This page has been archived and commenting is disabled.

Ben Bernanke Now Blogs

Gold Standard Institute's picture




 

by Keith Weiner

 

Ben Bernanke presided over the Federal Reserve for two terms, from 2006 through 2014. A year and half into his first term, he began driving the Federal Funds Rate down. By the end of his frantic interest episode, this key overnight lending benchmark had been crushed. It hit bottom, and it hasn’t sprung back in over 6 years since.

Everyone is harmed by zero interest policy. Who suffers the most is open to debate, but one obvious candidate is the retiree who lives on a fixed income. These are people who worked and saved their whole lives, and now they depend on interest to buy groceries and heat their homes. For them, zero interest is like breathing air without oxygen. They suffer a slow death by suffocation.

In writing about this class of people, economist John Maynard Keynes used a term he intended to be pejorative—the rentier. In Keynes’ view, those who invest capital to earn a yield are parasites. In The General Theory of Employment, Interest, and Money, he asserted that the rentier is a “functionless investor” (i.e. gets paid for doing nothing). Keynes
called for “the euthanasia of the rentier” by government suppression of the interest rate.

Recently, former Federal Reserve Chairman Ben Bernanke has begun blogging at the Brookings Institution. He wrote that legislators said he was “throwing seniors under the bus.” He reassures us that he “was concerned about those seniors as well.”

That is a neat little example of context-switching. These unnamed legislators did not ask Chairman Bernanke how he felt as he was throwing senior citizens under the bus. His feelings are not the issue. The issue is whether zero interest does, in fact, throw seniors and other rentiers under the bus. Bernanke can’t deny that, and he doesn’t try.

Instead, he offers this, “But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do.” Got that? We have to keep interest low, so seniors can earn more interest.

Bernanke then unwittingly makes a good point. “Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by ‘the markets.’ The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.”

This is indeed the whole point of irredeemable paper money and central banking. The decision to extend credit, and at what interest rate, has been taken away from the people. The saver is totally disenfranchised. The power to set rates has been concentrated, and placed into the hands of the committee who runs the central bank. It’s just how irredeemable paper money works.

We free marketers should always keep something in mind. The regime of the dollar centrally planned. Although then planners deserve criticism, we should not focus on them. We should take care not to imply that any other planner would do better.

There is no such thing as a good central planner. There are only central planners that destroy capital less quickly and those who destroy more quickly. Sometimes, people may think that a Fed chairman is not so harmful during his tenure, only to realize the full extent of the destruction later (for example, Alan Greenspan).

Bernanke thinks he is defending himself, when he makes his most damning statement. “A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again. This is hardly a hypothetical scenario: In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases.”

So interest rates have to go down when the economy is weakening. Consider the interest rate trend since 1981.

long term Treasurys
(Courtesy of the Federal Reserve Bank of St. Louis)

Why has the rate been falling for over three decades? Why has the economy been weakening for 34 years? It’s even worse in Japan and Germany, and even worse than that in Switzerland (which sports a negative rate on the 10-year bond).

Bernanke and his colleagues did not see the crisis of 2008 coming, even as they centrally plowed the world into it. Despite his crocodile tears, savers all have bus tire tracks on their backs. When I was in grade school, kids could work a paper route, and with compounded interest, pay for a college degree. No longer. Workers can set aside 10% of their salaries, if they wish, yet they have no hope that it will ever support retirement. Seniors are forced to spend their capital, fearing to outlive their money.

This is the central banking endgame. Have you ever seen one of those humorous signs that says “The beatings will continue until morale improves?” Similarly, the interest rate will keep falling until the economy improves. The Bernanke’s of the world will never find an opportunity to raise rates.

If we don’t change the regime, rates will continue to fall into the black hole of zero—and negative, as in Switzerland and Germany.

Instead of giving us an apologia, Ben Bernanke has a unique opportunity to show the world that central banking has weakened the global economy. Central banking cannot plan us out of the quagmire it has planned us into. Bernanke could give a clear statement, and explain that for all of his intelligence and education, it availed him not. The irredeemable dollar cannot be fixed.

What he should say is that it is now time for the world to consider a four-letter word that has been all but banished for decades. Gold.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 04/07/2015 - 08:04 | 5966166 thecrud
thecrud's picture

You can fix this economy in exactly the way it was fixed in the early 70's let anyone get a loan at 17 percent.

This fixes it because money gets put to work not bed.

 

 

Tue, 04/07/2015 - 17:21 | 5968069 wwxx
wwxx's picture

"You can fix this economy in exactly the way it was fixed in the early 70's let anyone get a loan at 17 percent."

 

Well that is real nice to say, wish, or dream, but the reality is that no one, is going to buy a loan at that high a rate.  Why?~~~Because the interest rate is a reflection of the value of the money.  And because there is mega-humongous overload of fiat money (intentional inflation created by the FED over the last many years) therefore with this mega-volume of money, the value of the money has been rendered extremely low.  And there is no reason to pay extremely high interest rate, for something that isn't worth much at this time.  Just look at the price of gold, and how many paper dollars you will have to fork over to buy some of it.  Personally I cannot fathom selling gold to anyone for fiat money that is worthless.  Would you sell your gold for a boat load of pesos?

 

You could set the FED discount window rate at 17% tomorrow, but the market will not seek to borrow any of it, at that rate, not even the US Congress would seek that kind of expense, considering they now have an annualized debt of $18T, which is much much cheaper to deal with at ZIRP, or NIRP.

 

The only way I can see fixing anything is to totally destroy the US Dollar, and all that it stands for.  Start over with a new currency, a specific amount for every legal citizen, create a mountain of graves reserved for the special ones that have taken part in this fiasco now called the New Normal, and a new modern constitution, with a direction aimed at conservation of natural resource and reclamation of all international & even interstellar infrastructure.  Throw away the name United States, and that worthless red, white, and blue rag.

 

I think with a decent leader, cutting off the rot & reclaiming the mismanaged waste might well provide the pressure to actually succeed in an honest way.

 

No WTO

 

wwxx

Tue, 04/07/2015 - 07:58 | 5966157 DavidC
DavidC's picture

I can think of a four letter word that describes Bernanke...

DavidC

Tue, 04/07/2015 - 07:55 | 5966154 AUD
AUD's picture

So interest rates have to go down when the economy is weakening

That's exactly what is happening. Interest rates are declining because under the irredeemable $, just about the sum total of the money markets has become worthless junk. Central banks must bid up the price of this junk, that is, lower rates, to keep the Ponzi scheme functioning. Prices must rise.

You still haven't worked it out Keith. I put it down to your illogical view that gold is somehow money because of its quantity, whilst credit is money because of its quality.

Tue, 04/07/2015 - 07:44 | 5966144 Lone_Star
Lone_Star's picture

Nice post, but I doubt Gold could solve the problems of government deficits. It takes money to mine gold and process it, as someone has to put in the labor. The endless printing is also not the answer because despite the mindless economists assurances, debt has to be repaid. The only real answer, in my belief is to cut spending. The simplest way to do that is to eliminate transfer payments because they are already being subsidized by government debt, and move on from there. Once debt has been removed then you can bring back a gold standard.

As for interest rates, the ZIRP policy is basically theft in my eyes. Stealing from not only savers, but future generations, in order to mask the mountains of debt that are accumulating.

Tue, 04/07/2015 - 08:54 | 5966294 optimator
optimator's picture

The Dollar wouldn't have to be backed by gold 100%.  Even backing it 10% would be an inprovement.

Tue, 04/07/2015 - 07:41 | 5966128 wwxx
wwxx's picture

The Bernanke didn't waste much time introducing Larry Summers & his theory, of which the dog & pony blog begins to reveal how overly complicated they demonstrate their strategies of the day.  The roulette wheel of excuses is even distorted for the sake of posterity.

 

The bottom line is that the discount window rate is a reflection of the value of money.  If your discount rate is 0.63%, then your money is not worth much, if your discount rate is 4%, then it has much more value, quite simple actually.  If you want a larger more dramatic fire than simple low discount rates provide, helicopter drop cash to your friends.

 

wwxx

Tue, 04/07/2015 - 06:49 | 5966061 realWhiteNight123129
realWhiteNight123129's picture

Keith,

This is a good post. The central bank has massively hurt everbody with their policies, except paper pushers in Wall Street.

 

Do NOT follow this link or you will be banned from the site!