by John Tamny, Toreador Research and Trading (Guest Contributor)
On February 12, 1973, after the second Treasury announced devaluation of the dollar, George Shultz said, “there is no doubt that we have achieved a major improvement in the competitive position of American workers and American business.” Translated, a weak dollar would stoke an exporting bonanza for U.S. businesses that would need to hire new workers to help fulfill all the demand driven by the dollar’s debasement.
That Shultz was soon enough revealed as tragically incorrect is a classic understatement. Needless to say, the dollar’s devaluation predictably unleashed a lost decade of inflation and economic misery for the U.S. and the world.
And while Fed Chairman Ben Bernanke’s recent proclamation that “We do not have a problem” with inflation doesn’t match Shultz’s word for word, it surely rhymes. History has proven Shultz staggeringly wrong, and when economic historians render judgment on the lost economic period that coincided with Bernanke’s time at the Fed, it’s a fair bet that “We do not have a problem” will loom large in the various accounts.
Ben Bernanke is quite simply confused, and his confusion promises Americans and the world an era of limp economic growth that has no endpoint. While it’s certainly true that economic downturns correlate with rebounds for the recession ridding the economy of all the failed economic concepts and misuse of labor, this rebound promises to be flaccid relative to past ones, and the dollar’s weakness explains why.
A weak, inflationary dollar is an economic weight simply because the profits that drive wealth creation are, as John Stuart Mill long ago noted, the remuneration of abstinence. When we save we provide capital to risk-taking entrepreneurs, but with the dollar suffering from unceasing Washington neglect, there’s no incentive for those with the means to fund economic advancement to delay their consumption of capital. Why delay near-term capital consumption if dollars invested and saved will, if lucky, come back reduced in value? To gain access to our best stock picks, most extensive buy/sell lists and market commentary, click here to sign up for our free weekly newsletter Investment Advisor Ideas.
Apparently unfamiliar with Robert Mundell’s essential point that the “only closed economy is the world economy”, Bernanke persists in the naïve belief that inflation is the problem of others despite the currencies of the world having vague to explicit pegs to the weak dollar that are showing up in the commodities most sensitive to monetary error. Instead, Bernanke fingers “too much demand” overseas as the driver of the commodity boom, and there he glosses over the simple truth that rising demand is not only a false inflation signal, but that if demand were in fact the driver, we’d see as many commodities plummeting in value as others spiking.
And with the global economy nothing if not interconnected, inflation is most certainly our problem, and that’s the case even if – as Bernanke falsely assumes – it’s not an issue in the United States. Once again, inflation is a function of sagging currency values that foster reduced investment in productive endeavors. When individuals in other nations suffer the economic pain of inflation through declining investment, we too hurt for the natural expansion of the global division of labor that authors our economic specialization being halted to varying degrees.
The problem here is that Bernanke quite simply does not believe that inflation is what it’s always been; as in a symptom of declining currency values. To Bernanke, inflation results from too many people working and prospering, thus his statement that the Fed would only change course if the economy began to grow “very quickly.”
As Bernanke sees it, the countries presently suffering high inflation are because “their policies have not been such to keep growth and capacity balanced.” The latter statement is pregnant with false meaning, endorses the kind of central planning so discredited in the 20th century, and explains why Bernanke’s continued perch at the Fed signals a continuance of subpar economic growth.
That is so because growth cannot cause inflation. Not only is inflation a monetary concept once again resulting from declining currency values, but countries are not islands. As we’ve seen through decades of globalization, labor and capacity are moving targets both domestically and globally.
When wage demands increase due to reduced labor inventory, that’s merely a signal for sidelined workers to rejoin the workforce, of for companies to secure the work of individuals outside the city, state or country where labor is scarce. The same applies to factory capacity.
Growth could never cause inflation, and it certainly can’t in a world still largely inhabited by individuals wilting under crushing levels of underemployment. And last this writer checked, Zimbabwe is nowhere near achieving full employment or capacity utilization, yet it suffers hyperinflation just the same.
Still content to pursue policies that have failed so impressively, Bernanke will continue his pursuit of money illusion in the form of QE based on the absurd belief that money creation is the source of economic energy, and worse, he’ll arrogantly set the short rate for credit as though his Fed could have a clue what that number is. What’s missed here is that other than the dollar’s price, the cost of credit is the most important in the world for matching credit demand with credit supply.
But nothing if not self-impressed, Bernanke will use the heft of the world’s foremost central bank to keep rates from reaching natural market levels, and the result will be tight money for all but the most blue-chip of borrowers. Contrary to the popular belief that the central bank must keep credit cheap in times of distress in order to make it plentiful, the greater truth is that credit costs should rise during downturns as a way of luring the savers so essential to capital restoration back into the marketplace.
Put simply, Bernanke’s myriad responses to economic hardship are making things more difficult, and much more worrisome for all of us, as things get worse, a central banker oblivious to the cruelty that is devaluation and distorted markets for credit will continue pursuing that which hasn’t worked, and that logically won’t. In short, Ben Bernanke’s confusion is our long-term economic ill health. To gain access to our best stock picks, most extensive buy/sell lists and market commentary, click here to sign up for our free weekly newsletter Investment Advisor Ideas.
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 Channel.