Of Etatiste Scribblers and Real Economists

Back when Christina Romer was still chairwoman of the president's council of economic advisers, we critically commented on her horrendous advice, her untenable apologias for Keynesian deficit spending and her crass misinterpretation of historical events, specifically of the economic history of the 1930's depression era. Not only do her views conflict with sound economic theory, they are also entirely unsupported by empirical facts (contrary to her claims, as it were).


Economic history naturally depends on economic theory if it wants to elucidate past events. As Mises noted, while it is generally accepted how historians should apply the natural sciences in the study of history, the subject of economics is far more controversial:


“However, no appeal to understanding could justify a historian's attempt to maintain that the devil really existed and interfered with human events otherwise than in the visions of an excited human brain.

While this is generally admitted with regard to the natural sciences, there are some historians who adopt another attitude with regard to economic theory. They try to oppose to the theorems of economics an appeal to documents allegedly proving things incompatible with these theorems. They do not realize that complex phenomena can neither prove nor disprove any theorem and therefore cannot bear witness against any statement of a theory. Economic history is possible only because there is an economic theory capable of throwing light upon economic actions. If there were no economic theory, reports concerning economic facts would be nothing more than a collection of unconnected data open to any arbitrary interpretation.”


from Human Action, ch. II,7.

The controversy is ultimately politically motivated. Keynesian doctrine and its predecessors in the inflationist 'underconsumption theory' camp (see e.g. Gesell, Foster and Catchings, et al.) is characterized by its subservience to the State and its usefulness to a totalitarian political dispensation. As Keynes himself remarked in the foreword to the German edition of his 'General Theory',


“The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory”


Who could have said it better than the 'Master' himself? Naturally, the political class was quite happy to have found someone who could provide it with the 'scientific' fig leaf that allowed it to roll back economic liberty, and with it, liberty in general (there can be no liberty without economic liberty). Here was an economist telling the politicians that they were actually right in spending money they didn't have, that printing money was just fine, and that the State had to intervene in the economy to prevent the alleged 'failures of the market' from 'creating depressions'.

Here is how Mises describes where a real economist generally stands relative to those in power, and what most of economic history ultimately really describes:


The issue has been obfuscated by the endeavors of governments and powerful pressure groups to disparage economics and to defame the economists. Princes and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature. But they reject the very notion of economic law. Are they not the supreme legislators? Don't they have the power to crush every opponent? No war lord is prone to acknowledge any limits other than those imposed on him by a superior armed force: Servile scribblers are always ready to foster such complacency by expounding the appropriate doctrines. They call their garbled presumptions "historical economics." In fact, economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.

It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.”


(our emphasis)

L. v. Mises, Human Action, ch. II, 10

Guess where we would place Keynes on this scale of evaluation – servile scribbler or a thorn in the side of autocrats? It's not even necessary to say it – after all, he said himself that his work is best suited to a totalitarian system (the passage in the German version of the foreword reads: 'Die Theorie […] kann viel leichter den Verhältnissen  eines  totalen Staates angepasst werden, […]' – which literally translated means, 'The theory […] can be better adapted to the conditions of the Total State, etc.').

Unless one is pining for the 'Total State' one should perhaps consider forgoing  the Keynesian recipes. Just saying.



John Maynard Keynes – handmaiden to totalitarianism

(Photo credit: Wikimedia Commons)



His ideological opposite, the great defender of liberty, Ludwig von Mises.

(Photo credit: Wikimedia Commons)


In the meantime, Romer is back at her redoubt in Berkeley, poisoning the minds of innocent students with Keynesian inflationist doctrine. While she can arguably do less direct damage to the economy from there than from her previous post, we certainly commiserate with her students and recommend that they pay a visit to Auburn, Alabama, where they would have the opportunity to free themselves of the statist religion and learn some real economics in its stead.

We don't know Mrs. Romer personally and for all we know she may be a nice person and may even be convinced that the theories she expounds serve some greater good, i.e. her motives may well be pure. Alas, if you think our criticism is too harsh, then we would point out that it is up to her to learn what kind of ideology has fathered the doctrines she espouses.

This brings us to the fact that she is these days occasionally sniping from said redoubt in Berkeley, via the editorial pages of the New York Times (where else). Given that the NYT is currently providing a soapbox to Paul Krugman, it must be assumed that it welcomes anything that smacks of statism and socialism with open arms. It is depressing to consider how widely read this newspaper is. In our opinion most of the time its economics section is to economics what military music is to music.

Misguided Empiricists and Theorists

Here is the link to Romer's recent editorial at the NYT, entitled 'The Debate That’s Muting the Fed’s Response'.

If one didn't know who wrote it, one would think it is an article bemoaning the Fed's muted response to growing evidence that its extremely inflationary policies have had an increasingly obvious effect on numerous prices in the economy. Alas, that is not the case.

She begins as follows:


“Monetary policy makers at the Federal Reserve have long been classified as “hawks” or “doves.” The distinction is appealing in its simplicity. Hawks care deeply about inflation, while doves are willing to risk inflation to reduce unemployment.”


Note to those poor Berkeley students: your teacher apparently believes inflation can 'reduce unemployment'. Unless this prompts you to switch courses right away, challenge her on this nonsense. The 'Phillips curve' which she is likely to invoke, has been thoroughly discredited for decades.

Thereafter, her screed becomes outright bizarre:


“Unfortunately, this division is no longer useful. Monetary policy makers are all hawks now. Even those who most emphasize the Fed’s role in fighting unemployment oppose policies that would raise inflation noticeably above the Fed’s implicit target of about 2 percent.”


(our emphasis)

Some hawks! It may have escaped Romer's notice that these alleged 'hawks' are currently not only implementing a 'zero interest rate policy' but  have been busy on the side monetizing trillions of debt. If these are 'hawks', what would 'doves' look like? As to 'those emphasizing the Fed's role in fighting unemployment',  these poor souls are misguided. What creates employment is a sound economy on a sustainable path of growth. Printing money or pretending that the cost of capital should be zero is not going to achieve either of these objectives. Romer then let's us in on what divides the policy makers at the most powerful central economic planning agency on the planet:


“Unfortunately, this division is no longer useful. Monetary policy makers are all hawks now. Even those who most emphasize the Fed’s role in fighting unemployment oppose policies that would raise inflation noticeably above the Fed’s implicit target of about 2 percent.

The real division is not about the acceptable level of inflation, but about its causes, and the dispute is limiting the Fed’s aid to the economic recovery. The debate is between what I would describe as empiricists and theorists.

Empiricists, as the name suggests, put most weight on the evidence. Empirical analysis shows that the main determinants of inflation are past inflation and unemployment. Inflation rises when unemployment is below normal and falls when it is above normal.

Though there is much debate about what level of unemployment is now normal, virtually no one doubts that at 9 percent, unemployment is well above it. With core inflation running at less than 1 percent, empiricists are therefore relatively unconcerned about inflation in the current environment.

Theorists, on the other hand, emphasize economic models that assume people are highly rational in forming expectations of future inflation. In these models, Fed actions that call its commitment to low inflation into question can cause inflation expectations to spike, leading to actual increases in prices and wages.

For theorists, any rise in an indicator of expected or future inflation, like the recent boom in commodity prices, suggests that the Fed’s credibility is at risk. They fear that general inflation could re-emerge quickly, despite high unemployment.

Now, not every monetary policy maker fits neatly into these categories. Most empiricists care about expectations of inflation and would hesitate to take extreme actions for fear that they would damage the Fed’s credibility. Some theorists oppose monetary expansion on other grounds, like the fear of setting off asset price bubbles. But the main division is between the empiricists who say “inflation is unlikely at 9 percent unemployment” and the theorists who say “inflation could bite us at any moment.”


The 'empirical analysis' Romer refers to here is the above mentioned, long discredited 'Phillips curve'. It is discredited for a good reason: its 'discoverer' William Phillips wrongly assumed that correlation is proof of causation. In fact, one of the reasons why Keynesian doctrine in general became so discredited in the 1970's is that the correlation broke down – completely. Since there was no longer even a correlation, the assumption that there was a causal connection evidently had to be wrong. Phillips could have saved himself some time and embarrassment if he had read 'Human Action' before going on his fruitless hunt for an equation that would bear his name. It seems Romer has banished the 1970's from her mind.



CPI and unemployment in the 1970's – the decade that remains safely untouched by Romer's empiricism – click for higher resolution.



We should once again stress here: 'empiricism' is no useful substitute for economic theory. It can not be, since at any given point in economic history, it is impossible to measure the multitude of factors influencing the state of economic data. What is required to explain economic phenomena are unassailable logic and reasoning.

In addition, it seems blindingly obvious to us that the real problem is the semantic confusion we often bemoan. By refusing to acknowledge what inflation really is – namely an increase in the supply of money –  we are left to discuss its symptoms, one of which – rising prices –  has wrongly been dubbed 'inflation'.

Now to briefly discuss the 'theorists' at the Fed, it is actually not fair to put them all in the same basket, so to speak. While there is a lot of emphasis on 'inflation expectations' to the detriment of an analysis of the true cause of inflation, namely loose monetary policy, there are at least some people on the Fed's board who have a let us say more nuanced view of the interaction between money printing and unemployment. For instance, Charles Plosser is quoted in a recent WSJ article ('The Fed's Easy Money Skeptic') as follows:


“One of the most perplexing questions for the Fed these days concerns the continuation of "QE2," its second round of quantitative easing, which will dump $600 billion in new money into our banking system over the first half of this year.

Mr. Plosser doesn't see a deflation risk for the U.S. economy right now. Even those who were worried about deflation six months ago, he says, have begun to change their tune. That means that, with moderate GDP growth and low inflation in the mix, the only thing left as an excuse for QE2 is high unemployment. Can lax monetary policy change that picture?

Mr. Plosser's answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. "You can't change the carpenter into a nurse easily, and you can't change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they'll find jobs in other industries. But monetary policy can't retrain people. Monetary policy can't fix those problems."

Mr. Plosser reminds me that when QE2 was first proposed last year, he wasn't in favor. "I didn't think it was necessary and I thought that the costs outweighed the benefits." He says he thought that "it carried some very significant risks" that "would not be borne today but would be borne down the road when the time comes to unwind what we've been doing."


A similar view on unemployment was enunciated by another Fed president, Nayarana Kocherlakota, and we suspect that Richard Fisher's views (who is mostly concerned about the 'regime uncertainty' aspect of the government's economic policy) would not be too far from those either.

What Plosser says here is in our view broadly correct. To be sure, it is not only the mismatch between the job skills people possess and the skills actually demanded in the marketplace after the bursting of the housing bubble that is relevant. As Robert Murphy points out in a recent article on Plosser, we must also consider that malinvested capital needs to be liquidated or where possible reconfigured and redirected to new uses. In addition, the boom has consumed capital – fixed capital that was starved of maintenance needs to be repaired and savings must be made available to fund the production of new capital goods. All of this requires time – and most importantly, as unhampered a market process as possible. A decisive feature of an unhampered market is that  interest rates should be left alone so that they will reflect actual time preferences – something they are not doing due to the Fed's interventions. It is not possible for the economy to properly coordinate production with the actual demand schedules of consumers when the interest rate is kept artificially low. It is no exaggeration to say that the rate of interest is the most important price ratio in the market economy, the signal that is the sine qua non for conveying information to entrepreneurs about where in the time structure of production they should invest. It is precisely because the Fed falsified this signal after the bust of the Nasdaq bubble in 2000 – 2002 that  the unhealthy housing boom was set into motion and almost destroyed the entire financial system in the end. So Plosser is quite correct when he utters strong doubts about what can be achieved by loose monetary policy, and he is definitely also correct when he suspects that there will be a price to pay 'down the road'.



Philadelphia Fed president Charles Plosser: even though he has yet to dissent from the Fed's current loose monetary policy, he is not convinced of its merits.

(Photo via: Bloomberg)



A long term view of the ratio of business equipment production to non-durable consumer goods production.This shows that the economy continues to be dangerously imbalanced – too many factors of production have been drawn toward the higher order stages of the productive structure. The ratio's deviation from its long term average began to accelerate the looser the Fed's monetary policy became. Also note how the 'Volcker recession' in the early 1980's set up the basis for what was initially a fairly healthy economic expansion, with malinvestments purged from the economy and a reasonable balance between higher and lower order goods production achieved – click for higher resolution.



The inability and unwillingness of inflationist faction to consider the debilitating long range effects of its policies is often waved aside with Keynes' bon mot that 'we're all dead in the long run', but everyone who was alive in 2008 would probably have to admit that this is no consolation when one suddenly realizes that the 'long run' has come home to roost, so to speak.

Lastly, when Romer mentions that some of the 'theorists' fear that 'general inflation could re-emerge quickly, despite high unemployment', i.e. that prices of goods and services could rise strongly even if unemployment remains high, it should perhaps be pointed out to her that this can indeed happen when there is explosive growth of the money supply. High rates of unemployment are not a guarantee that money will hold on to its purchasing power.

Romer continues:


“These differing views have come to a head around the Fed’s policy of quantitative easing — monetary expansion when the benchmark federal funds rate is near zero. Quantitative easing typically involves purchases of longer-term assets. The Fed bought more than a $1 trillion of mortgage-backed securities and $300 billion of long-term government bonds over the course of 2009 and early 2010, and has committed to buy an additional $600 billion of long-term government bonds through June.

Quantitative easing can help the economy through several channels. It can push down longer-term interest rates that are not yet at zero. This encourages interest-sensitive spending, like construction, investment and consumer purchases of durable goods. It can also lessen fears of deflation, and so lower the real cost of borrowing, even if nominal interest rates barely fall.

Like conventional monetary policy, quantitative easing also works through exchange rates. Reductions in American interest rates make domestic assets less attractive, reducing the demand for dollars and lowering the currency’s value in foreign exchange markets. This tends to decrease our imports and increase our exports, raising domestic production and employment.

Most monetary policy makers agree that quantitative easing can stimulate the economy. Studies show that news of the first round led to declines in mortgage rates and other long-term interest rates. And long-term rates and the dollar fell slightly over the late summer and early fall in conjunction with Fed hints and announcements of its latest actions.”


Never mind that mortgage rates have risen by more than 100 basis points since the latest round of 'quantitative easing' began, Romer's assertions ('studies show') make it sound as though there were no downside to any of this. Let's devalue the currency! Prosperity is sure to follow! We won't deny that 'this encourages interest-sensitive spending, like construction, investment and consumer purchases of durable goods'.

Indeed, an artificial lowering of interest rates encourages investment in the higher order stages of production and it also encourages spending on durable consumer goods, which should, as we have mentioned before,  be regarded as higher order goods for analytical purposes (see also de Soto, 'Money, Bank Credit and Economic Cycles', p. 316 ).  The question is not whether this happens, the question is whether it is desirable in the sense of ensuring smooth economic development. We would argue that on the contrary, the illusion that 'QE' and an artificially low interest rate create – via the falsification of essential information about consumer demands and the size of the pool of real funding – will only lead to the consumption of even more scarce capital. While the current 'echo boom' progresses, it won't be possible to determine with certainty how much of the economic activity that takes place is of the capital consuming kind and how much of it is directed toward actually producing new wealth. We can not measure these things – but neither can Christina Romer or anyone at the Fed. We can only state in a general sense: monetary pumping will end up destroying wealth and it will make the real wealth creation process much more difficult for those actually engaged in it.


Misinterpreting History – Again

Mrs. Romer then looks at what the potential downsides of the policy are according to the 'theorists' and why she, as an 'empiricist' disagrees with them. As you might have guessed, she once again invokes the Great Depression:


“The fight over quantitative easing is about the costs. The empiricists say the policy won’t cause inflation because the economy remains so weak. The theorists argue that a small gain in growth could come at the price of a rapid rise in inflation. Although the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, shows virtually no change in long-run inflation expectations since the start of the program, the theorists hold fast to their concerns.

As a confirmed empiricist, I am frustrated that the two sides have been able to agree only on painfully small additional aid for a very troubled economy. For a sense of how much more useful monetary policy could be, one can look to the Great Depression.

By 1933, short-term interest rates were near zero — just as they are today. As I described in a 1992 academic article, Franklin D. Roosevelt took the United States off the gold standard in April 1933, and rapid devaluation led to huge gold inflows and a large increase in the money supply. Roosevelt also made it clear that the monetary expansion would not be reversed. Expectations of deflation, which had been enormous, abated quickly. As a result, with nominal rates at zero, real interest rates (the nominal rate less expected inflation) plummeted.

The first types of demand to recover were ones that were sensitive to interest rates. Automobile production, for example, jumped 42 percent from March to April in 1933. Inflation did pick up somewhat in the mid-1930s, in part because of other New Deal measures like the National Industrial Recovery Act. But the inflation was modest, and after the crushing deflation of the early 1930s, widely celebrated.

THE triumph of hawkish views on inflation means that there is no appetite today for a Roosevelt-style, inflationary monetary policy. But that doesn’t mean the Fed couldn’t be more aggressive if the empiricists were willing to risk a split with the theorists.”


Memo to Romer: there is a good reason why the history books call the period from 1929-1939 the 'Great Depression' and not the 'uncomfortably intense recession of 1930 hardly anyone can remember these days'. Even her fellow empiricists have broken with her views on the alleged benefits of FDR's inflationism, deficit spending and regimentation of the economy. Perhaps she should not only look toward her own papers from almost 20 years ago, but entertain some fresher – and evidently better researched –  information. In fact, the economists who perfomed the requisite study – Harold L. Cole and Lee E. Ohanianare practically next door to her, at UCLA in L.A.

Their study comes to a conclusion that was no great surprise to Austrian economists, namely that 'FDR's policies prolonged the Depression by 7 years'. The initial bust was of course the result of the preceding credit and asset boom that broke once the Fed began to hike rates in 1929 (if the Fed had not done that, the boom would still have ended – and likely with even more catastrophic results). The first three years that set the decisive course for transforming a severe downturn into a depression were of course entirely the work of the interventionist president Hoover – whose disastrous policies FDR not only emulated, but intensified, while adding numerous blunders of his own.  It is worth quoting Harold L. Cole on FDR's reign:


“"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened." 


The Austrians have been saying this forever of course, but it is nice to see some belated 'empirical confirmation' emanating from a mainstream source.

Now let's consider Romer's data. First of all, it is debatable whether the 'inflation of the mid 30's was modest' (annualized CPI shot to just over 5% twice, in 1934 and 1937), and we're not so sure that there were any great celebrations when the meager incomes of people were subjected to a loss of purchasing power in the midst of a crushing economic crisis. Yes, there was indeed an 'inflationary boomlet' when FDR let the deficit spending and printing presses rip. For the sake of completeness it must be noted though that contrary to conventional wisdom, the Fed did everything it could from 1929 to 1933 in order to stoke inflation. It failed to succeed, because it had far less control over the banking system than today, and there was no FDIC that could stop deposit money from going to money heaven when banks failed. However, the Fed increased its holdings of securities, and with that, free bank reserves, by over 400% between 1929 to 1933.  The reason why the inflationary policy suddenly seemed to 'succeed' from 1933 onward was that there was nowhere for prices to go but up once the money supply contraction occasioned by bank failures stopped. In addition, FDR confiscated the citizen's gold and subsequently devalued the dollar against it by 70%. Alas, it became obvious by 1938-1939 that the 1933-1937 boomlet was nothing but yet another inflationary illusion that had squandered even more scarce capital. By 1939 the unemployment rate was nearly back at its highs of 1932/33 – the trough of the money supply deflation. Hence, the era is today known as the 'Great Depression'. Even Roosevelt's treasury secretary Morgenthau admitted in front of the Senate in 1939 that the 'New Deal' policy had been a complete failure. Perhaps a more thorough study of the history of the depression would help Mrs. Romer to see the errors of her reasoning – after all, she's an 'empiricist' and there is plenty of empirical evidence confirming that FDR's policies were an unadulterated catastrophe. The true end of the depression came only when Congress finally dismantled the worst features of the New Deal in 1946. Hailing Roosevelt's policies as some sort of panacea and example  one should follow today is about as misguided an idea as we have ever come across.


Romer's Conclusion

Building on her erroneous views of the past wonders of inflation, Romer concludes her editorial as follows:


“In a strongly worded article and speech several years ago, before he was Fed chairman, Ben S. Bernanke provided a user’s manual for responsible but unconventional monetary policy. Mr. Bernanke focused on Japan in the 1990s, but his recommendations could apply just as well to the United States today.

The Fed could engage in much more aggressive quantitative easing, both in size and in scope, to further lower long-term interest rates and value of the dollar. It could more effectively convey to markets its intentions for the funds rate, which would also lower long-term rates. And it could set a price-level target, which, unlike an inflation target, calls for Fed policy to take past years’ price changes into account. That would lead the Fed to counteract some of the extremely low inflation during the recession with a more expansionary policy and lower real rates for a while.

All of these alternatives would be helpful and would retain the Fed’s credibility as a defender of price stability. And any would be better than doing too little just because some Fed policy makers believe in an unproven, theoretical view of how inflation works.”


Well, yes, it's true – Bernanke is a monetary crank too. Anyone who is familiar with his papers and speeches should be fully aware of that fact, but that isn't a good reason to hearken to his views, it is at best a reason to pray for his early retirement. His berating of the Bank of Japan is especially amusing and misguided, since the BoJ, as its current governor Masaaki Shirakawa points out,  was the 'pioneer in implementing unconventional monetary policies' (not counting the German Reichsbank in the early 20's or Hungary's central bank in 1946, one presumes. They were even more 'pioneering', as contrary to the BoJ, they just kept on printing until their currencies collapsed). 



BoJ governor Masaaki Shirakawa: 'Hey, we were the first ones to print gobs of money!'

(Photo via: top-10-list.org)



So let's get this straight: The Fed should, in Romer's view, print even more money. This it should do because it is, according to Romer, an 'empirically proven fact' – according mostly to her own papers apparently – that it is possible to achieve prosperity by money printing and manipulating interest rates. Is that why Zimbabwe is such a Utopia of riches?

The final sentence really takes the cake however: money printing on a grand scale would be 'better' than 'doing too little'  ('too little' refers to the allegedly timid efforts to date  – again, note that these timid efforts altogether involve the monetization of more  than $2 trillion in debt!) 'just because some Fed policy makers believe in an unproven, theoretical view of how inflation works'. 

Is that in contrast to John Law's, Rudolf von Havenstein's or Gideon Gono's proven view of 'how inflation works'?  You really couldn't make this stuff up.

As noted above, we find it actually slightly disturbing that such nonsense sees the light of day in one of the most widely read newspapers in America. It is even more disturbing to realize that it is taken seriously by quite a few influential economists, not least by several who currently serve as governors or regional presidents of the central bank.

It is truly amazing that no matter how often inflationist doctrines are refuted by eminent economic thinkers or how often they have failed in practice, over and over again throughout history,  their popularity never seems to diminish. From the time of the Roman emperor Diocletian to today, interventionists have attempted to cure perceived economic ills by means of the devaluation of money. All of them have failed, without exception. Perhaps Mrs. Romer should do a paper on how that was possible.



Christina Romer: Wants the Fed to print us back to prosperity. Inflation is good for us, we just don't know it yet.

(Photo via: crooksandliars.com)

Charts by: St. Louis Federal Reserve Research



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4 Responses to “Meet Christina Romer’s Inner Inflationist”

  • I don’t believe this has anything to do with boosting the economy, preventing deflation or lowering long term interest rates. I think has to do with maintaining the zombie banking system. Fed money is bank money, meant to be passed around between bankers and some of it doled out to depositors who need cash. The depositors aren’t getting any more money other than the credits being put out by speculating bankers. The worst kind of credit is that used for speculation, as when margin calls come and they will, the money has to be drawn out of the economy. We go through another bust after a credit induced crack up boom. The big 4 or 5 banks in the US would be insolvent if they had to raise money in the market and recognize the true value of their bad assets. The Fed is doing nothing more than transferring more wealth from the middle class to the super rich, stealing and destroying the country for a privileged few.

    As far as longer term interest rate? Look at the junk being bought by those in search of yield. A 3% fed funds rate right now shouldn’t be out of the question and it would provide enough income on money to keep many from taking the plunge into pure crap. If risk and inflation do return, the value of these longer term assets will drop to reflect such, not increase and along with the policy, longer interest rates will go up, not down. Upon anticipation of QE, rates have fallen, but upon the start of both plans rats went up, not down. The actions of the Fed are those of a financial moron.

    Lastly, Bernanke was on the TV the other day. I upset my sister by saying that she knew more about what caused the Great Depression than Bernanke. His theories are total myths and had they been implemented, then they would have only increased the amount of bad investment and bad debt in the system. The same thing happened in the 20’s as the 1990’s and 2000’s, rapid increases in consumer and speculative credit, one feeding the other. I read something about the stock market not being so levered. It was levered out of the actions of FNMA and FHLMC starting in the early 1990’s, allowing for the extraction of trillions of dollars out of housing. The money on the sidelines they keep talking about all came out of housing and mortgages are a future claim on this money.

    • I entirely agree with your views, except for one small point. I would note that there are two factions at the Fed. One faction consists of ‘pure’ academics like Bernanke, who have never held a job at a bank or elsewhere in the private sector. The other faction are mostly regional Fed presidents that have in fact been directors of private sector banks before being appointed to their positions at the Fed.
      My contention would be that the ‘academic faction’ is far more concerned about deflation than the banker faction. I hold with Vijay Boyapati that if it were up to the bankers, they would opt for a policy of ‘grinding, slow deflation’ until the write-offs of toxic assets are completed some ten or twenty years down the road. The bankers sure don’t want to see the dollar destroyed by hyperinflation.
      Otoh, the ‘academic faction’ fears that once deflation were to set in, it would be very difficult to arrest the process. Bernanke and others in his camp are extremely worried about the Japanese experience and want to forestall it by all means.

  • Alan Simpson:

    I may be a bit dim here, but surely the Central Banks have given up any pretence of having a positive effect on the economy.

    When they ran out of interest rate changes and started printing money they effectively created inflation.

    However, money lenders still would like to make a profit, so borrowers will still see an interest rate which is Central Bank rate plus inflation expectations plus profit.

    That said, the “real” cost of borrowing is going to go up regardless of the Central Bank rate so things financial are worsening.

    Did I get that right?

    BTW, thank you for the recommendation of J.H. de Soto, excellent reading.

    • Hi Alan,

      I would tend to agree that the central bank has less control over the real interest rate charged to borrowers than it would like. Given the fact that the private sector remains in credit retrenchment mode, most of the monetary pumping currently underway helps to finance an ever-expanding government deficit, but even there we see that the Fed has surprisingly little control over the long end of the yield curve – in spite of its bond buying program. However, contrary to the private sector, the government is not influenced much by economic calculation, since it is not a creator of wealth anyway. Only if the interest rate were to suddenly spike to levels that would make its interest costs unbearably high and render further monetization operations increasingly counterproductive would the government presumably care about this.

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      Shooting from the Hip [ed. note: the tweets linked below mainly show videos from various lockdown phases]   Reminiscent of his demonetization effort in 2016, on 24th March 2020, Indian Prime Minister Narendra Modi, appeared on TV and declared an immediate nationwide curfew. No one was to be allowed to leave wherever he or she happened to be. All flights, trains (after 167 years of continual operation) and road transportation came to a complete, shrieking...

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