Yesterday …

… Fed chief Ben Bernanke's testimony continued, moving on to Congress from the Senate. Politicians are understandably concerned about the economic situation – especially as it is not only marked by an enormous and seemingly intractable rise in joblessness among the hoi-polloi (that'd be Joe Six Pack, for readers not familiar with this Greek expression, a.k.a. the 'voter'), but because it now threatens their own jobs as well. Forgive us for being so cynical about the political and bureaucratic classes – but the best way to describe their dilemma is probably by comparing them to a parasite apoplectic about the unexpected, but suddenly seemingly possible, demise of its host.

 

The slightly frightened emotional state of law makers was palpable throughout the proceedings. They are facing a (s)election in November, and it doesn't look good for incumbents, to put it mildly. You have to also keep in mind that most Congressmen are economically illiterate and are hoping for miracles from the Fed chief – who in turn, although a trained economist, is philosophically stuck somewhere between Keynesianism and Monetarism, this is to say, he strongly believes both in the power of deficit spending and money printing to 'avert recession'. At least he has to our knowledge not once said anything that would make one think otherwise. Some of his colleagues at the Fed, such as e.g. Thomas Hoenig, strike us as more thoughtful regarding their appraisal of what the central bank can achieve in this kind of situation, although it remains of course the case that even the most adept central bankers must, by dint of their profession, believe in the efficacy of central monetary planning. This fundamental error is a sine qua non of their very existence as such – if they were to admit that central planning does not work, all of them would have to immediately resign and would no longer have a job. That would be one step of intellectual honesty too far, so to speak.

Moving on to Bernanke's spiel about more deficit spending:

 

“Testifying before the House Financial Services Committee, Bernanke urged lawmakers to come up with a credible plan to reduce the government's record-high budget deficits in the long run. But he said they shouldn't move now to slash spending or boost taxes in the near future. "I believe we should maintain our stimulus in the short term," Bernanke said as he spoke about the economy's challenges for the second straight day on Capitol Hill.”

 

This is a typical Keynesian idea molded after St. Augustine of Hippo's famous prayer: “Grant me chastity and continence, oh Lord, just not yet”. You can find similar thoughts expressed in the numerous writings of Paul Krugman, who finds deficit spending very, very -woe! – damaging to the economy when engaged in by Republican administrations, but has a St. Augustinian view of it when Democratic administrations rule the roost. 'Spend now, pay later', so the hue and cry. It is based on the quite mistaken notion that what is good for the over-indebted individual with his or her back to the wall – namely to economize, pay down debt and save – is 'bad for the economy' when too many individuals do it at once. Thus the State, so it is held, must jump into the fray and spend money it doesn't have on things no-one really needs.

This idea is prominently supported by luminaries ranging from Alan (“The real question is not whether we want elements of socialism on planning to abridge our personal freedom, but by how much”) Blinder to Lawrence ('zzzz') Summers, which of course doesn't make it any less wrong. As we pointed out before, Paul Krugman once tried to 'prove' to his readers how deficit spending improves the economy by means of a nifty-looking formula. If there's a formula proving it, it must work, right? The only slight problem with that is that it evidently hasn't worked. Not that this obvious failure, demonstrated in Japan for over two decades and counting and now demonstrated in the US for the past two years as well, will ever deter the tax-and-spenders. After all, they have a formula. However, as usually happens in great contractions, interventionist theories will eventually be shipwrecked by implacable market forces. The question for the citizenry is largely – can the interventionists be stopped before they have spent everything?

As a reminder why the notion that government spending can 'help' he economy is nutty, the government does not possess any resources or wealth of its own. All is can do is shift already existing private wealth forcibly from 'A' to 'B'. The only way this can have a positive effect on the economy is if we were to believe that the government does a better job at allocating scarce resources than the private sector. This in turn runs into the insurmountable calculation problem of socialism. That government spending is a burden on the economy and will destroy even more wealth should be beyond the slightest doubt. Alas, as you can see, the Fed chief believes otherwise.

Bernanke of course also tries to shift some of the 'economy lifting job' back to Congress, as he is encountering some resistance within the Fed regarding the 'Plan B' of printing even more money. It is also a neat way of seeing to it that  the eventual blame is more evenly apportioned between Congress and the Fed once the various interventionist programs have failed.

However, as the press reports note:

 

“Bernanke is under pressure to keep the recovery going because there's little appetite in Congress to provide a major new stimulus package.”

 

So we have the politicians and the monetary bureaucracy at odds here, with each of them trying to get the other to 'do something'. Meanwhile, Rep. Spencer Bachus has pointed out what is glaringly obvious:

 

“[…]Rep. Spencer Bachus of Alabama, and other Republican members complained about the effectiveness of President Barack Obama's $862 billion stimulus package. That has increased government spending and cut taxes at a time when most Republicans and some Democrats are worried about the government's exploding red ink.

"The economic recovery is anemic at best," Bachus said, arguing that the stimulus package hasn't delivered.”

 

D…d…d…duh. Then Ben Bernanke came out with what sounds like a surprisingly good idea to us:

 

Bernanke also gave a nod to renewing tax cuts by President George W. Bush, which are set to expire at the end of this year. "In the short term, I would believe that we ought to maintain a reasonable degree of fiscal support — stimulus — for the economy. There are many ways to do that. This is one way," he said.”

 

It is in fact the only way that makes any sense. If the private sector can be reassured that tax hikes will be averted, then there might actually be an incentive to invest. One of the reasons why the 'tax and spend' policy doesn't work is 'Ricardian equivalence'. The public knows very well that it will have to pay for all the 'free lunches' provided by the government. Thus the prospect of higher taxes and higher inflation, both of which are usually unavoidable after a big spending orgy, leads people to shelve investment plans. Why invest when you know the fruits of your labor will later be confiscated by the State?

However, it must be noted here: for tax cuts to work, they must be accompanied by a commensurate reduction in government spending. The burden on the economy must be relieved at both ends.

In view of the pressure, Bernanke repeated what he already said on Wednesday as well:

 

“If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed, although there are some technical difficulties raised by such a move, Bernanke said. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy. “

 

As we noted before, the idea that what the economy needs is 'more spending' flies into the face of common sense. The severe damage done to the economy's production structure and the pool of real funding by the previous Fed-orchestrated credit boom should have made clear that this method does not work. Even a supporter of Keynesian or Monetarist theory should by now ask himself 'what the hell went wrong when we tried this same tack last time around?'. '

Spending' can never 'grow the economy'. The economy grows only by producing things, not by consuming things. Thus what is required is not more spending, but more saving and investment. Printing money will only distort the economy more on a structural level – precisely what Austrian economists warned that Greenspan's post Nasdaq-bubble policy would in the end wreak. Never mind that they have been proved entirely correct and were the only economists to correctly predict the bust. Whether one has been right or wrong is apparently not a criterion of any importance when it comes to implementing economic policy. Let's rather do the same thing over and over again, only bigger. It has never worked in the past, but this time it surely will!

This, in a word, is institutionalized insanity.

 

“Rep. David Scott, D-Ga., complained about a lack of "aggressiveness" on the part of the Fed to tackle high unemployment. And, Rep. Gary Peters, D-Mich., wondered why the Fed wasn't taking new steps to stimulate the economy now.”

 

Print more money already! What the Congressman apparently doesn't realize: printing money can not create one iota of wealth. It is simply not in the power of the central bank to 'create employment', no matter what its statutes say its policy 'should' achieve.

 

Despite growing threats to the recovery, Bernanke said the Fed continues to believe the economy will grow modestly this year and avoid sliding back into recession. Some disappointing economic data hasn't been bad enough for Fed policymakers to "radically change our outlook," he said.

 

Here Bernanke confirms what we have been saying all along: as long as there is no in-your-face evidence that the depression continues, the Fed won't do anything just yet. It is reactive, not proactive. If you want to know when the next round of money printing is about to begin, best watch the stock market.

 


 

Ben Bernanke: More spending, please!

(Photo credit: Nicholas Kamm / AFP / Getty Images)

 


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Bernanke urges more ‘Stimulus Spending’”

  • xcut:

    Professional politicians want to be seen to be “doing” things, so between two alternative routes, they will choose the more “active”. Especially in the US, where – absent any opposition to the two parties – there is a good chance of getting re-elected by pandering to the supporting base.

    As for the economics, well… the FED may get its forecasts wrong, but so will other people. I am reminded once again why economics is not a science. It would be useful for everybody involved (that includes the proponents of the Austrian school!) to keep remembering this!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Federal Reserve is a Barbarous Relic
      The Sky is Falling   “We believe monetary policy is in a good place.” – Federal Reserve Chairman Jerome Powell, October 30, 2019.   The man from the good place. "As I was going up the stair, I met a man who wasn't there. He wasn't there again today, Oh how I wish he'd go away!" [PT]   Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian...
  • Incrementum 2019 Gold Chart Book
      The Most Comprehensive Collection of Gold Charts Our friends at Incrementum have just published their newest Gold Chart Book, a complement to the annual “In Gold We Trust” report. A download link to the chart book is provided below.   As of late 2019 an ounce of gold will get you 115 liters of beer at the Munich October Fest – a 7-year high. Cheers!   The Incrementum Gold Chart Book is easily the most comprehensive collection of charts related to or relevant...
  • The Golden Autumn Season – One of the Most Reliable Seasonal Patterns Begins
      The Strongest Seasonal Stock Market Trend Readers may already have guessed: when the vibrant colors of the autumn leaves are revealed in all their splendor, the strongest seasonal period of the year begins in the stock market – namely the year-end rally.   Will Santa wake up this year? Last year he was clearly missing in action – but that is actually the exception, not the rule [PT]   Stocks typically rise in this time period. However, there are questions, such...
  • Riding the Type 3 Mega Market Melt Up Train
      Beta-driven Fantasy The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies. The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst. So, too, blind faith in data has prompted the rise of Psychic Quants... who see the future by modeling the past.   Gandalf, quant of Middle-Earth, dispensing sage advice. [PT]   For the big financial outfits, optimizing systematic –...
  • Maybe the West Should Adopt Iran’s Nuclear Weapons Policy
      The Rise of Total War Prior to the modern age, when war was engaged in, combatants, for the most part, acted by a code of conduct which attempted to minimize civilian deaths and the destruction of non-participants’ property. With the onset of the democratic age and the idea of “total war” such modes of conduct have tragically fallen by the wayside, the consequence of which has made warfare far more bloody and destructive.   Iranian Seiji-2 missile. Of course, we...
  • Is the Fed Secretly Bailing Out a Major Bank?
      Prettifying Toxic Waste The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?   The yield-chasing hamster wheel... [PT]   Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying...
  • Bitcoin Moonshot - Precious Metals Supply and Demand
      Bitcoin Gets Juiced The prices of gold and silver were up $19 and $0.48 respectively last week. But that’s not where the massive inpouring of groceries went.   When Friday began (Arizona time), Bitcoin’s purchasing power was under 75 grocery units (assuming a grocery unit is $100). By evening, speculators added 25 more grocery units to the same unit of bitcoin.   Bitcoin, daily – shortly after breaking below an obvious lateral support level, Bitcoin did an...
  • Maurice Jackson Interviews Brien Lundin and Jayant Bhandari
      Two Interesting Recent P&P Interviews Our friend Maurice Jackson of Proven and Probable has recently conducted two interviews which we believe will be of interest to our readers. The first interview  is with Brien Lundin, the president of Jefferson Financial, host of the famed New Orleans Investment Conference and publisher & editor of the Gold Newsletter – an investment newsletter that has been around for almost five decades, which actually makes it the longest-running...
  • Targeting nGDP Targeting – Precious Metals Supply and Demand
      Everybody Has a Plan Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.   A few images documenting cargo cults on the island of...
  • Volatility Galore - Precious Metals Supply and Demand
      Fun and Regret Ex Nihilo The price of gold dropped last week, but not calamitously. From $1514 to $1459, or -$55. The price of silver dropped. Calamitously. From $18.08 to $16.75, or -$1.33. -3.6% vs -7.4%. Once again, silver proves to be volatile relative to gold.   Silver jumped off a cliff again last week – the chart formation nevertheless continues to look corrective. [PT]   In standard vernacular, the metals lost purchasing power this week. Purchasing power can...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!