Bernanke pledges to keep interest rates low for at least the next two years – meaning real interest are several percent negative. Large negative interest rates rapidly lead to economic crisis.
“The low level of inflation is a validation,†Bernanke said. “There are some who were very concerned that our balance-sheet policies and the like would lead to high inflation. There’s certainly no sign of that yet.â€
Really? Sales have gone up ten percent in nominal value, which only makes sense if the real rate of inflation is seven to ten percent. The US economy is on fire, and Bernanke pledges to continue throwing gasoline on the flames.
Why the madness? Well, reading human souls is a chancy business, but here is my reading:
For political reasons the left, aka the United States Government, aka the guys who cannot be fired or lose their jobs no matter how badly they screw up, has been hurling great gobs of money at political insiders, such as favored bankers and financiers, and also great gobs of money at favored voting blocks, in particular Mexicans.
Therefore, everyone has to believe that these policies are not a matter of throwing America over the cliff for short term political and financial gain, even though the US economy appears to be falling off a cliff, but rather are sound and principled actions dictated by sound economic reasoning, and the reasoning is, um, ah, err, uh – Oh yes. Vitally needed Keynesian stimulus!
And if Keynesian stimulus is vitally needed, then we must be suffering serious deflation.
So everyone who knows how to get ahead convinces himself that we are suffering serious deflation, or at least that inflation is a very minor problem. And of course these guys don’t do any shopping, and they don’t know anyone who does their own shopping, so there is no inconvenient risk of reality butting its head in where it is not wanted. The Bureau of labor statistics notes that computers are greatly improving in value, televisions are significantly improving in value, and blithely closes its eyes to the fact that everything you need to live is getting more expensive.
And now, something even chancier than reading human souls: Reading the future: I think we are nine to eighteen months from an “Oh $#!%†moment when everyone except the ruling elite recognizes that the US economy is in total meltdown, and about three years to five years or so for the ruling elite to catch on.
There is a lot of ruin in a nation, and I still predict ruin around 2020-2025 or so, but this disturbing statement by Bernanke, and everyone’s calm acceptance that it is perfectly reasonable, and that there is nothing even faintly suggestive of madness and evil about it, leads me to predict interesting times arriving sooner than that.
A lot of people think that the ruling elite is cynically aware of what it is doing, but seems to me that everyone knew of the mortgage meltdown in 2005 November, whereas Goldman and Sach did not start unloading their mortgage exposure onto their customers until 2007. In the mortgage crisis, the elite from Harvard were the last to know. That is why they needed to be bailed out.
Similarly, when the Soviet Union was falling, after 1985 lots of people knew the fall was imminent, yet the left, aka the government, was still in denial well after it had fallen.
We are not ruled by an elite selected for intelligence, but rather for the ability to believe six impossible things before breakfast.
Jim,
First, do you read Scott Sumner’s blog? I’m quite sure you’ll disagree with him, but the question is why? Second, according to the “Billion Prices Project”, inflation is only about 3%:
http://mjperry.blogspot.com/2012/01/ppmit-data-show-inflation-moderating-at.html
With unemployment at close to 10% it seems kind of silly to talk about the U.S. economy being “on fire”.
I think he means on fire as in it’s turning wealth into smoke.
I know what he meant…but again, the prices tracked by the BPP don’t suggest wealth destruction. Instead, thanks to capitalism, shoppers can go to their nearest big box store and get great deals on all sorts of food — grocery stores never had to compete with Wal-Mart or Costco or Trader Joe’s before.
If you are feeding 8 kids your grocery bill is the largest part. And then 3% inflation does not sound plausible. Food inflation is a fair bit higher than that by official statistics, and official statistics are implausibly low. And if you have 2.5 kids and you hope to put them through college, college has been going up at nine percent a year.
No, on fire as in demand is exceeding the capability to supply, resulting in alarming levels of inflation. The amount of money paid for stuff sold has increased by ten percent, but obviously our capability to produce actual value has not increased by ten percent.
The billion prices project relies on internet prices, which understate overall inflation by a substantial factor. Everything I buy over the internet is cheap and getting cheaper, but my grocery bill with the supermarket is high and getting higher.
The relevant factor in determining if the economy is overheated and overheating is not the availability of labor, but the capability of supply to meet demand. To turn labor into goods requires the rule of law and all that, requires conditions that are not present. Unemployment in Zimbabwe was a lot higher than ten percent, but stimulating the Zimbabwean economy did not reduce unemployment, nor should any reasonable man have expected it to.
Internet goods are for the most part internationally traded, so their price reflects the US dollar. The US dollar has been doing better lately, so internet inflation has been falling, because uncertainty over Euro assets causes Europeans to move their assets to the US.
He argues that the fed should target nominal GDP, and guarantee a rapid and substantial rise in nominal GDP.
Seems to me that total sales volume is the best indicator of how nominal GDP is doing, and to judge by total sales volume, the Fed is targeting nominal GDP, has been doing so for several years, and as a result nominal GDP is rising at a rapid, substantial, and indeed quite terrifying rate.
He is fond of saying that Zimbabwe proves the Fed can raise nominal GDP as fast as it likes. Quite so. But Zimbabwe also proves that does not help unemployment, when the political conditions for turning labor into supply do not exist.
Hmm, I think inflation makes some sense. Not that I am for it, mind — it would be better if we squarely faced our problems, tasted the pain, and got over it.
Anyway, here are several of the problems faced by USG:
(1) overly high wages for government workers
(2) too high welfare payments to various groups (retirees in particular)
(3) overly high property values in the wake of their own real-estate bubble; market is not clearing yet. Pyramid of debt still exists, based on high real estate prices.
The proper way to deal with these would be:
(1) cut all government salaries, perhaps to 3/4 of their current level.
(2) cut all government benefits similarly
(3) nationalize all mortgages and all banks; ban maturity-mismatched banking (this includes fractional reserve); abolish the fiat dollar and the Fed, replace with a new, gold-based dollar, and finally re-privatize real estate and banks.
Of course these can never happen in democracy.
So, given the limited tools the state does have at hand, inflation makes sense. Although much government spending is “inflation” indexed (that is, indexed to some fudge number concocted via measured prices and duct tape), as you point out, all they need to do is include computers and TVs in the fudge recipe and voila!: low “inflation”. So, in effect they get a cramdown on all government beneficiaries. (1) and (2) are accomplished, albeit slowly. Similarly, in (3), because mortgages (debt instruments) are basic in the pyramid, by (in effect) making repayment easier (by debasing the currency), they make the pyramid more stable. Again, it’s not a great solution; in this case the adjustment needed may be more than just 0.75 but… who knows? 0.25? 0.10? But at least inflation moves things in the right direction.
I think the general hope in all three cases is that if we just keep temporizing in other ways (i.e., TARP-type mega transfers to banks), then we’ll buy enough time for inflation to work its magic and the inflation, slow though it is compared to how much is needed, will have the time to work.
Obviously I would prefer it if the government just defaulted on its obligations, rather than manufacturing inflation to get rid of unindexed obligations, while piously proclaiming a low rate of inflation to get rid of indexed obligations, because when the government inflates away its obligations, it screws up everyone, and in particular screws up me.
However the reasons indexed and unindexed obligations got out of control are still present. High inflation combined with low official inflation produces fake growth, that “grows” us out of our pension and debt problems would work – provided welfare and government salaries grow slower than real inflation.
Inflating our way out of our financial difficulties can work if there is the will to restrain government salaries and welfare payments, which will is not apparent. This does not look to me like an effort to bring the government’s finances under control by inflating impossible obligations away, but rather a rationalization that the governemnt’s obligations are perfectly feasible.
Steve,
First of all, what’s the deal with the alien abduction website? I loved it but I assume you are goofing…
Second, put your money in the stock market or better yet, Treasury bonds (or an index fund with bonds) or even gold — forget about the banks!
Jim,
I don’t think “total sales volume” is the same thing as nominal GDP. Scott talks a bit about the subject in his latest post.
Total sales is not the same thing as nominal GDP. However, nominal GDP is extremely difficult, perhaps fundamentally impossible, to measure. Total sales is a visible indicator of the invisible nominal GDP.
While one can never know what nominal GDP really is, it is probably changing by about the same amount as total sales volume – and if it is not, if total sales volume is increasing rapidly, the economy is on fire, no matter what the hypothetical quantity “nominal GDP” may hypothetically be doing.
Volume of money, inflation, real GDP, nominal GDP, monetary velocity, are none of them directly measurable and observable.
If we had an economy with one product, one factor of production and one form of money, they would be well defined quantities that could in principle be defined and measured, but of course economics is all about balancing a multitude of factors and products and monies, so these quantities should be treated as an illustrative just so story, the radius of a spherical cow, rather than real things.
Actual cows don’t have a well defined radius, and actual economies don’t have a well defined nominal GDP. Actual economies do however have a well defined total sales volume for businesses with a significant number of employees and regular business premises.
I hate these discussions because one school of economic thought is as good as the next, ie they’re all worthless.
Everyone claims to know more than the chairman of the Fed, but the reality is they’d screw up in some other way were they chairman themselves.
The good thing about our money system is that the rest of the world has at least some way of punishing us if we screw up bad enough.
It is almost impossible (nigh literally impossible) for one school of economic thought to equal another, given history.
There is quite clearly a winner.
A lie that has been bestowed upon the masses in that both sides of a story are equally true if given proper bias. This if false.
All macro economic theories are necessarily not very good approximations, since one good is not the same as another good, and one resource not the same as another resource. Which approximations are useful in practice is an empirical question. If, however, those operating the state adopt theory X, the smart money will soon start acting so that theory X ceases to be true.
If the economy contains an actor that is powerful enough to implement macroeconomic theory, whatever theory that actor uses is apt to become false.
Rational expectations theory is closer to the truth, since it explicitly acknowledges that “the economy” is composed of people who are apt to resist whatever the government is trying to do, and the Austrian theory of economic cycles is closer to the truth, since it explicitly acknowledges that goods are not interchangeable and that capital goods have long lifetimes – malinvestment in housing cannot be instantly reallocated to rational investment in fracking.
But the suffix “macro” means you are making some rather drastic approximations, which may lose important aspects of reality.