Kremlinologists Required
More proof that our analogy to the Kremlin observers of old is highly appropriate in the context of interpreting the words emanating from our well-meaning central planners arrived today when Fed media mouthpiece Joh Hilsenrath endeavored to enlighten the hoi-polloi with a a live blog entitled 'What Bernanke Means'. We need this interlocutor, see, because what Bernanke 'means' is apparently not what he 'says'. Presumably this is so because Bernanke speaks in Bureaucratese.
We will go through the notes and add our two cents.
1) WHAT HE SAID: “The risks remain that tight fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”
WHAT IT MEANS: Lots of focus on downside risks here, which is striking because the Fed said in its June policy statement that downside risks to the economy had diminished. That’s a slightly “dovish” tilt toward easy money.”
Well, ha ha, big surprise. Bernanke is a dove and wants to print more money! Who would have ever thought?
2) WHAT HE SAID: “I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions-which have tightened recently-were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained longer.”
WHAT IT MEANS: Mr. Bernanke tries to be even-handed here about the outlook for bond purchases, but he spends a lot more time talking about the conditions that could convince the Fed to leave bond buying in place than he does on the conditions that would convince the Fed to pull back sooner than planned. Another dovish tilt.”
Another big surprise there. Bernanke is a dove and wants to print more money. Absolutely no-one could have seen that one coming. We are surprised out of our socks. What to buy, what to buy?
3) WHAT HE SAID: “If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5 percent (unemployment rate) as a sufficient reason to raise its target for the federal funds rate. Likewise, the committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective.”
WHAT IT MEANS: The Fed has said it won’t raise the fed funds rate until after the jobless rate falls below 6.5%. These comments, along with others Bernanke has made, suggest the Fed could wait for a while even after the jobless rate falls below 6.5% before trying to raise short-term rates. The 6.5% threshold, it seems, appears to carry less and less meaning within the Fed as it tries to emphasize low rates for a long-time.”
(emphasis added)
Could anyone have predicted that the 6.5% unemployment rate threshold was just meaningless bla-bla and that the Fed would eventually find new reasons to print even more money and continue to artificially suppress interest rates once it was reached? Surely no-one could have possibly expected that.
“4) WHAT HE SAID: “The [Fed] is certainly aware that very low inflation poses risks to economic performance – for example by raising the real cost of capital investment—and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 percent objective over time.”
WHAT IT MEANS: There seems to be a little shift in emphasis here. The Fed’s preferred measure of inflation is around 1%, below the Fed’s 2% goal. In his press conference in June, Mr. Bernanke emphasized his view that inflation has been driven down by “transitory factors.” Wednesday he seems to emphasize the damaging effects of low inflation , a little tilt toward keeping monetary policy easy.”
(emphasis added)
A 'little tilt' toward keeping monetary policy easy! The surprises never end! Who would have thought that the Fed was worried that 'inflation' is 'too low'?
More Bernanke Bon-Mots
Could it be that this widely admired bien pensant and beloved bubble-blower Ben Bernanke is really as dense as he sometimes comes across? We doubt it, although we do think that he actually believes in many of the theories his policies are based on. But anyway, here goes with a few of the chairman's bon-mots uttered during the Q&A (via Zerohedge):
Q: “Are You Printing Money?”
Bernanke: “Not Literally.”
Now, it is true that Bernanke isn't running down into the basement and personally pushing the levers and turning the wheels of a Gutenberg press. But he does create bank reserves as well as deposit money (i.e., money substitutes that form part of the broad money supply) literally from thin air. You might as well refer to the process as 'printing money', because that is what it is, finer semantic points notwithstanding. The Fed has no secret stash of real resources that it exchanges for securities in its open market operations. It simply writes checks drawn on itself that are 'backed' by absolutely nothing.
BERNANKE: WALL STREET HASN'T BENEFITED MORE THAN MAIN STREET
BERNANKE SAYS FED `VERY FOCUSED' ON MAIN STREET
Bill Gross apparently referred to this as the 'Bernanke tweet from Mars'. Either Mr. Bernanke knows nothing about monetary theory, or he is lying. Printing money definitely redistributes wealth from 'Main Street' to 'Wall Street', simply because the banks are the first receivers of the newly created money. The early receivers of new money always profit to the detriment of later receivers, as they can employ the funds before they have affected prices. By the time lowly wage earners get their money, prices have risen and their real income and real wealth has consequently declined. This is well known since Richard Cantillon wrote his famous treatise on economics in the 17th century, but the news apparently have yet to reach Mr. Bernanke.
It is perfectly legitimate to distinguish between these groups by the terms 'Wall Street' and 'Main Street'. The latter is impoverished by Bernanke's policies in favor of the former. We have discussed the Fed's role in producing and steadily increasing wealth inequality at length in a previous article.
“Bernanke: If the Fed were to tighten policy, the economy "would tank"
We agree with this assessment. Due to the Fed's loose policies, numerous bubble activities have sprung up in the economy that could not possibly continue if policy were tightened: they absolutely depend on it. However, these activities actively destroy wealth. Loose monetary policy leads to capital malinvestment and capital consumption. The true wealth generators in the economy are moreover hindered in their beneficial activities as they must compete for scarce resources with all those engaged in bubble activities (i.e., activities that are only seemingly profitable because of the artificially suppressed interest rate). It follows that when policy is tightened, an economic bust will ensue, as the false activities will have to be liquidated.
However, it does not follow that therefore, the Fed can just continue its monetary pumping forever and ever without there being any negative consequences. The Keynesian wet dream of the 'eternal boom' is a mirage that cannot be realized in the real world, in which capital is a scarce resource. Loose monetary policy creates a fata morgana of phantom prosperity even while said scarce capital is consumed. It should be obvious that there must be a limit to this: at some point, too much capital will have been consumed. The economy's pool of real funding, instead of expanding, will then begin to shrink. If at that point the Fed redoubles its pumping efforts, it will quickly end up destroying the underlying currency system.
BERNANKE SAYS GOLD `IS AN UNUSUAL ASSET
BERNANKE SAYS SOME SEE GOLD AS DISASTER INSURANCE
BERNANKE SAYS `NOBODY REALLY UNDERSTANDS GOLD PRICES'
BERNANKE: GOLD MAY BE LOWER ON LESS CONCERN OF EXTREME OUTCOMES
1. Gold is not an 'unusual asset'. It has been money for thousands of years, and if not for the State usurping money, arrogating a money monopoly to itself and forcibly replacing gold with fiat money tokens, gold would still be our money. As we have recently pointed out, people everywhere would rather have sound than unsound money. Gold is the money of the free market.
2. Gold is indeed 'disaster insurance' nowadays, and with people like Bernanke at the helm of the monetary ship, it is more needed than ever. Disaster is the foreordained outcome of the policies pursued by the Fed and other central banks.
3. Speak for yourself Mr. Bernanke. Some people actually do 'understand gold prices'. You may start by reading this.
4. We actually agree that one of the reasons why gold prices have declined is that one of the 'extreme outcomes', namely a coming apart at the seams of the euro area, has been temporarily taken off the table. We should stress 'temporarily' here, as only very few of the most important fundamentals have actually changed (if we were pressed to name a fundamental datum that has lessened the pressure on euro area governments, it would be the decline in current account imbalances within the euro area. This has however not altered the fact that many governments and banks remain just as insolvent as before).
The Fed's Absurd Deflation Paranoia
As the FT's Alphaville blog reports, most analysts have focused on Bernanke's dovish tone (as if his tone had ever been different) and the re-emergence of the dreaded 'D-word', i.e., deflation. According to Bernanke's definition, deflation denotes falling prices (we define it as a decline in the money supply. Needless to say, the money supply has definitely not 'deflated', not even for a nanosecond, practically forever. In recent years it has grown faster than at any time since the end of WW2) . Here is what he said:
“Meanwhile, consumer price inflation has been running below the Committee’s longer-run objective of 2 percent. The price index for personal consumption expenditures rose only 1 percent over the year ending in May. This softness reflects in part some factors that are likely to be transitory. Moreover, measures of longer-term inflation expectations have generally remained stable, which should help move inflation back up toward 2 percent. However, the Committee is certainly aware that very low inflation poses risks to economic performance–for example, by raising the real cost of capital investment–and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 percent objective over time.”
(emphasis added)
Note that this seemingly 'harmless' target of 2% 'inflation' roughly halves the value of everyone's cash balances every 35 years. It is never explained why we should actually be afraid of falling prices. As Frank Hollenbeck points out in a recent article at mises.org, the very same economists who are so afraid of deflation “hunt the newspapers for the latest sales”, because just like all other consumers, they want to pay as little as possible.
Of course the whole story (invented by Keynes) as to why we should fear falling prices is complete hogwash as we have frequently pointed out in these pages. If that were not so, the computer industry would have been in permanent depression from the day it started, as the prices for computers and computer periphery have done nothing but decline from day one. In fact, the computing power one can buy today for a few hundred bucks would have set one back tens of millions of dollars in the mid 1980s.
And yet, it seems that the computer industry and all the ancillary industries that sprang from it (internet, smart phones, software, etc.,etc.) are doing exceedingly well. For some reason, consumers have refused to 'obey' the Keynesian theory so dear to Bernanke and his fellow monetary bureaucrats and their host of apologists in the economics profession and have not 'postponed their spending' on computers, smart phones, internet connections and so forth, in spite of the fact that prices are falling reliably, year after year.
It would be the same with other products and services that are produced by industries that unlike the computer industry have not exhibited such large productivity growth that they were able to outrun the effects of monetary inflation. The prices of these goods and services are rising, but that is certainly not why people are consuming them. In fact, you can ask any consumer whether he would e.g. prefer falling education, insurance and health costs over rising ones, and you would find 100% unanimous agreement: falling prices are considered better than rising ones. Alas and alack, central bankers assert they know better what's good for consumers, and insist that prices must continue to rise inexorably, based on their flimsy and unproved 'theory' that falling prices would inevitable lead to economic depression.
We should point out here that this assertion can be refuted both theoretically and empirically. We don't want to go over this terrain in detail again, as we have already done that many times in the past. However, readers not familiar with the theoretical argument against Bernanke's deflation paranoia should read Mr. Hollenbeck's article, which provides an excellent and easy to grasp summary of the main points. Let's just say that the whole 'deflation is bad' meme is among the very worst nonsense promoted by central bankers and their apologists.
It should be fairly obvious to every thinking person that in a free unhampered market economy, continually falling prices would be the normal state of affairs. Purposeful, future-oriented economic activity aims at 'doing more with less', i.e. at raising economic productivity. It follows that in a free market with a fairly stable money supply, prices for goods and services would in the long run roughly decline by the difference in the annual growth of the supply of gold and the annual increase in economic productivity. Of course these price declines would not be evenly spread and some prices may even occasionally rise for reasons such as temporary supply disruptions, but overall, there would be a tendency for prices to decline in a free market. Consequently, the real incomes and real wealth of all citizens would rise. By contrast, in the current monetary regime, the only people who see their wealth increase are the often cited '1%' that already own a lot of assets (these assets tend to benefit disproportionately from monetary inflation), while the middle class and the poor keep losing ground.
It is not 'deflation' that is evil. It is central economic planning and the purposely pursued goal of eternal inflation (misnamed as 'price stability policy') that is evil. It robs people surreptitiously of the fruits of their labor in favor of those who have control over the money supply.
The 'hero' defends the prescriptions of the John Law school of money and banking on the Hill. He will probably come to rue this cover one day (just as Time's 'Man of the Year' cover), as it is bound to turn out to be a major contrary indicator.
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