How Greenspan & Bernanke Invalidated Friedman

Hedge fund manager Scott Frew is a friend and occasional fishing partner. He had a few words to say about this morning’s discussion re: Volcker and Bernanke:

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I wanted to flesh out some of what Barry wrote earlier about former and current Fed Chairs Volcker and Bernanke. We must begin with Bernake’s now infamous Deflation speech. It is certainly “The Speech.”  And I think in many ways it’s a terrifying document.

I am, by the way, in total agreement that Greenspan’s the guy who’s responsible for all of this; the particularly insidious quality of bubbles is that once you’re in one, the future is more or less pre-ordained.

An ironic corollary of that thought is that it pretty much invalidates the entire, mainstream (most certainly including Bernanke and Greeenspan), Milton Friedman-inspired critique/view of the Great Depression as having resulted from bad monetary policy on the part of the Fed as the bubble burst. They needed, according to that critique, to be much looser than they were, and all the problems would have been avoided.

So, in a sense, Bernanke’s an acolyte of that same church (recall him saying to Friedman, at some dinner or something honoring him, Never again; i.e., as a result of the lessons learned, taught by Friedman, the central bank would never repeat those Depression errors,), can’t fall back himself on a “It’s Greenspan’s fault” defense, because that’s antithetical to their whole view of history.

I see The Speech itself as a terrifying document, although it’s also an
absolute blueprint for what’s going on today — you’ve got to give Ben
credit for foresight; he’s running down the checklist he provided there,
item by item, line by line. Too bad none of it’s working, at least to date, but
instead is exacerbating the problems.

The other thing to do is to look at
the steps along the way, including that represented by this speech,
incidentally, by which Ben provided intellectual cover and backdrop for
Greenspan’s moves.

The latter task is pretty simple. Let’s first note that Bernanke
moved from the Fed, to become Chairman of the Bush’s Council of
Economic Advisors, and then back to succeed Greenspan as Fed Chairman.
There’s been lots of criticism of the Bush administration, on lots of
fronts, for its politicization of many different policy arms. Certainly
Greenspan has been criticized, and not just recently, for being an
overly political creature, shifting his public statements about fiscal
policy and taxation to fit the views of his changing political masters.
And there’s been recent criticism that the Fed has come to view itself
more as an adjunct member of the Bush cabinet, than in its traditional
and prescribed role as an independent policy-making body. Bernanke’s
career path exemplifies that sort of politicization, which ought to
raise alarms on all sorts of level. Getting to more fundamental issues,
he was at all moments a willing and eager accomplice to Greenspan’s
rate-cutting efforts and asymmetrical policy responses, all of which
engendered moral hazard in the DNA of the markets, and told speculators
at every level not to worry, that the Fed had their collective backs.
The “global savings glut” answer to Greenspan’s “conundrum” as to the
explanation for low long term interest rates is a perfect example of
Bernanke playing the geeky intellectual to Greenspan’s smoove political
animal, providing an ingenious, and plausible, explanation for a
phenomenon that had equally plausible, and far simpler, yet less
convenient, explanations. Occam’s razor doesn’t always rule.

Back to the speech, early on Bernanke signals the asymmetrical
policy response which characterized the Greenspan Fed from early on,
and which has continued under Bernanke. The Congress has given the Fed
the responsibility of preserving price stability (among other
objectives), which most definitely implies avoiding deflation as well
as inflation. I am confident that the Fed would take whatever means
necessary to prevent significant deflation in the United States. Do you
have any recollection of Ben suggesting, at any point, as the prices of
a wide variety of goods and services, that middle class Americans
purchase on a day to day basis, has skyrocketed, invoking Malcolm X in
his willingness to use any means necessary to keep inflation under
control? I sure don’t.

Then in the speech he starts talking about how to prevent deflation.
The famous “technology, called a printing press” statement is a
not-veiled at all threat to simply drive down the value of the dollar.
Certainly one way to get people spending is to let them know in no
uncertain terms that tomorrow their savings will be worth half of what
they’re worth today. Ask any citizen of Harrar — it works for them. By
increasing the number of U.S. dollars in circulation, or even by
credibly threatening to do so, the U.S. government can also reduce the
value of a dollar in terms of goods and services, which is equivalent
to raising the prices in dollars of those goods and services.
Bernanke’s been incredibly successful in this endeavor — just look at
the price of oil, gold, wheat, milk, rice — the list goes on and on.

The speech runs through all of the other gambits that Bernanke’s
been attempting over the last six or so months. At the end, he
discusses the case of Japan, and why despite all these theoretical
weapons in the Fed’s toolbox, Japan was unable to stave off
deflationary forces. He starts that section of the speech by noting
significant differences between Japan and the United States — recall
that this was November, 2002:

"As you know, Japan’s economy faces some significant barriers to
growth besides deflation, including massive financial problems in the
banking and corporate sectors and a large overhang of government debt.
Plausibly, private-sector financial problems have muted the effects of
the monetary policies that have been tried in Japan, even as the heavy
overhang of government debt has made Japanese policymakers more
reluctant to use aggressive fiscal policies (for evidence see, for
example, Posen, 1998). Fortunately, the U.S. economy does not share
these problems, at least not to anything like the same degree,
suggesting that anti-deflationary monetary and fiscal policies would be
more potent here than they have been in Japan."

Uh, Dr. Bernanke, I’m not sure you had that quite right, or that the
conditions than applicable pertain today. In fact, it appears that our
situation today is worse than Japan’s in those respects. The one factor
in our favor is that exorbitant privilege of having the reserve
currency, of being able to pay off our debt in a currency which only we
can print. As Jim Grant said in a recent essay, there’s only one nation
that has that ability, and it’s national pastime is baseball. But the
advantage of owning the reserve currency is a blessing easily abused.
In terms of what our national balance sheet looks like, it seems easy
to describe it as more curse than blessing. Bernanke has often seemed
blind to the fact that our monetary policy has far-reaching
implications, that riots over inflation in the Gulf Cooperative Countries,
over food in Egypt and the Philippines, might be connected to our
interest rates and the value of the dollar.

In the end though, I keep coming back to the thought that Bernanke
apparently believes that deflation, a decline in the general level of
prices—those of milk, of gas at the pump, of home heating oil, and of
food and clothes— is such a threat to our society, that printing
dollars until the cows come home, in a conscious effort to destroy the
dollar’s purchasing power, is a rational response. Interesting stance
for the head of the Federal Reserve to take, I must say.

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Good stuff. Thanks, Scott!

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Previously:
Volcker: "Bernanke a One Termer"
http://bigpicture.typepad.com/comments/2008/04/volcker-bernank.html

Sources:
Deflation: Making Sure "It" Doesn’t Happen Here
Governor Ben S. Bernanke
November 21, 2002
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

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What's been said:

Discussions found on the web:
  1. ideogenetic commented on Apr 14

    […our banking system remains healthy and well-regulated…] – Ben Bernanke, “The Speech”

    Not much foresight there.

  2. Mike M commented on Apr 14

    Bernanke believes he is an expert on the Depression. His misguided confidence in this subject will absolutely cause him to screw this up. I suggest he read America’s Great Depression by Murray Rothbard. It is free here. http://www.mises.org/rothbard/agd.pdf

  3. stormrunner commented on Apr 14

    If the dollar is an aggregate measure of US productivity, the dilution used to compensate for fraud will kill incentive to produce, as such a downward spiral ensues. Fraud can not be printed away, legitamate new production must replace that which was stolen. There is no free lunch.

  4. Karl K commented on Apr 14

    I think all the critics of Bernanke on here are misreading him, mainly by assuming he’s stupid.

    This just in: he isn’t.

    Does anyone REALLY believe he is SO ignorant of inflationary pressure in the economy? C’mon.

    No, what Bernanke fears, and is right to fear, is what ALSO happened in the depression: a complete seizing up of the credit markets.

    This really isn’t all that hard everybody. Let me go slow for you.

    In the depression, there was no capital to be lent because there wasn’t any liquidity and the economy collapsed.

    In today’s world, a depression will take the form of no capital to lend because no one WANTS to lend, not because they don’t have money to lend, but because they believe they won’t get their money BACK when they do lend. Ergo, ecnonomy collapses.

    Same result, same primary cause, different INITIAL cause.

    This is what Bernanke’s trying to head off, and he’s right to do it.

  5. flow5 commented on Apr 14

    Friedman offered a superficial explaination for the cause(s) responsible for the Great Depression. In fact, he misses some of the most important ones.

    Of Friedman, Greenspan, and Bernanke, Bernanke is the lone wolf. He stands head and shoulders above all the others. Friedman and Greenspan didn’t understand money & central banking.

  6. BDG123 commented on Apr 14

    I’m missing something. How does Bernanke invalidate Friedman? I’m aware of Friedman and Schwartz’s perspective on the causes of the GD and I’m not sure what Scott is concluding.

    ie What’s the punch line?

  7. dark1p commented on Apr 14

    “This is what Bernanke’s trying to head off, and he’s right to do it.”

    Yes, but still the same result: “Ergo, ecnonomy collapses.”

  8. dissent commented on Apr 14

    Good post.

    I have a question.

    Before Milton Friedman’s theories came to dominate, we had decades of growth and financial stability.

    Somehow, during this post WWII period of growth and stability, economists decided that regulation stifled financial markets. In this, they were following Friedman.

    But why? From what data did they decide this? How did the post WWII period justify tossing regulation, particularly when the preceding, Depression era, was a case study in the dangers of unregulated speculation?

    I can’t figure this out!

  9. Josh Stiles commented on Apr 14

    Great analysis Scott. Some related things I remember include Bernanke, when briefly at the CEA, saying on CNBC that he supported making the tax cuts permanent. Just the right answer to get the big nod. And, I do remember him saying back in ’03 to an audience I was part of that core inflation in 04 would be lower than the second half of 03. I knew that would be wrong. I wrote such in my research and spoke it in the media. That was with negative real Fed Funds, the low long rates triggering a refi boom, home price gains and on top of that there were two massive tax cuts. He made too big a deal out of deflation risk. Not that ne intended to boost 04 election chances for the incumbent, but just what the White House wanted. He has not had a good sense of where inflation is going since being on the Fed. He said “By a standard textbook calculation, this amount of slack should lead to additional disinflation of a few tenths of a percentage point or so by the end of 2004. So by my reckoning, inflation in 2004 might well be a bit lower than in the second half of 2003, not higher as the majority of private-sector forecasters have projected.

  10. Karl K commented on Apr 14

    Dark1p wrote:

    “This is what Bernanke’s trying to head off, and he’s right to do it.”

    Yes, but still the same result: “Ergo, ecnonomy collapses.”

    Tell me, which alternative do you prefer?

    (1) Breadlines and no jobs.

    (2) Food, jobs, and double digit inflation.

    Or think of this another way: only a war can cure a depression, but inflation can be cured by simple monetary discipline.

    Of course, one thing at a time.

  11. Mark commented on Apr 14

    We are in the midst of the deleveraging $516 trillion derivatives betting scenario. I do not think we are going to sucessfully deflate this. We need the congress to do their job and http://www.TakeBackThe Fed.com

    The congress needs to fully nationalize the Fed, open up the Fed’s books, open up any investment (or other) bank’s books that ask for assitance, likely enter into bankruptcy type proceedings woth some institutions, freeze derivative’s bets (where possible), canel them (where required), etc.

    I don’t think Fed policy is going to solve the current mess, and the longer we let them toy with our financial system, the more damage they will inflict on us (as American citizens).

    Spread the word about http://www.TakeBackTheFed.com

  12. mr reality commented on Apr 14

    bernanke is STUPID because he ‘knows’ he must provide liquidity but he also knows it isnt working….maybe he thinks it will work out with time….he is stupid because he isnt flexible and able to recognize that he cant take back the fraud, it is too big, and he doesnt have the balls to let banks fail.

    there is only one ending to this and that is pain……….

  13. Tom commented on Apr 14

    RE: Dissent wrote “I can’t figure this out…”

    Simple. Same reason “Supply Side” came to be gospel: these policies justify what the promoters want, lower taxes (for them), fewer restrictions (for them) and plenty of both for everyone else.

  14. John F. commented on Apr 14

    Ummm….didn’t Friedman say we should replace the Federal Reserve with a computer which gradually increases the money supply? Is this policy recommendation being validated or invalidated by this Minsky moment? OT: the Japanese are more fanatical about baseball than we are. Your friend’s argument is a little sloppy.

  15. Blissex commented on Apr 14

    «(1) Breadlines and no jobs.
    (2) Food, jobs, and double digit inflation.
    Or think of this another way: only a war can cure a depression, but inflation can be cured by simple monetary discipline.»

    Ahhh Brad deLong is posting here :-).

  16. Brian commented on Apr 14

    “[Bernanke] can’t fall back himself on a “It’s Greenspan’s fault” defense, because that’s antithetical to their whole view of history.”

    Great observation. This needs to be pointed out more often.

  17. Karl K commented on Apr 14

    Mr. reality wrote

    bernanke is STUPID because he ‘knows’ he must provide liquidity but he also knows it isnt working….maybe he thinks it will work out with time….he is stupid because he isnt flexible and able to recognize that he cant take back the fraud, it is too big, and he doesnt have the balls to let banks fail.

    there is only one ending to this and that is pain……….

    And Fire! And Brimstone! And Cats and Dogs Lying Together!

  18. flow5 commented on Apr 14

    MILTON FRIEDMAN’S ERRORS:

    Couldn’t define the means-of-payment money

    thought the MO was a base for the expansion of money

    thought MO/money was the money multiplier

    utilized income velocity & not transactions velocity. Sept 1 1983

  19. STS commented on Apr 14

    Too bad none of it’s working, at least to date, but instead is exacerbating the problems.

    Clearly nothing the Fed has done so far has brought the crisis to a nice neat resolution. But it’s not at all obvious to me what chain of reasoning can lead you to the confident conclusion that the Fed is making things worse. We can’t even get consensus among economists about what precise effect Fed actions had almost 80 years ago. What makes you think you can isolate their influence on events that are still in progress?

  20. Pat G. commented on Apr 14

    Some have indicated that more lending is a necessity while I argue that’s what got us here. Regulation, first!! Not more money.

    The Government can fund all those projects that they have been putting off for years and create a lot of jobs. And baby boomers have started retiring which will shrink the employee pool if;

    An environment of non-inflationary energy, food and medical costs can be created for a retiring populace which needs to survive on a fixed income.

    Current inflationary costs caused by our weak dollar policy rob investors of “real” gains, savers of money and promote retirees to work longer.

    Regardless of who is to blame we need to correct the problem now before it becomes much worse.

  21. DonKei commented on Apr 14

    Although I believe it mostly correct, I have a couple of problems w/ Mr. Frew’s analysis:

    Greenspan or Bernanke, neither one, have done anything to invalidate Friedman’s analysis of the Great Depression. All Friedman showed was that the money supply drastically contracted, in 1929/30, and then again in 1933/34, and again in about 1938, thereby pushing prices down, which yielded more money supply contraction, i.e., the deflationary spiral about which everyone seems so afraid. He pointed out that fiscal and monetary policies both exacerbated the shrinking of the money supply.

    Given that the US was on a gold standard during the Great Depression, it is hard to see how this analysis applies today, except in the general sense that deflation is bad, and a little inflation is good. With fiat currency, you can have as much or as little inflation or deflation as you like, which is not true w/ a currency itself constrained by supply limitations, like gold.

    I think Friedman would look, instead of at the CPE, or CPI, or any other domestic index, at the commodities index and foreign exchange indexes, to try and fathom whether there was too much or too little money.

    But Friedman’s basic premise–that inflation/deflation is everywhere and always a monetary phenomenon–remains sound, yet, as Mr. Frew indictated, mostly ignored by Greenspan and Bernanke, even if they claim to keep a watchful eye over it. Perhaps they do/did, but are/were looking at the wrong things. Friedman never based his analysis of inflation solely on the prices of consumer goods.

  22. Winston Munn commented on Apr 14

    To react today to the threat of tomorrow’s inflation, though, one must have money to spend – or be able to borrow.

    The piece of the puzzle that Bernanke overlooks is that debt-creation has a built-in cap called solvency.

    America is waking up to learn there is no money increase, only more debt – and there is a price to pay for more debt, and it is never cheap.

  23. EnglishMuffin commented on Apr 14

    I hope he’s a better fishing partner:)

    I’d rather focus on what Bernanke actually *does* rather than reading too much into these P.R. events.

    First, as soon as Bernanke was installed (2006), the Fed began to *slow* the growth of the monetary base to *below* price inflation.

    http://research.stlouisfed.org/fred2/series/BASE

    So, all this “printing press” talk is for the ignorant. The Fed has not been expanding the money supply, at least that portion of the money supply controlled by the Fed.

    Moreover, all of the various new lending facilities to date have been sterilized, so the Fed has provided no net new liquidity to the economy, rather they have been removing liquidity — i.e. the Fed has been attempting to *cause* a controlled, mild deflation, very much like it did in 1929, but this time the Fed is aware of the need to fund the banks through the de-leveraging. So, the rest of the world gets slightly higher interest rates and a shrinking monetary base, while the banks have negative interest rates and expanded lending facilities, together with much stricter Fed oversight — to the point where Fed officials have now set up offices in the broker dealers to monitor their day to day activities.

    Note that a lowering of the overnight fed funds rate, in and of itself, does not cause inflation. The channel by which this happens is that when it is cheaper for banks to borrow their reserves, they will lend more, increasing the money supply. This will increase inflation, not the overnight fed funds target rate. However, banks have not been lending more — they have been using the cheaper lending to meet payroll, not to extend their balance sheets.

    A truer measure (purchasing power parity) of the dollar reveals that was has happened is not the dollar “falling” due to fed funds rate cuts, but rather the dollar falling from an artificially high level in 2001 — a speculative forex dollar “bubble”, if you will — and this fall would have happened regardless, and would have been much steeper had the bubble persisted longer.

    http://www.econbrowser.com/archives/2006/03/the_dollar_and.html

  24. Ken H. commented on Apr 14

    Stagflation. I am no expert but I think we were in the pickle before Ben took over. We have a situation where we are in debt and China owns ?….trillions in treasuries? Didn’t they threaten to lose them because interest rates were too low in 2006? I think Ben’s inflating our way out of this whether it bail banks out or not. My point is, this was the plan from the beginning.

    The pointless blather of comparing this to the GD is boring. This is a completly different situation. Certainly there are some similarities.

    Scott points out how we are the reserve currency. I believe this is a planned power play to get us out of a monetary bind.

    Certainly BB is much more suited for the job than an armchair chairman like me.

    In Grad school there were the book smart labratory types who could kill a test. Problem was when they had to deal with the human condition they folded like a lawn chair. Let’s hope Ben’s not one of those?

  25. me commented on Apr 14

    I agree with KarlK and EnglishMuffin. Alice Rivlin had a defense of BB in the NY Times and she has more credibility with me than a lot of fishermen.

    What do you want the guy to do? This country makes nothing anymore. Are we going to start buying IPODS from US manufacturers now? We can’t switch because there is nothing to switch to.

    The problems will be difficult to deal with but it will be because CEOs and Wall Street wizards and not BB.

    Let’s have a show of hands. Bring back PV and raise rates to 25% and that solves everything.

  26. dukeb commented on Apr 14

    Inflation will not increase spending. It will have the exact opposite effect on savers. And if inflation gets painful enough, even spenders will stop or at least slow their spending. I understand that savvy home gamers might play the Fed’s hand as they hope, but the savvy are few & far between.

    Also, John F. is very correct that the Japanese as a whole are fanatical about baseball. Incredibly fanatical. They make Americans look like Little Leaguers. It still blows my mind.

  27. Francois commented on Apr 14

    “”This is what Bernanke’s trying to head off, and he’s right to do it.”

    Yes, but still the same result: “Ergo, ecnonomy collapses.”

    Tell me, which alternative do you prefer?

    (1) Breadlines and no jobs.

    (2) Food, jobs, and double digit inflation.”

    Yeah right! How much food and jobs will be left if we have double digit inflation AND wages kept stagnant?

    Oh wait! We can always get a 2nd and 3rd job right? Make one day = 50 hours instead of 24, so we can juggle these 3 jobs.

  28. Unsympathetic commented on Apr 14

    This entire thread is precisely the gratuitous rhetoric Bernanke has hoped.

    His entire career is based upon a strawman. “Either we do what I, BB the Great Disguisor, say.. or the economy collapses!” — is simply designed to take America’s taxpayer money and give it to bankers rather than anything remotely resembling a sound national fiscal policy.

    I refuse to buy the moronic polemic of “Either me or you’re in a breadline tomorrow!”

    Bernanke is simply a traitor.

  29. Clyde commented on Apr 14

    I will raise my hand for Volcker. Subsidizing poor managers & poor financial institutions instead of rewarding good managers & good financial institutions does unspeakable damage to markets and public confidence.

  30. rj commented on Apr 14

    “A truer measure (purchasing power parity) of the dollar reveals that was has happened is not the dollar “falling” due to fed funds rate cuts, but rather the dollar falling from an artificially high level in 2001 — a speculative forex dollar “bubble”, if you will — and this fall would have happened regardless, and would have been much steeper had the bubble persisted longer.”

    Let me relate my personal investment decision. I saw what the Fed was going to do in the first sign of trouble, they were going to cut interest rates, they always do. I knew that would result in the value of the dollar going down. I went out and bought some metals, thinking their value would go up as a way to protect myself. Guess what? I was right.

    So I don’t really buy what you’re saying in entirety. The whole forex bubble thing could certainly be true in part, but it’s irrelevant cause of how Bernanke responded by jumping up and down on the dollar to force it lower.

    Back to the forex, states all across the world going through big inflation stages right now? Food, metals, energy, it’s an across the board phenomenon. Certainly there’s a demand aspect, although the media doesn’t want to admit it. However, while our currency is going down and the prices are rising. Around the world, their currencies are going up relative to the dollar pretty much, and yet they’re still paying more. So I think that discounts forex.

  31. chad commented on Apr 15

    Its odd that Japan didn’t have these kinds of problems with inflation. Were the Yen the reserve currency of the world? Perhaps, but I don’t know. I mean Japan has had negative real rates for how long? And I don’t see them using Yen for wallpaper. They don’t have negative trade balances either. Maybe if the Yen could depreciate some it would kick start the economy. DonKei is absolutely dead on. If inflation is a monetary phenomena and everybody is blaming Greenspan’s and Bernanke’s bubble blowing that is causing the inflation/devaluation of the dollar how can friedman be invalidated? Granted, I only have a minor in Economics, so a lot goes over my head.

    My theory on the dollar is it is simply correcting for decades of trade imbalances once the commodity boom began in earnest. People put money here because of the productivity gains made throughout the 80s and 90s and in general, a lack of investable alternatives. I think its a sign of globalization and not necessarily directly caused by greenspan. Face it – there’s a lot of great places to park cash precisely because of the over investment in technology in the 90s. It gave the rest of the world a means to communicate and compete with us and we’ve been helping them do just that with the infrastructure investment boom in emerging economies. Plus, it’ll give the next generation some discipline for a while. I don’t think the end is neigh.

  32. Samuel commented on Apr 15

    We had a debt bubble prior to the Great Depression. We have a deflating debt bubble now. The situations are remarkably similar.

    And the author above is right that the people in charge should have prevented these bubbles from being created in the first place. There is not much to do now that the bubble has burst.

  33. Simon commented on Apr 15

    I’m going to mention TV and other mass media. I think people-populations (Americans and others) have become thoughtless about the results of their actions. I’m blaming the mind numbing effect of TV. Buy buy buy is the message. People have done just that. The result is a huge dept burden. Inflation is possibly good for people with dept which seems to be most of us. No good for savers unless they are very savy like the gold buyer who posted above. At least if you save you do have the chance to try to protect your money and keep your self respect.

  34. Mike commented on Apr 15

    Thank you Karl for some reason in this argument!

  35. me commented on Apr 15

    “I mean Japan has had negative real rates for how long? And I don’t see them using Yen for wallpaper.”

    That is pretty interesting chad.

    Maybe it is because they are more of a manufacturing economy and we aren’t. The WSJ today details how across the country everybody works at the local hospital now instead of the plant.

  36. BDG123 commented on Apr 15

    Japan’s situation was very different. It was contained to Japan. And, the U.S. has a disproportionate impact on Japan’s economy so as long as the U.S. was in reasonably good shape, the deflation in Japan was not a crisis. And, Japanese people were not burdened with consumer debt as we are.

    This situation is different. There is NO inflation in the U.S. The U.S. is in a deflationary environment. But, emerging markets are in an inflationary bubble. So, the commodities bubble makes it appear as thought there is inflation in the U.S. economy. There isn’t. It’s price distortions caused as much by supply/demand characteristics in the FUTURES market as much as anything. That isn’t necessarily representative of supply and demand. Steel prices aren’t going up because of demand in the U.S. but because the weaker dollar is giving U.S. producers temporary pricing power versus imports. And, the Fed isn’t printing money. And, 1% interest rates didn’t cause this problem either. And, and, and.

    Have patience. The emerging market bubble is going to bust and when that happens, we are going to see their inflation bubble pop with it. Then goes commodities. Then the world joins the U.S. in a deflationary mess. Rome wasn’t built in a day. Nor will the outcome to this cycle.

  37. Ron Israel commented on Apr 15

    We could sure use some reviews of the best books on investing in an inflation.

  38. Blissex commented on Apr 15

    «But Friedman’s basic premise–that inflation/deflation is everywhere and always a monetary phenomenon–remains sound,»

    That’s classic friedmanite wishful thinking — inflation (at least) is everywhere and always a POLITICAL phenomenon. It is always the result of policy, and even of policy deliberately chosen to create inflation. It is just seignorage by another means.

  39. Blissex commented on Apr 15

    «I mean Japan has had negative real rates for how long?»

    Probably never or only recently? Because price deflation in Japan was higher than the interest rate. A classic liquidity trap, where nugatory interest rates stay higher than the rate of inflation, which is negative, making borrowing quite expensive.

    Japan was/is a very different case from the USA: very different politics, a much more aging society, much more export oriented, less predatory elites,completely different fiscal policy biases.

  40. Blissex commented on Apr 15

    «First, as soon as Bernanke was installed (2006), the Fed began to *slow* the growth of the monetary base to *below* price inflation. http://research.stlouisfed.org/fred2/series/BASE
    So, all this “printing press” talk is for the ignorant. The Fed has not been expanding the money supply, at least that portion of the money supply controlled by the Fed.»

    But this seems very misleading to me: the Fed has surely been not wild on narrow money, but has allowed in various ways for wide money measures to grow like crazy since 1995, and not just allowed, encouraged and aided and abetted the growth of credit, particularly the growth of types of wide measures of money used to buy assets on margin.

    That is still happening: after actively encouraging a bubble in stocks, one in bonds, one in mortgages, now the Fed is pushing hard to create a bubble in treasuries, which is happening right now (as one wise observer pointed out).

  41. Blissex commented on Apr 15

    «Inflation will not increase spending. It will have the exact opposite effect on savers.»

    But there are no savers left in the USA, at least in the aggregate. As pretty clear from the idea that even in housing hte usians owe more on their housing than they have equity in.

    In the USA only those usians that are dumb thick losers save! Consider this: for the past decade people have been able to borrow almost always at below the rate of inflation, with no money upfront/down to buy assets that they have been able to flip after a year and make 20%. If they chose the affet being bubbled up by the Fed. A lot of winners have done that most recently with 100% loans at a few % interest to buy houses appreciating at a couple ten %.

    Being a saver in the USA when foreigners are willing to drive down treasuries to 1% is solely for complete losers. Winners have properly valued the Fed Put with option theory and have been making lots and lots of money. Hey the guy who bubbled his bank into insolvency got paid $60m from the fed for his contribution, to add to the fabulous rewards he has already accumulated when the going looked good.

  42. Blissex commented on Apr 15

    «”Tell me, which alternative do you prefer?
    (1) Breadlines and no jobs.
    (2) Food, jobs, and double digit inflation.”
    Yeah right! How much food and jobs will be left if we have double digit inflation AND wages kept stagnant?»

    What happens to you and the other losers does not matter. Do you own a large amount of assets needing appreciation? Have you been a generous Republican campaign donor?

    If not your problems are a loser’s problems and they simply don’t matter.

  43. OhNoNotAgain commented on Apr 15

    “today’s world, a depression will take the form of no capital to lend because no one WANTS to lend, not because they don’t have money to lend,”

    Are we sure about this ? I seem to remember some recent discussions from Krugman and others regarding the solvency vs. liquidity argument, and most seemed to be on the side of solvency as the major issue. These investment banks have stuff on their books that is virtually worthless, and will never be worth anything.

    http://www.nytimes.com/2007/12/14/opinion/14krugman.html?_r=1&oref=slogin

  44. Michael G commented on Apr 16

    ahem…May I?

    I have read some doozies here, among them that the only way out of a depression is war….

    But I see nothing representing my view of things, so I offer it here:

    Bubbles cause depressions. By directly (through extremely easy monetary policy) and indirectly (through feigned ignorance, laziness, and deliberate sitting-on-hands) causing the entwined bubbles in housing and credit, the Fed is to blame for the macro-economic house fire from which they claim to be rescuing us. To those among you who feel the Fed had little to do with these (and prior) bubbles’ formation, I offer this:
    If the Fed does not exist to molify the amplitude of swings in the boom-bust natural economic cycle, then IT SHOULD NOT EXIST. In blasphemously claiming, as it has since 1997, that it is not their job to interfere with asset bubbles, only to deal with the aftermath, the dirtbags at the “Fed” effectively declared themselves worse than ineffectual – they are a menace; they exacerbate bubbles, and rather than promoting a stable currency, they instead only create inflation. And lots of it.

    Inflation has been discussed here in academic, anti-septic tones – a cure for this, a cause of that, yada yada. But let’s be honest: Inflation is a monetary phenomenon; and as such ALL inflation rests at the doorstep of the (cough) “Fed”. Inflation is a tax, and furthermore it is taxation without representation. Inflation is thievery. It is theft. Theft by those who control “the printing press” from those who do not. I do not think I am in any way being extreme in saying that inflation is just plain WRONG. And Bernanke, therefore, is a despicable dirtbag for advocating it as a panacea for maladies caused by the “Fed”. They are all dirtbags – criminals when you get right down to it.

    So all this defense of the “Fed” and debate about what course of action is most righteous for the Fed to take misses the point entirely. The only righteous course of action for the Bernanke to take is to dismantle the non-federal “Fed”. They have failed miserably to maintain a stable currency. They have failed miserably in maintaining systemic integrity. It is time to shut it down and move to a hard currency, because they are either too stupid, too corrupt, or both and therefore leave us no other option.

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