way to transferring their consumptive abilities to the eager buyer.
To make what's simple even simpler, all demand is the result of production first, and this has been the case for as long as man has roamed the earth. We produce so that we can consume.
Of course economists will continue to try to put the cart of demand before the production horse, and unsurprisingly the never disappointing Ben Bernanke - the walking definition of an economic fallacy - will carry the load for them from the Fed. Bernanke did just that in an opinion piece last week for the Washington Post.
Eager to justify his latest dose of "quantitative easing" (QE) amid increasing skepticism even in Washington where the false concept of getting something for nothing is religion, Bernanke proclaimed that lower interest rates wrought by QE will increase stock prices on the way to more consumer wealth and confidence. According to our Fed Chairman, this might boost spending, and "Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." One can't make this up.
But if the sentient among us could climb inside Bernanke's dopey dreams for a moment a la the film Inception, we might insert the part about production preceding demand so as to make his Utopian visions in the middle of the night whole. In Bernanke's case, it's apparent that he always wakes up before the production aspect enters his incomplete picture.
Absent it, the increased demand that Bernanke presumes is no such thing. That's the case because the wealth effect that he naively believes to exist is non-existent.
If shareholders exchange shares of increasing value for dollars in order to consume, the seller's dollar bonanza is naturally matched by the buyer's reduced cash position. These things even out, with no increase in consumption. And the same applies to housing. If Bernanke's rate machinations enable mortgage refinancing for certain individuals, suddenly flush mortgage holders will be matched by savers whose savings will enable the financial transaction.
Of course underlying Bernanke's vision is lower interest rates across the board driven by the Fed's interventions. But here too he gets things backwards.
Indeed, tight credit during uncertain economic periods is usually a positive signal that failed economic concepts are being starved of capital so that they're no longer able to destroy it. High rates of interest aren't scary as much they're a symptom of previous mistakes, and they're essential for drawing savers back into the marketplace to fund productive ideas quite unlike the ones that caused the financial panic to begin with.
More important, high prices of anything by definition beget lower prices in the future. No economist - including even Mr. Bernanke - would suggest that if actual demand drove gasoline to $5/gallon that price controls should be put in place. They wouldn't because the $5/gallon would signal to producers what the market desires, and that they will be compensated handsomely for delivering what consumers want.
What's never been explained is why central bank attempts to control the cost of credit are any different. In the gasoline example government intervention would distort precious price signals on the way to shortages, but just as Bernanke ignores Say's Law, his vain efforts to make credit plentiful reveal that he ignores too the crippling effects of price controls as they apply to him.
Bernanke continues to promote the view that we don't have an inflation problem, and to support his claim he points to a "considerable" amount of "spare capacity" in the U.S. The problem there, if we first ignore that U.S. producers operate in a global economy with lots of spare capacity, is that Zimbabwe, Mexico and Argentina have long had a great deal of spare capacity, and this has never spared them from the cruel monetary phenomenon that is inflation.
Indeed, outside of central banks and academic circles inflation remains what it's always been, and that's a decline in the value of money. And with the dollar continuing to test new lows against gold and every major foreign currency, it's apparent that Bernanke is additionally ignoring the price signals that are presently screaming inflation.
Perhaps to give us a laugh, Bernanke notes that the Fed labors under a dual mandate imposed by Congress "to promote a high level of employment and low, stable inflation." Funnily enough, on Bernanke's watch the rate of unemployment has doubled, and while he would correctly point out that the dollar's exchange value is a Treasury thing, gold has nearly tripled versus the dollar during his tenure. It's as though he's begging to be relieved of his duties by noting his failures, but his peers and overseers in Washington are as clueless as he is.
As a result, Americans and the world will continue to suffer a Fed head that, with every utterance shows how very unequal he is to his job. A self-proclaimed expert on the 1930s, Bernanke continues to intervene in the economy despite clear lessons from that decade showing that government intervention then turned what should have been a brief downturn into a Great Depression.
About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channe
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The guys at BAC, WFC, etc., all have HP12s. When they run the numbers with 7% interest rates, they start crying. Ben is their box of Kleenex for the next eight months.
I imagine that the derivative hedges have locked in lower interest rates forever now. There is not enough money in the world for the counterparties to pay off the gambling bets if interest rates went to 7%.
... seemingly all of those hedges/derivatives were made so that the banks could pull 30 years of earnings forward and pay themselves big bonuses. We have to maintain the Ponzi growth game, ya know ... and if you can't make it today then you have to steal from the future and let some other sucker take on the (unpayable) risk.
High interest rates aren't a crisis as Ben Bernanke assumes,...
In the 80's we had a robust sock, bond and private equity market (and a pretty decent economy) with interest rates that seem crazy-high by today's standards.
There are many bad things about prolonged low interest rates including an inability to build savings and the collapse of affordable insurance.
I think that they believe that without deflating the dollar first and inflating wages and taxes the servicing of the debt would be unmanagable for the US government if interest rates went higher. They are first bringing down the interest payments, making the dollar cheaper and then they will worry about the rest of it.
IMO it is not a solution at all. But it may be the best solution that saves the Fed and the banking empire. (So, why do we care about saving the Fed and the banking empire?)
That is frightening what you just wrote... and it is so true...
I see QE not as stimulating consumption. I see it as the solution they have created to save the private banking empire. Compare and contrast to China.
China owns its banks. The government stimulates the economy and puts people to work building things ... entire cities, loans to local businesses, and no one has any intention of every making those enterprises a profitable success, or so it seems. That is not the point. The point is that the debt is created and as soon as the funds have run their course the debt is written off. Money and assets have appeared in the economy and no debt exists.
China can do this because China is a big sink hole looking to get more money into the system.
The US on the other hand is awash with money. It is not only sloshing its way through the US, but after many years of American imperialism and consumption of natural resources it is sloshing its way throughout the world. We add more money, we create a bigger problem because there is already an excess of US Dollars out there.
OK, so the Fed is trying to do what China is doing. They are trying to make the debt disappear and leave the money in circulation with the banks (so the bankers can give themselves large bonuses because that is the Fed's constituency). The Fed buys the debt and can poof it without anyone really noticing or caring just like the Chinese government can poof it ... and never get into debt.
Two differences between the US and China
a) The US needs less money in circulation and China needs more
b) The US has parasitic bankers and debt to deal with whereas China controls its own money and never has to go into debt.
I believe that Weimer and Zimbabwe aside, monetization is absolutely the right thing to do, but only after the source of the problem is corrected. Debt is the problem, not the solution!
You guys are all off. Go read his articles from '94-'95 and his PANIC model for banks during the depression. He believes that the Depression ended when wages fell. Bernanke is very concerned, among other things with sticky wages. He has never retracted those opinions. Bernanke if consistent with his own writings, must bring wages lower to meet his belief that only when wages fell did employment gradually pick up and end the Depression.
Grossly simplified of course.
Bernanke's not trying to create a recovery, he's merely trying to control the collapse to allow an exit for the chosen survivors...