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Goldman's 'Unconventional' Inflation Policy vs. Austrian Deflation Endgame

Tyler Durden's picture


An intriguing research note from Goldman's Global Economics team tonight brought up the subject of 'unconventional' unconventional policies and how they ended the 'first' Great Depression. This gentle push towards softening the inflation leg of the Fed's mandate 'stool', while interesting in its own right given Goldman's policy-leading record, reminded us, by contrast, of a paper discussing how deflation is perhaps the more likely outcome when one shifts perspective from Keynesianism to a more Austrian view of the Fed's options. We are not choosing sides but for a quiet evening following a hope-shattering sell-off in risk assets, we thought it worth reflection.

Goldman Sachs: "Unconventional" Unconventional Policies and the End of the Great Depression

  • We argued in last Friday's US Economics Analyst that the Fed retains a number of "unconventional" unconventional options that would entail pushing inflation above the Fed’s "mandate consistent" rate for a number of years through a temporary change in the Fed’s inflation goal.
  • In an interesting paper, Gauti Eggertsson of the New York Fed argues that Franklin D. Roosevelt’s successful implementation of such policy actions in the 1930s – adopting a price level target and combining it with fiscal stimulus – shifted expectations and thereby played a key role in lifting the economy out of deflation and depression.
    Eggertsson's analysis holds two potential lessons for US policymakers in the current context: (1) credible commitment to raising inflation expectations could deliver a powerful boost to the economy, and an effective way to enhance the credibility would be to pair such a policy change with additional fiscal stimulus; (2) commitment to raise inflation to boost the economy is most desirable – and thus most likely – during times when the economy is weak and inflation is below the Fed's target.
  • In Friday’s US Economics Analyst, we explored the Fed’s options for delivering additional monetary stimulus. (See "The Fed’s "Unconventional" Unconventional Options," US Economics Analyst, September 23, 2011.) We believe the Fed is most likely to make further use of the "conventional" unconventional monetary policies already pursued through renewed asset purchases. But the Fed also retains a set of "unconventional" unconventional options that would entail pushing inflation above the Fed’s "mandate consistent" rate for a number of years through a temporary change in the Fed’s inflation goal. Doing so could boost the economy by pushing down real interest rates and by inflating away some private sector debt. Proposals to do so include a higher inflation target, the "Evans proposal," and a price/nominal GDP level target.


Our simulations of a "toy economy" suggest that the boost to the economy from such policies could be sizable if the Fed managed to commit credibly to their implementation. But this would require a delicate balancing act. In the short term, the Fed would need to “commit to being irresponsible.” That is, the real interest rate would only fall if the Fed managed to commit credibly to generating higher inflation in the future. But promising to do so is difficult because the Fed cannot cut the funds rate any further to boost the economy and, once inflation has risen—and real rates fallen to stimulate the economy—the Fed has an incentive to renege on its promise and raise interest rates prematurely. Markets understand this and no short-term benefits might be achieved. In the long run, the Fed would need to return to its usual "responsible" behavior and keep inflation in the "mandate-consistent" range. Although the Fed would again have the funds rate at its disposal to do so, the concern is that a temporary change in the Fed’s inflation goals could lead to a persistent increase in inflation expectations and that a return to price stability would require a prolonged period of tight monetary policy and subdued growth in the future.


In an interesting paper, Gauti Eggertsson of the New York Fed argues that Franklin D. Roosevelt’s successful implementation of such “unconventional” unconventional policies was a key factor in ending the Great Depression. (See “Great Expectations and the End of the Great Depression,” American Economic Review, 98:4, 2008.)

President Roosevelt took office in March 1933 at the height of the Great Depression: real GDP had declined by 13.4% in 1932—pushing the unemployment rate up to 25%—and deflation was running at double-digit levels (see exhibit below). Conventional monetary policy, however, was powerless as short-term nominal interest rates were stuck near zero (see exhibit). With negative inflation rates, real short-term interest rates—both ex-post and ex-ante—were therefore sharply positive, acting as a further drag on activity. (The ex-ante measure of the real interest rate is taken from a paper by Stephen Cecchetti, who estimates inflation expectations from available data on prices, interest rates and money growth. For details see “Prices During the Great Depression: Was the Deflation of 1930-32 Really Unanticipated?” American Economic Review, 82:1, 1992).


The Economy Climbed Out of Depression after 1933, As Real Interest Rates Declined Sharply


In this environment, President Roosevelt implemented two radical new policies. First, he abolished the gold standard in 1933—giving the administration unlimited power to print money—and announced the objective of inflating the price level to pre-Depression levels. That is, he adopted a price-level target that was designed to raise inflation for a number of years. Second, Eggertsson argues that President Roosevelt abandoned prior balanced budget principles and sharply expanded federal spending by running record-high budget deficits. Between 1932 and 1934, federal consumption and investment spending almost doubled.


Eggertsson shows that this policy regime change was key in breaking out of the Great Depression by affecting expectations about future policy: the adoption of price level targeting was a commitment to raise inflation and fiscal stimulus made this commitment credible. That is, the cooperation of monetary and fiscal policies shifted expectations from “contractionary” (the private sector expected future economic contraction and deflation) to "expansionary" (the private sector expected future expansion and inflation). Although short-term nominal interest rates continued to be stuck at zero, inflation expectations rose and real interest rates declined sharply after 1933 (see exhibit above). At the same time, the economy received a boost and the economy climbed out of deflation (see exhibit).


We can draw two potential lessons from Eggertsson's analysis for US policymakers in the current context. First, credible commitment to raising inflation expectations could deliver a powerful boost to the economy and the best way to enhance the credibility of any such commitment would be to pair a temporary change in the Fed's inflation goal with additional stimulus. Fiscal stimulus would probably be the most effective option but, if unavailable, the Fed could combine any promise to boost inflation with additional balance sheet expansion. Second, a commitment to raise inflation to boost the economy is most desirable during times when the economy is weak and inflation is below the Fed's target (as was the case when President Roosevelt took office). Otherwise, the Fed would need to trade off the costs of above-target inflation with more growth. The likelihood that the Fed would adopt an "unconventional" unconventional policy would thus rise sharply should deflationary concerns re-emerge going forward.


Which contracts interestingly with the insights of the following article, particularly the author's perspective on the Fed's raison d'etre (for the benefit of the banking class) versus its capability to print, advocating a slow-and-steady 'controlled deflation':



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Wed, 09/28/2011 - 01:22 | 1717467 redpill
redpill's picture

When the only tool is a hammer...

Wed, 09/28/2011 - 05:07 | 1717678 Cynical Sidney
Cynical Sidney's picture

unconventional policy/deflation endgame == WWII, which ended the great depression.

What these cluebags are really saying, is that we need revolutions and another world war to end current crises. if that's the case i sincerely wish that these white collar criminals and financial gluttons are the first to be purged in the upcoming war/revolution

Wed, 09/28/2011 - 07:07 | 1717779 DormRoom
DormRoom's picture

The Fed must not implement a policy of higher inflation!  Firstly, Goldman Sachs assumes a large fiscal stimulus coupled with Fed action.  But fiscal stimulus by means of direct government jobs, which has the largest multiplier effect, has a slim chance, due to the Tea Party.  So without proper fiscal stimulus, increasing inflation expection, implies further misallocation of capital, likely into commodities, which will lead to HUGE adjustments in the medium term, ie a great depression or US sovereign default.


Furthermore, increased inflation expectation, but a fiscal stimulus, that produces < 1 mutliplier effect, also leads to the same result.


Therefore the Fed must not act unless it is certain proper fiscal stimulus is applied before hand, or concurrently.

Wed, 09/28/2011 - 13:46 | 1718993 i_fly_me
i_fly_me's picture

WWII did not end The Great Depression; WWII delayed recovery. It was only after the war ended, once the restrictions, price controls and, rationing were removed, that growth returned.

Wed, 09/28/2011 - 08:55 | 1717993 Sean7k
Sean7k's picture

I hate to spoil the ending, but you have to read to the ending. If you read the conclusion of the Austrian article, you will see exactly what the FED is doing and will continue to do in the future. If you just read the conclusion, you will not understand it, but you will see the path chosen by Bernanke and the Banking Class.


Thu, 09/29/2011 - 01:25 | 1720933 mcguire
mcguire's picture

the austrian article is one of the best articles i have read...  bravo!! 

yet, one aspect of his analysis that falls woefully short is that he does not consider the international nature and aspirations of the banking class..  

i wonder what he thinks of 'the bancor'..

if a monopoly on money in one country is good, then a monopoly on money in the entire globe would be better..

we all see the competitive devaluations, taking turns, around the globe.. it would be logical (albeit naive) to think that this in terms of central bank 'game theory' where the idea for each country is to gain trade advantages over the next..  but if we are going to talk about a 'banking class', it is more consistent to think that what is happening is a coordinated global attack on all currency regimes, getting ready to achieve that global monopoly that has been sought after since language was confounded at babel.. 

and of course, if you look outside of the economic sphere, there is more than enough evidence to corroborate aspirations for a "new world order", which would of course be the marriage of the political and banking class..

global hyperinflation is the price that will be paid to bring in the 'new monopoly'.... ordo ab chao... 


Wed, 09/28/2011 - 11:02 | 1718425 covert
covert's picture

deflation is always the best policy and consequently, the least popular.


Wed, 09/28/2011 - 01:24 | 1717470 Dasa Slooofoot
Dasa Slooofoot's picture

Do we get to flatten the #2 & #3 economies too? 

Wed, 09/28/2011 - 01:24 | 1717471 UP Forester
UP Forester's picture

They lost me at "unconventional" unconventional options.

Oh, yeah, its Newspeak,  er,  um,  Fedspeak.

Whiskey Tango Foxtrot, over.

Wed, 09/28/2011 - 12:28 | 1718724 MrSteve
MrSteve's picture

To best avoid confusing double-talk, read Charles P. Kindleberger. His Manias, Panics, etc is in every public library and can be read for free. Order up a copy today and get smart. He makes it all crystal clear.

Manias, Panics, and Crashes: A History of Financial Crises 

Wed, 09/28/2011 - 01:28 | 1717482 Fips_OnTheSpot
Fips_OnTheSpot's picture

Ok, so they have this ubersekret box including verrrry unconventional tools.

When do we see it? Christmas would fit - all the presents for a rallye (to nowhere).


This, my dear Sir, is a dead parrot!

Wed, 09/28/2011 - 01:34 | 1717488 UP Forester
UP Forester's picture

It is an EX-parrot!

Wed, 09/28/2011 - 01:55 | 1717495 philipat
philipat's picture

It's actually pining for the fyords where they don't use the Euro?

Wed, 09/28/2011 - 08:27 | 1717943 Thomas
Thomas's picture

Is it just me or is anybody else suffering vomit fatigue? I find it harder and harder each day to read this stuff without getting physically agitated.

Wed, 09/28/2011 - 01:40 | 1717497 Fips_OnTheSpot
Fips_OnTheSpot's picture

EX-actly :)

Wed, 09/28/2011 - 01:32 | 1717486 Spitzer
Spitzer's picture

This article is referring to Austrian deflation but Austrian deflation is only possible when currency is at least partially backed by gold under a gold standard.In case the author is not aware, the US is not on a gold standard.

There is a big difference.

Wed, 09/28/2011 - 04:44 | 1717662 Re-Discovery
Re-Discovery's picture

I am sorry, I usually appreciate your posts, but did you read the article?  The author very clearly explains the evolution -- or more appropriately devolution -- from the gold standard into the no standard.  In fact, this shift is the whole argument why we will face deflation, in his opinion.

In his view, in our current 'no standard' environment, our commercial banks have literally choked our system with debt.  As a result, the author expects that the system has no where to go but to start puking up that debt in the form of massive default and deflation.   The author believes that Fed action of increasing reserves in the system will not generate inflation because debt creation has already maxed out.  Fed has been a follower when it creates reserves for the banking system rather than a leader, as commercial banks have already stuffed debt into all the economy's channels without regard to the reserve requirements.

I think the 'inflation deflation' all comes down to whether you think the money creation mechanism in the banking system still works.  If it does, it seems inevitable that it will break down at some point.  The author is arguing that that point is now.

Wed, 09/28/2011 - 05:18 | 1717685 lookma
lookma's picture

The author is a moron poseur trying to pander to a crowd by using a label, "AE," instead of bothering to unerstand anything Mises wrote in lieu of a semanto-linguistic circle jerk.

Clearly what happens when the banking system fails is that the paper dollar grows ever stronger in purchasing power.  And the Fed is powerless because banks won't lend. 

WTF is that crap? Thanks for playing know run and get youself a snowcone.

Wed, 09/28/2011 - 05:25 | 1717688 lookma
lookma's picture

Some Mises:

No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which national governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market.

Still confused?  How about this one (and no Johnny, that's not deflation we see when a huge credit expansion ends)

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Wed, 09/28/2011 - 05:37 | 1717700 lookma
lookma's picture

Just to make it clear:


In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur. Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long. The theoretical value of our definition is not in the least reduced by the fact that we are not able to measure the fluctuations in the objective exchange value of money, or even by the fact that we are not able to discern them at all except when they are large

Wed, 09/28/2011 - 08:58 | 1717998 tarsubil
tarsubil's picture

The second bolded line is so easy to forget. Forgetting that is the key to the deflationista's argument.

Wed, 09/28/2011 - 10:15 | 1718243 Pinto Currency
Pinto Currency's picture


Red Pill (above) and Spitzer -  you are right on.


The inflation (currency debasement) has already occurred over the past decades and the debt edifice is collapsing, worldwide.  The debt and currency bubble is unsustainable.


The deflation is only occurring when prices are measured in gold and silver.


How's the dollar doing?


Central banker and economics profession sophistry can find endless theories and proposed scenarios where debasing the buying power of currency just a bit more will benefit us when that is what has launched us off the rails in the first place.  Yakkity, yakkity.

Wed, 09/28/2011 - 07:35 | 1717820 DormRoom
DormRoom's picture

Austrian economics has been applied in the US under Hoover.  His Treasury secretary, Andrew Mellon, argued for the "leave it alone", or 'bleed out the excesses' economic approach ala Hayek.  And what happened?  The mother fucking depression. It wasn't until Keynesian intervention did the US economy slip out of the great depression.




Wed, 09/28/2011 - 09:07 | 1718007 Sean7k
Sean7k's picture

What part of Austrian economics includes a central bank? Or government expansion and the creation of cartels? Or fixed wages? Do you even know what Hoover did? The information is out there.

Wed, 09/28/2011 - 15:10 | 1719323 BigJim
BigJim's picture

Or Smoot-Hawley? Or doubling income tax?

There seems an inexhaustible supply of Keynesian cannon-fodder out there, willing to fling themselves headlong onto the teeth of historical fact.

Wed, 09/28/2011 - 09:14 | 1718040 tarsubil
tarsubil's picture

I think you're thinking of 1920 when Harding didn't really do anything and the economy recovered quickly. Hoover's band of experts did stuff like raise taxes on the highest earners and well, you know this already, don't you?

Wed, 09/28/2011 - 15:01 | 1719289 BigJim
BigJim's picture

O dear. Every few months we get one of these guys, spouting the same nonsense.

Yes, Mellon argued for 'leave it alone'. Did Hoover listen? No. He was thoroughly interventionist:

Read it and weep, ignoramus.

Wed, 09/28/2011 - 07:54 | 1717874 narnia
narnia's picture

Deflation has always been the market signal.  Trillions of $ of promises have been made on prices the free market cannot support. Absent another divergent mother of all bubbles coming along- which also would eventually pop- this debt has no where to go but destruction.  

What the author overlooks is the extent to which the Treasury is bound. This pocket- directly, through the FDIC, IMF, etc.- is the mother of all CDOs.  It is the owner/guarantor of all worthless government & post-paltry banking sector equity debts. Additionally, this pocket is also on the hook many more times over should interest rates rise to blow up the swap market.  

The Fed has to print to infinity to stay ahead of the destruction of the Treasury or to finance the destruction of the Treasury.  The posse is bearing down on the FRN & it truly has no where to go.

Wed, 09/28/2011 - 09:02 | 1718003 Sean7k
Sean7k's picture

Actually, the author is arguing that the deflation is being managed with controlled inflation, targeting the MBS overhang. This should remind readers of the shadow banking systemic collapse and the creation of easing to offset it. The consequences are high unemployment (which we can see) and and a static buisness environment of very low growth (Japan). 

This is being done to control popular passions and to maintain the structure that allows the banking class to maintain its' position in control of wealth transfer. 

Wed, 09/28/2011 - 01:45 | 1717507 Goldtoothchimp09
Goldtoothchimp09's picture

this argument is an ongoing battle -- Geithner the weasel suggesting the Europeans leverage up -- and the Europeans calling the idea stupid.

The US won't be able to go it alone... seems clear they would go the inflation route.  Europe may not allow them.  The war of ideas is on currently.

Wed, 09/28/2011 - 01:51 | 1717514 newbee
newbee's picture

And they still think big brother can control the economy.  Good lord, let the free market do what it's best at, and get big gov out of the way!!

Wed, 09/28/2011 - 06:25 | 1717738 Bartanist
Bartanist's picture

Obviously they can't have that because they would be forced to collapse all of the major banks, individual stocks/companies would all fall to the value of their cash flows and those bucket shop bets they have been selling for the last 10 years would fall to a price of $0. Endus Ponzius.

This would a result in the global banking cabal losing all of their power... and they cannot allow that. It is fascism, martial law, global war and Governor Tarkin squeezing his greasy fingers around your throat first.

Wed, 09/28/2011 - 02:04 | 1717528 Gubbmint Cheese
Gubbmint Cheese's picture

Reminds me of Rummy's classic, ' unknown unknowns' from the beginning of the Iraq war (part II).

Wed, 09/28/2011 - 02:11 | 1717532 philipat
philipat's picture

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. These are things we don't know we don't know”


Come again? I think he had been taking too many of his own pharmaceuticals?

Wed, 09/28/2011 - 05:54 | 1717707 N57Mike
N57Mike's picture

I always liked .... "the Syrians are being noticeably unhelpful"

Wed, 09/28/2011 - 05:57 | 1717708 jeff montanye
jeff montanye's picture

not at all.  for a hard core war criminal rummy sometimes offered insight.  an unknown unknown?  the cause of disease prior to the understanding of pathogens when doctors argued about which humor (choleric, melancholic, sanguinary, phlegmatic) dominated the patient and bled her.  the doctors knew they weren't sure which humor was excessive or exactly how much to bleed her, but didn't know they didn't know anything about what was really happening.

for some reason i am reminded of the report of the 9-11 commission (or more exactly of the credulous readers of same).

Wed, 09/28/2011 - 02:11 | 1717533 geekgrrl
geekgrrl's picture

WTF is "unconventional" unconventional policy?

These bankers have the most convoluted explanations imaginable. How does jacking up inflation solve a debt problem? It reminds me of what my mother always used to say: You can dazzle them with brilliance, or you can baffle them with bullshit. I think I know which we're seeing here.

Wed, 09/28/2011 - 04:09 | 1717636 itchy166
itchy166's picture

Unconventional unconventional policies are somewhat more conventional than unconventional unconventional unconventional policies but are less conventional than conventional unconventional policies.  Do not confuse them with unconventional conventional unconventional policies which should only be used in conventional unconventional deflationary times.

I hope that helps.


Thu, 09/29/2011 - 06:04 | 1721168 geekgrrl
geekgrrl's picture

Thanks for the comic relief itchy! That was the best laugh I've had in weeks! I'm just glad I read it tonight and not in the morning with coffee... :-)

Wed, 09/28/2011 - 02:14 | 1717536 Whalley World
Whalley World's picture

Did Goldman say that FDR's policies ended the depression.  Not from my research

Wed, 09/28/2011 - 02:15 | 1717538 Johnk
Johnk's picture

As Spitzer points out, there are no brakes on this train. 

What do the last, oh, say 2500 years of human history tell you?  If they can print/debase, they will, and they can. 

Every conceivable endgame (except for an asteroid hitting the Earth) results in your cost of living being markedly higher in the future.  Deflationists can argue semantics and theory over reality all day long - in the end our purchasing power is declining.  It's the natural order.

Wed, 09/28/2011 - 02:21 | 1717540 philipat
philipat's picture

"CPI does not include volatile food and energy prices because...................................................................."

Answers please on a postcard to Mr B. Bernanke, Washington DC.

Wed, 09/28/2011 - 04:23 | 1717645 akak
akak's picture

" .... because manipulating the government's CPI figures downward to pretend that the debasement of the US dollar is at all times less of a problem than it really is for the average citizen is tradition."

Wed, 09/28/2011 - 04:58 | 1717671 UP Forester
UP Forester's picture

".....because if we told you the truth, you might want to tar & feather, draw & quarter, mob & lynch or boil us in oil, thus reducing the value of the $10,000 suits and $2 ties that our bonuses from the value of the money we have stolen from you have paid for.  Thus we decree that you can't handle the truth."

Wed, 09/28/2011 - 02:28 | 1717544 Poor Grogman
Poor Grogman's picture

This is just a trial balloon, same one as Volker was talking about a week or so ago. The head morons are just trying to raise inflation expectations to get everyone borrowing money again.

This is all they have....

Global market horse-wisperers. Truly pathetic...

Wed, 09/28/2011 - 02:29 | 1717549 DalaiLamaInAShark
DalaiLamaInAShark's picture

I know there aren't many Krugman fans here, but I happen to believe that he's the best Keynes-o-meter available.  Interestingly, he's also been in support of higher inflation targets.

Yes, that's from back in May!

And, this one from July...

So, not all Keynesians are predicting higher inflation.  Krugman at least has been calling for a HIGHER inflation target as well.

Just an FYI.

Wed, 09/28/2011 - 02:32 | 1717551 Poor Grogman
Poor Grogman's picture

You are correct about one thing. There are not many Krugman fans here

Wed, 09/28/2011 - 02:37 | 1717559 DalaiLamaInAShark
DalaiLamaInAShark's picture

If there's one thing this on-going crisis should have proved to us is that modern economic theories (ALL OF THEM) are severely deficient.  I just try to stay abreast of what all the different camps are prediciting.  I've found that to be "prudent".  I'm just passing along some observations.

Wed, 09/28/2011 - 02:44 | 1717564 Cliff Claven Cheers
Cliff Claven Cheers's picture

Thanks for the insights. I think you are very well served to stay abreast of all the camps.

Wed, 09/28/2011 - 02:59 | 1717584 Poor Grogman
Poor Grogman's picture

I commend your attitude to stay abreast of the camps.

IMHO inflation targets are irrelevant, they are losing control of the apparatus.

I wonder what their inflation target was in 2008-2009 or last week for that matter.

These idiots can have whatever inflation target they want and have statistics to back it up but at the end of the day the amplitude of the oscillations are getting bigger and more dangerous.

People are awaking and front running the machinery.

The total economic chaos that will result when things finally let loose will render all forecasts obsolete.

I wish you luck in the great journey ahead.


Wed, 09/28/2011 - 04:13 | 1717638 macholatte
macholatte's picture

If there's one thing this on-going crisis should have proved to us is that modern economic theories (ALL OF THEM) are severely deficient.  

The one thing that's deficient is that you and nearly everyone else does not know what the motivation of the PTB is. They say blue but do green. Supposedly the economists are trying to come up with a way to save the country but for some reason they keep missing the target. Or do they? See, we don't know what their target is. An exception to what I just said is GS. We know they intend to make themselves a lot of money and don't care how they do it or who gets hurt. So one could say that the article is really just a dissertation on another way to screw the sheeple and if the country gets saved then that's just an unintended consequence of GS making a profit.

Reality; not what you think it is, not what you believe it is and not what you want it to be.


As far as the laws of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality.
Albert Einstein

Sometimes you have to look reality in the eye, and deny it.
Garrison Keillor

In so far as a scientific statement speaks about reality, it must be falsifiable; and in so far as it is not falsifiable, it does not speak about reality.
Karl Popper

Wed, 09/28/2011 - 08:27 | 1717941 hardcleareye
hardcleareye's picture

Krugman on ZH is like JR Ewing from Dallas, the man you love to hate..... lol 

Wed, 09/28/2011 - 08:25 | 1717939 hardcleareye
hardcleareye's picture

I for one enjoy reading Krugmen, but I don't aways agree with him.... 

Seems like Krugman :

it’s more a matter of the wealthy gravitating toward views of economic policy that make immediate sense in terms of their own interests, and politicians believing that only these views count as Serious because they’re the views of wealthy people.

And Vijay:

The Fed was created for the benefit of the banking class and while it remains under the control of that class it will not pursue a policy that would lead to a breakdown in the monetary system from which the banking class profits.

Are not that far apart in their views!

Wed, 09/28/2011 - 11:59 | 1718615 ShoeShineBoy
ShoeShineBoy's picture

what are you doing here Krugman? hiding in a sheep's cloth?? get out!!

Wed, 09/28/2011 - 02:50 | 1717572 Where My Dawg At
Where My Dawg At's picture

I'm not going to type up some long diatribe about economics and how stupid Goldman is. Instead, I'm just going to write a couple completely useless sentences that will preface what my overall point is.


Goldman sucks.

Wed, 09/28/2011 - 03:14 | 1717594 Sizzurp
Sizzurp's picture

I got a better idea Goldman, why don't all you ivy league prissy boys leave the central planning to the effing free market and let the chips fall where they may.  All this endless pontificating about which economic lever to pull is making me sick.  It's pretty clear none of you know what the hell you are doing anyway, so how bout you just leave it alone and get the hell out of the way. Quit the manipulation, quit screwing with interest rates, and quit screwing other people.

Wed, 09/28/2011 - 03:34 | 1717610 Tic tock
Tic tock's picture

Article doesn't discuss any one area in tremendously great detail, two interesting points though; bank reserves follow loans - thanks essentially to being a ponzi. And hidden away and just-mentioned, the impact that a managed draw-down of banks mortgage books has on keeping labor immobile, from an employment options perspective.

'un-sound banking and labor immobility' - there are wide implications, 

Wed, 09/28/2011 - 05:46 | 1717705 ArkansasAngie
ArkansasAngie's picture

What a complete pile of self-serving horse manure.

It pisses me off that the shatheads are trying to tell me what is good for me.

Inflate debt away?  I'm the saver arse hole ... that's my money Goldman et al want to inflate away.

This is getting personal.


Wed, 09/28/2011 - 07:41 | 1717828 YHC-FTSE
YHC-FTSE's picture

Exactly. Thank you! 


Anyway why hasn't anyone else noticed that this is the same tune Goldman always whistles? Inflation = printing fiat = POMO going apeshit buying assets, aka QE. Same song as usual, advocating pricing the whole world out of staple foods. I suppose their reasoning must be, if you make it so that the peasants find it too expensive to eat, they'll work harder and contribute more to domestic output, whilst other countries' peasants fight each other for the last crumbs and contribute to the defence industries. Psychopaths. 

Wed, 09/28/2011 - 06:30 | 1717716 Bartanist
Bartanist's picture

This is what happens when book smart idiots look at the tail of the elephant and declare it is a rope. If we look at the entire picture then it is entirely different.

1. We are not starting in a deflationary depression as Roosevelt was. We have had massive inflation of food, energy, education and healthcare going on for years.

2. The massive wartime spending budget has already been going on for years.

3. Massive government spending and accelerating phenominally massive deficits have already been going on for years... and duh, we have no gold standard.

4. The so called Roosevelt solution FIRST took the economy down and purged the banks through default so that they had to be recapitalized THEN he built it up again... seems Goldman is not admitting that we missed a step.


How dense can they be? Can they really think that people are so stupid as to take their self serving B/S as anything other than propaganda to make themselves and their cronies richer at the expense of everyone else?

Wed, 09/28/2011 - 09:55 | 1718188 Bicycle Repairman
Bicycle Repairman's picture

An outstanding post.

Wed, 09/28/2011 - 12:04 | 1718627 ShoeShineBoy
ShoeShineBoy's picture

how can one put 10^10 green arrows to this very post?

Wed, 09/28/2011 - 06:28 | 1717730 -273
-273's picture

I thought these guys were meant to be smart? How can they make ANY comparison between the great depression and now with a straight face? Back in the 30's the oil boom was just starting and there was plenty of cheap, readily available oil so an easy money policy worked. Since we have evidently been on the bumpy plateau of peak oil since around 2005, no amount of money will create a return to long term growth. Once the oil price moves near to and especially over 100 dollars a barrel all of the advanced economies start shrinking. This idea will make things worse, not better as it will push up the oil price. These economists seem to live in insulated imaginary worlds where with a little economic wizzardry they seem to think we can move outside of the geological restraints we live under.

Any economic policy which does not take into account the effect it will have on the oil price, in this day and age of tight supply and demand fundamentals with an already elevated oil price is not just irrelevant, it is extremely dangerous.

Wed, 09/28/2011 - 07:01 | 1717775 Robslob
Robslob's picture



One scenario is consistent and it is the only one that matters:

Liars, lawyers, bankers, politicians or whatever else you wish to name them keep coming up with the same rehashed "We are doing this to save the system!" bullshit over and over....the only thing they are trying to save is their asses.

Here is my economic theory...there is no such thing as economics.

Stay the fuck out of my business and I will take care of the rest.


Wed, 09/28/2011 - 07:19 | 1717795 Catullus
Catullus's picture

The Libertarian Paper essay is describing a case where Fed purchasing of assets does not in the strict sense directly lead to inflation. Basically if banks don't lend, you can't create inflation even if the Fed is purchasing assets and injecting new money into the banks. One could conclude that under fractional reserve banking that if everyone paid back their loan on time and in full, and no new loans were created, you would necessarily still have a deflation in credit money. The problem with this thinking is that this is not possible in a closed loop fractional reserve system. This is why the bust happens. You go through periods of people realizing that there's not enough money supporting the credit money system to pay everything back. Someone has to take a haircut absent more money printing... Inflate or die.

Taking the emprical cases over the past few decades loses the closed loop fractional reserve element. Foreign banks can keep the system going longer by loaning to you in your currency (think Japan carry trade), so taking a historical reference doesn't give much guidance into what is actually going on.

What the Austrian analysis is missing is the roll of interest rate and currency swaps. Though the banks don't create money under these cotracts per se, they do create contractual obligations to provide a cash payment in the event the contracts are triggered. There are a lot of eurodollar obligations floating around out there and in the event they are triggered, the cash demands on the banks that issued them will be acute. The part where the Fed guarantees short term interest rates will be low for an extended period of time means that the banks will not be called on to produce cash for the IR swaps for that period of time.

Wed, 09/28/2011 - 08:53 | 1717990 alpha60
alpha60's picture

catullus, do you mean that credit deflation is not possbile in a close loop system. or that it is not sustainable?

to me the key question is who has to pay for bad risk that is yet to clear.  if the cb's are powerful enough to slowly but surely push it down the throats of currency holders through moderate <10% real inflation, and the gov is deft enough to maintian power while it squeezes taxes and pays out welfare (while still avoiding a class war) until some mythical change occurs in the midst of the minds of underclass saying "all is good, go forward and spend,' then it works. 

but it seems to me that the system WILL break. when it breaks, the fundamentally political decision to print will face an exploding populous. in short, deflation is the choice few like b/c it has the immediate and tangible result of bringing the ponzi to light, and crushing many systems in short order. hayek was calling for the system destruct in the 80's, Shiff in 09

i understand you are saying that perpetuation of moderate credit growth through ZIRP on international swaps maintains the status quo for another iteration of scale.  yeah?

Wed, 09/28/2011 - 08:19 | 1717928 Quinvarius
Quinvarius's picture

Roosevelt purchased everyone's gold before he devalued the dollar.  That is what people call the confiscation.

What if he had purchased everyone's gold after the devaluation?  Instead of robbing everyone of their life's savings, he would have actually achieved the inflation he targeted.

Ever consider that horrid bit of timing was the sole reason he plunged us back into a depression?

Wed, 09/28/2011 - 08:24 | 1717938 somethingelse
somethingelse's picture

The FED "committed to being irresponsible"  in 1913 and for 98 years they've really stuck to their guns.

Wed, 09/28/2011 - 08:28 | 1717945 Ranger4564
Ranger4564's picture

I really don't understand the amount of arrogance here, most often expressed in the replies to these articles.  Why do all of you think you are smarter than the people who are running the world?  Why do you contend that somehow, they misunderstood the material?  I find it ridiculous.

Look, these guys are brilliant.  They've told you what they're going to do, they've done it, and they made shitloads of money in the process, and made you piss poor.  How the fuck do you then conclude you're smarter than them?

What you fail to admit is that this is all intentional.  Because of the cognitive dissnoance, you cannot see how or why anyone would want to perpetrate this on anyone.  Fact is, they're telling you plain and simple, get ready for Hyperinflation. They will continue to devalue your assets as they wish, and the consequence will be unconventional inflation.  You can bad mouth them all you want, or you can face facts and grab the pitch fork.  This is not misguided policies, this is misanthropic policies.

So what do we do if these policies / strategies / tactics / actions to devastate the economies are intentional?  What?

PS... Please, for god's sake, and I am an athiest to boot, have some fucking humility.  Thanks.

PS PS... I'm not suggesting any of you are stupid, just stating that you seem to be unwilling to accept the most likely explanation for the current situation.  It might save your ass and mine. 

Wed, 09/28/2011 - 08:53 | 1717987 Money_for_Nothing
Money_for_Nothing's picture

"I really don't understand the amount of arrogance here, most often expressed in the replies to these articles.  Why do all of you think you are smarter than the people who are running the world?"

Your misunderstanding and theirs is that you and them think they are running the world. You and them are going through the denial phase. Also the arrogance you see is not real. You are projecting it.


Wed, 09/28/2011 - 08:57 | 1717995 alpha60
alpha60's picture

them you tell they, money!

Wed, 09/28/2011 - 13:15 | 1718250 Ranger4564
Ranger4564's picture

I'm only asking for the consideration of the possibility.  I do in fact believe it's all planned, and none of it is accidental*, but i find the dearth of such consideration alarming. I don't think it's out of the question that there is a "cabal" controlling the terms of our existence. Do you recall historically that rulers are present in every civilization?  And what was their role?  To dictate to the peasants.


* originally had "intentionally" which was the wrong word... accidentally is what i meant.

Wed, 09/28/2011 - 09:28 | 1718097 bill40
bill40's picture

I think the problem is this. You should never allow yourself to get in a situation where anything you do will make matters worse.

Oh shit but we did do that.

Wed, 09/28/2011 - 09:42 | 1718140 Ellesmere
Ellesmere's picture

Interesting topic, article a bit hard and as I usually find at ZH, a couple of good posts.

My two cents worth:

a) Aren't we in the "liquidity trap" that Keynes foresaw as a possible outcome of a purely monetarist policy?

b) Seems to me the argument that monetarism is simply a special case (subset) of the Keynesian model is more and more valid.

c) "Unconventional" unconventional is code for (b)

d) the above article is the first I have seen when comparing Austrian & Keynesian models to include fractional reserve banking in a meaningful way

e) Fucking around with fractional reserve banking, both traditonal and by ignoring derative instrumenst (i.e. "deregulation") is the real culprit


Wed, 09/28/2011 - 12:02 | 1718620 Snakeeyes
Snakeeyes's picture

I have been arguing for YEARS that we are in the aftermath of a post Austrian Credit/Housing bubble and that deflation is a classic result.

I was on Fox with Brian Sullivan talking about deflation:




Wed, 09/28/2011 - 12:11 | 1718656 Steroid
Steroid's picture


In your video you put the chart in front of the horse.

Wed, 09/28/2011 - 12:03 | 1718626 Steroid
Steroid's picture



Boyapati's paper only reduces the inflation vs. deflation debate to a fight between the political and the banker class. His conclusion that we can expect only deflation due to the entrenchment of the banking class is highly questionable. The position of the FED is weakened tremendously in the last election cycle and it will weaken further on. If he is right, in this sense the reservation of the FED is crucial to the avoidance of hyperinflation. Do we still want to end the FED? On the other hand, that would be the faster and probably the only way to reboot the system and return to the gold standard.

Wed, 09/28/2011 - 12:33 | 1718741 boredbutdeadly
boredbutdeadly's picture

I find the juxtaposition of the Goldman and Austrian articles interesting.

The Austrian article highlighted some aspects of empirical reality that run contrary to doctrine (both Keynesian and Austrian).  In particular, the author observes that inflation of the base money stock follows rather than leads fractional reserve money expansion (or, at least that it has in recent years).  In corollary, he correctly points out that fractional reserve banks are not bounded by reserve requirements, and are instead bounded by capital constraints.  His attribution of motives to powerful actors (political and banking class) also rings true.  However, his line of reasoning grows ambiguous and vague when he moves from these observations to his conclusion.  

It is almost certainly true that the Federal Reserve serves large banks to a greater degree than it serves the immediate desires of the political class.  It is also true that the Federal Reserve has a strong motivation to avoid a hyperinflation and the destruction of the monetary system that serves that class.  It is also entirely plausible that the Federal Reserve (and even the political class, to the extent that they even know what they are doing) are engaged in attempting to engineer a (comparatively) "soft landing" by allowing the liquidation of malinvestment to play out over years rather than immediately.

So what?  How do you go from these observations to the conclusion that a sustained mild deflation is therefore a more likely outcome?  Why would the banking class want that?  The Goldman article plainly states what the banking class desires.  They do not desire a mild deflation.  They desire a moderate inflation, and this is what the federal reserve will attempt to engineer.

Of course, it remains to be seen whether the Federal Reserve can calibrate its policy response that accurately without allowing things to spin out of control.  But they will likely try.  To some degree, they will be assisted in this effort by the political class who, after all, are largely beholden to the same interests.



Wed, 09/28/2011 - 12:51 | 1718807 emil
emil's picture

Gauti Eggertsson of the New York Fed is a nut!

Have a  look at Bernanke's “Deflation: Making Sure "It" Doesn't Happen Here” from Nov. 2002.  You'll find among the references:  "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible" written by Gauti Eggertsson formerly of the IMF and now a Research Officer at the NY Fed.

Here's the abstract of Mr Eggertsson's more recent “The Deflation Bias and Committing to being Irresponsible” (1).  Some of those who provided assistance to Mr Eggertsson on his paper were Ben Bernanke, Alan Blinder, Paul Krugman, Ken Rogoff.
"I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model.  I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, i.e. increasing money supply by open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem.  They involve printing money or issuing nominal debt and either 1) cutting taxes, 2) buying real assets such as stocks, or 3) purchasing foreign exchange. The government credibly “commits to being irresponsible” by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal since it curbs deflation and increases output by lowering the real rate of return."
My comments:
Anyone with just a passing acquaintance with Zero Hedge knows that the world is heading towards a downwardly spiraling debt deflation.  So clearly the Chairman of the Fed has reached this level of understanding about our economic affairs.
So what does Federal Reserve Chairman Ben S. Bernanke, the world's leading expert in deflation do when confronted by "the deflation"?  He follows his own and his colleagues advice!  Based on my reading of Mr Eggertsson’s work and Mr Bernanke’s actions, I believe the Fed is trying to convince the world's financial markets that U.S Federal Reserve will act irresponsibly with respect to the world's largest economy.
Now I get it.  It's going to be a game of chicken. Either 1) we believe that Ben Bernanke is prepared to bring about financial and economic armageddon or 2) he acts on his promise.  Great.
This does lead to some known unknowns...
e.g. Does Ben Bernanke believe that he's acting in the economy's best interests when he is executing his irresponsible actions?


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