June 7, 2011
Ben Bernanke does not understand economics. This much is clear every time the man speaks to an audience. Of course he is “learned” and is an “expert” on the Great Depression, but the Fed Chief constantly makes what was one time considered the primary mistake in the field of economics. This mistake is to believe there is a single connection between the supply of money and economic growth therefore employment. Nobel Prize winning economist F.A. Hayek once remarked that no economist could be considered serious if they were to ever make the mistake of assuming controlling the volume of money is a silver bullet to high unemployment. It is a silver bullet in one sense; it is a bullet right through the heart of efficient markets and freedom when central planners fix prices and cause asset bubbles through currency manipulation. This is exactly what Fed is about, no matter
how often Americans wag our finger in China’s direction. Regardless of what name they call their tinkering, the net effect is a conspiracy to raise prices and benefit the connected. If the local gas stations collude to gouge you on fuel and Doritos for the Memorial Day weekend, they are prosecuted as criminal conspirators. When bankers collude to gouge you, steal your tax dollars and give it to their crony investor class, it is given an acronym such as TARP and told it is for your benefit. Once again, the mega-criminals maintain the color of law and their aura of prestige.
Today Ben Bernanke spoke and the markets shuddered. The S&P and the Dow gave up early session gains after Bernanke exited the podium. The reason for the pullback could be the fact that Bernanke gave no indication that he was imminently about to try another round of bubble creating – asset inflation known as Quantitative Easing 3 as QE2 ends. Investors have a mantra of not fighting the tape or a bailout, but that is usually because bailouts are finite events to make some quick cash. These bailouts for lack of a better term are open ended engagements that reveal the underlying economic rot and portends eventual calamity.
Currently, equities are behaving more like an alcoholic human than a paper investment vehicle. Drinking in Fed distorting liquor known as QE is surely unsustainable but detoxifying is simply too painful. Both situations present the danger of death. It has become a pick your poison scenario, however one option, the perceived difficult route of detoxification actually offers a sustainable foundation. The good part about the economic detoxification route is really only the poor forecasters and riverboat gamblers stand to lose unlike all of society if the Fed keeps supplying the poison. Going through the detox may have some temporary spillover if you personally made no poor decisions but the company you work for did. In the detoxifying scenario the people who supposedly took the risk, made the poor decisions lose, unlike in Bernanke and the politicians’ rigged game. New entrants will assume the capital of collapsed firms, legitimate needs will be filled and a recovery could happen as America still has a lot to offer if we were ever to get our act together. Real demand creates real recoveries. Phony Fed and government created demand through everything from Cash for Clunkers to Homebuyer credits create malaise and bigger problems on the horizon.
Along with no mention of a date and duration of QE3 (which most assume will happen at some point, likely after the markets are tested without priming) the Dow and S&P conceivably could have reacted as they did because the usually optimistic helicopter pilot Ben was somewhat reserved in his economic assessment and used muted language throughout. Bernanke stated that:
“As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters.”
He continued by saying:
“Increases in household wealth–largely reflecting gains in equity values–and lower debt burdens have also increased consumers’ willingness to spend.”
However, this rose colored glasses statement was abrogated by the following:
“On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.”
So in summation of Chairman Bernanke’s 4,000 word speech, an economy that is 71% based on consumer spending needs consumer spending to grow and create jobs. I suppose this is the great knowledge bestowed upon graduates of government groupthink mills such as Princeton. The Ivy League educated steward of economic well-being was obviously taught the classic error in economics since he believes in a single connection between the volume of money and growth. His reference to what has been coined “the wealth effect” and consumer spending demonstrates this yet again. Reading between the lines and relying on Ben’s past actions, one can logically deduce that the Chairman of the Federal Reserve is planning more asset price manipulation through another round of bond purchases. Apparently giving cronies free money to plow back into Fed inflated equities “worked” so well for growth and employment the last three years, might as well go back to that well ad infinitum. Actually, I guess secret insider Fed loans (sic) at .01% isn’t technically free because most of these stoolie banks simply put that money in Treasuries paying 3%. That is more consistent with fraud as you pay banks to take your Fed Notes with the hopes these banks will return to teasing consumers and businesses with access to debt that many do not need or currently want.
Bernanke clearly thinks that if only he can trick people into believing they have more wealth than is actually the case (as with housing prices and all the equity there), then consumer will again turn to credit cards and living outside their means and business will expand with no thought of strategic planning, capital allocation or forecasting. This displays a complete lack of understanding in economics and is doomed to fail yet again. Bernanke might not believe in accurate forecasting as is clear from his well-documented missed calls on everything, but real people who live on a budget and real entrepreneurs trying to create and sustain something do and they will plan accordingly. Consumer confidence is so low despite America still not quite being to the level of a Khmer Rouge or Zimbabwe because many people are simply not persuaded by the calm before the storm or phony government numbers and teleprompter speeches. There is no Fed formula to solve for this variable in the psyche of Americans. Current individual economic decisions are being shaped by much larger things than the politicians or bankers seem to grasp or choose to address. The scarce resources involved in all the individual economic decisions that are constantly occurring in a society will never be controlled solely through the use of a printing press. Big Brother, Soma, a police state and the aforementioned printing press have a better shot at this level of control, but any talk of such connections is automatically relegated to the land of tin-foil hats.
Economics is simply the study of decisions people make when they have nearly infinite desires yet limited resources. The numbers and formulas that turn so many people off from the study of economics are simply ways to attempt to quantify and model complex decision making done at an individual level. The problem with Bernanke and all ideologies based on any form of central planning collectivism is simply the denial of human nature or something more nefarious, the attempted destruction of human nature through these ideologies. When you believe every person in every town, city, state, country and culture can be mathematically analyzed and the behavior and thoughts adjusted you have to make far too many assumptions. The social sciences are not the natural sciences and the methodologies in play are quite different. There is no laboratory to falsify a theory, the problem is, Ben Bernanke believes their is one. It just happens to be the global economy is his lab and you his lab rats. There is no economic formula which can tell the central planners how nearly 7 billion people on this planet plan are using their resources in any given moment. Equally there can be no single connection between all these decisions, hence why any assumption that controlling the volume of money is tantamount to controlling all individual decisions that make up an economic system is borderline delusional. One trick pony Bernanke’s actions expose his delusions. There many be different names to these delusions such as TARP and QE and TALF or what have you, but it is all one thing, money out of thin air. Bernanke in his speech to the International Monetary Conference in Atlanta was borderline delusional especially considering it was simply more of the same. Albert Einstein had a famous quote about the behavior Ben Bernanke exhibits. Einstein said, “Insanity: doing the same thing over and over again and expecting different results.”