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Thursday, August 03, 2006

Forbes on Bernanke

Sean Rushton asked for this to be posted:

Fact and Comment
Steve Forbes

08.14.06

Dunce Cap

Fed Chairman Ben Bernanke's Congressional testimony a few weeks ago was a disappointment. Investors and executives better expect more turbulence and higher interest rates.

The man is still underestimating inflation -- despite the sky-high levels of prices for gold and other commodities. More disturbingly, the Fed boss hinted that inflationary pressures would be easing because of a slowing economy. Bernanke and the Federal Reserve bureaucracy still seem to cling to the notion that growth causes inflation. It doesn't. Excess money creation does, as Milton Friedman conclusively demonstrated decades ago. The destructive idea that there's a tradeoff between inflation and economic growth has unnecessarily retarded our expansion and capital markets in the past. Experience has shown this idea to be nonsense. Both the 1980s and 1990s saw vigorous growth and declining inflation.

Bad ideas are sometimes harder to kill than obsolete government agencies.
Ben Bernanke's education in central banking, alas, is going to be a long one. So far this student is proving to be a slow learner.

11 Comments:

Blogger David Wood said...

I agree with Forbes. The growth/inflation tradeoff, what I call the Phillips curve mentality is probably one of the most destructive ideas a central banker can have.

1:32 PM  
Blogger Henry Meers said...

Take it a step further. Leaving the gold standard was a big mistake: from Bordo, "The Gold Standard & Related Regimes", "As in the UK case, U.S. real per capita income was more stable under the gold standard from 1879 to 1913 compared with the entire post-World War I period...Morevoer, unemployment was was on average lower in the pre-1914 period in both countries than in the post-World War I period".

Not only did the Progressives who created the Fed open the door to all manner of macroeconomic mismanagement, such as the Phillips Curve, they cut its monetary anchor cable and set it adrift. The discussions about inflation we constantly see in the press are nonsense without a reference point. Even Hong Kong could use a currency board successfully for generations; we have nothing.

4:07 PM  
Anonymous judith said...

Sean & David - thank you for posting the Forbes 'comment'! I now can post it at a few places where I have taken a lot of flak for saying the same thing.

There are many, many people who believe the Fed nonsense. Of course, the mass media certainly doesn't help matters any.

7:06 PM  
Blogger Ed Hanson said...

David and Henry,

Not disagreeing with your conclusions, but putting a different spin on them.

It is not Phillips Curve mentallity that is driving the Fed conclusion that monetary pressure will ease with a slowing economy. As distasteful as it is, it is a fact, directly resulting from Fed Fund targeting.

It has been well established at talkshop that the Fed must supply all the demanded liquidity at any given time in order to defend its rate target(Rombach?).

Unfortunately and destructively, this means the only way this Fed mechanism has in reducing liquidity demand (and supply) is a slower economy. I am most sorry to say, this does work. The lagging price inflation indexes will show this some months in the future. And the Fed will take credit ending another inflation cycle.

Until the Fed uses direct monetary control tools, the economy will continue to fluctuate from shallow short lived recessions to monetary growth created expansions.

4:43 AM  
Blogger David Wood said...

I don't deny it works, Ed. So does killing houseflies with handgrenades. In both cases, though, a lot of unnecessary damage is done in the process.

6:20 AM  
Blogger Henry Meers said...

Ed & David,

Yes, and what if the Fed "tightening" when it should be loosening? A world economy growing in real terms is going to bid up oil and other tradable commodities, and their prices are going to flow through to whatever price indexes people are watching. Remember what Greenspan did in 1997 - '99 and the passthrough to the stock market in 2000.

The difference this time is gold is going the other way, up instead of down. Of course, we didn't have the uncertain international situation we do now and as strong a China, for example. If gold is "acting like a commodity", because people want it, a lot of our assumptions are going to be off the track. Ed's GVM will still show higher prices as it should, but will that be inflation?

If real demand is rising, it is not inflation, rather the market's way of telling investors to put more money into producing more of some commodities: oil, copper etc., as a way to fuel growth. Inflation, on the other hand, would tend to show up in the bond market as investors sold bonds for higher rates of return.

7:54 AM  
Blogger David Wood said...

You bring up an interesting point, Henry. Could part of the rise in gold be due to increased international money demand (gold is the basic money) as so much more of the world's population is starting to enter the world market economy? I know if I were in one of these places and had a bit of savings I wanted to hang on to, I certainly wouldn't want to put it into the local currency. I'd want gold or silver.

8:11 AM  
Blogger ed hanson said...

Henry and David,

As far as I am concerned, the rise in gold price is mostly from a worldwide increase in liquidity, plus a smaller factor of war uncertainty. With the Euro replacing Euro dollars and the Yen finally expanding again, the result was more trustworthy liquidity then the world needed.

The Fed could have moved to buy those dollars as they came in, but I believe that would have disrupted our economy. In the short term as the US dollar would have become much stronger, faster then trade could adjust. In another matter, I am not sure, but it seems to me that it is current bank reserves would be drained during hat type of Fed action. However, I would like to here a more familiar banker type explain what would actually happen.

11:41 AM  
Blogger Henry Meers said...

Ed,

"Buy dollars As they come in"? Eurodollars etc., already exist and are part of the dollar supply, new dollars cause further inflation. There is only one U.S. Dollar, never has been a foreign and domestic one.

The Fed could sop them up and get rid of past inflation as it could with any other dollars. It seems to prefer to slow the economy down.

12:17 PM  
Blogger ed hanson said...

Henry

There were all sorts of Euro dollars that were not part of economy, but held in 'matresses' to protect from constantly changing currency rates. This was as true in Europe as well as the world. In addition, I am talking about all those dollars that acted in place of local currencies, never needing repatriation to the US to be of value. Now that additional choices of real currencies are available, the which has been outside any effect on US economy. The amount of this currency is somewhat staggering.

This is a source of 'new' dollars not generated by the Fed or Treasury, but acts the same as your printing press.

2:37 PM  
Blogger Henry Meers said...

Ed,

You keep bringing up those dollars as if they were new or unknown; they're not. If they "come back", there won't be a surprise to the forex markets. What you seem to mean is they will become supply over the market should people change their mind about holding the U.S. Dollar. Whenever that happens, they are a small part of the avalanche.

The real problem would be the decision not to horde them anymore. The Euro may have supplemented that demand for Eastern Europe. It is even true that a lot of stage-money dollars were sold there during the communist era. The general removal of restrictions on holding currencies and the ability to trade them has put a lot of that money back into circulation.

When the Fed tried to sterilize its international monetary operations, it always failed. So this isn't going to be different. It might, however, be a reason to enhance the attractiveness of dollars in this newly competitive environment. Gold backing, anyone?

5:17 PM  

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