Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The End of Bernanke's "End Game"

Interest-Rates / Central Banks May 13, 2011 - 08:58 AM GMT

By: William_Anderson

Interest-Rates

Best Financial Markets Analysis ArticleIn a recent screed masquerading as the thoughts of a Nobel prize winner in economics, Paul Krugman excoriates those who speak of

fear: fear of a debt crisis, of runaway inflation, of a disastrous plunge in the dollar. Scare stories are very much on politicians' minds.


As Krugman explains, such worries are irrational and certainly untrue:

None of these scare stories reflect anything that is actually happening, or is likely to happen. And while the threats are imaginary, fear of these imaginary threats has real consequences: an absence of any action to deal with the real crisis, the suffering now being experienced by millions of jobless Americans and their families.

In other words, there is no real inflation, and to even broach the subject is proof that one hates the poor and jobless.

The rise of prices for fuel, food, and other commodities is nothing more than a reflection of their "volatility." And the decline of the US dollar against other fiat currencies of the world is a good thing, because it will improve US manufacturing sales.

But while Krugman takes the move-along-folks-nothing-to-see-here approach to the real crises at hand, calling them "phantom menaces," others are looking at the horrific damage that Ben Bernanke and his allies in both the Bush and Obama administrations have created — and rightly seeing even more crises ahead. To make things even more ironic, we are seeing a situation akin to what occurred in the early 1930s; Bernanke and others claim they want to avoid the "mistakes" make by the Federal Reserve System at that time, and so they are following the same path the Fed took 80 years ago. We are at the end of the "end game" that Bernanke and his allies have been imposing upon the rest of us.

Forget for the moment the argument that Krugman and others have made, that the economy is in that "special case": the "liquidity trap," which requires an infusion of massive government spending in order to snap the economy back into prosperity. Instead, let us look at the actions the Fed took right after the failure of Lehman Brothers in September 2008, a failure that "convinced" Congress to bail out Wall Street.

Until that time, the Fed's portfolio consisted mostly of short-term Treasuries, something one would expect given the nature of the central bank's open-market activities, in which it would buy and sell government bonds in order to increase or shrink the economy's monetary base. However, the Wall Street crisis provided the fig leaf allowing the Fed to play the role of the rich uncle who bails out family members when they become financially overextended.

Thus, Bernanke's minions entered the financial marketplace with a bottomless checkbook, purchasing assets that had lost value (like mortgage securities, AIG stock, and the like) in the marketplace. However, in order to make it look as though the markets were fine, the Fed purchased these securities at prices close to their precollapse worth; Bernanke and company were playing the let's-pretend-this-worthless-paper-is-valuable game.

If you want a sense of just how reckless the Fed turned out to be in its rich-uncle role, the diagram below will help put things into perspective:

Source: Federal Reserve Bank of Atlanta

This was supposed to be Bernanke saving the economy, at least in the short term, but actually Bernanke's actions did no such thing. At this point, the gulf between the Austrians (who are unanimous in their criticism of Bernanke's actions) and the Keynesians (whose only regret is that Bernanke did not purchase even more worthless assets) is exposed. Let me explain.

In the Keynesian analysis, assets are held to be homogeneous, and the economy is believed to be a bland mixture of those assets that are fully employed when the amount of consumer and investment spending is high enough to continue to give the economy "traction."

When consumer and investment spending flag, however, Keynesians hold that the government must step in by borrowing and printing money in order to revive the spending circle. If the government spends enough, then the economy can move on its own to the point where consumers and investors keep it going — at least until the next crisis. Keynesians call this movement the "circular flow," although it is more like circular logic, in which the premise is the conclusion and the conclusion is the premise.

What must never happen is a large-scale liquidation of assets, because that would trigger deflation, which would be accompanied by an endless downward spiral and an economy stuck in a "liquidity trap" with falling prices and high unemployment. Thus, in the Keynesian view, the Fed was justified in purchasing these worthless assets, because it prevented their liquidation and preserved at least their "paper" values.

Austrians, however, take a much different view. What Keynesians call idle resources, which need only an injection of spending to be reemployed, Austrians call malinvested resources. The different is crucial, because Keynesians believe that the Fed's actions prevent an economic downward spiral, while Austrians hold that what the Fed has done furthers the economic downturn.

The difference in opinion centers on causality. Keynesians believe that the downturn is created simply by a reduction in spending, while Austrians hold that the recession is caused by the fact that the series of malinvestments created during the previous boom cannot be sustained. The drop in spending is the result of the downturn, not its cause. The difference in beliefs is crucial: in the Austrian paradigm, trying to sustain the boom conditions by injecting new government spending will always end in disaster.

The reason is simple: it takes real resources to prop up malinvestment, resources that should be going to those investments that fit within a sustainable structure of production. This point is absolutely crucial. Keynesians believe that because there are "idle" factors of production, directing them toward anything is better than letting them go unemployed; the opportunity cost of using them tends toward zero.

The Keynesian paradigm holds that if these idle factors are not directed by new government spending, they will be unemployed for an indefinite time period, as the system is locked into a "liquidity trap" and cannot move away from this perverse "equilibrium" without government help. Thus, massive new injections of government spending are absolutely necessary to keep the economy from imploding into deflation and depression.

To a Keynesian like Krugman, the only question one needs to ask is how much spending is needed. That the economy has not really moved in the direction of full employment is prima facie evidence to Krugman that spending has been too low, and he dismisses criticisms of his theory as the rantings of lunatics.

But here is the problem: despite Krugman's complaint that government spending is not high enough and despite his defense of Bernanke's actions against criticisms from people like Ron Paul (whom Krugman never misses a chance to smear with false allegations), the truth is that the Fed and the Obama administration are at the end of the tracks, and their train cannot go any farther. Even though the Fed and the government have thrown billions of dollars at the housing market to try to keep housing prices from falling, prices are falling.

Furthermore, even though Krugman admits the "recovery" is running out of steam, he blames people like Ron Paul because they don't believe the Fed should be in the money-printing business. What Krugman and Bernanke refuse to even acknowledge is that the scheme of diverting resources to prop up the failures of the last boom's malinvestments is a colossal failure, and until government policymakers stop trying to reflate the failed boom, there will be no recovery.

Ben Bernanke has opened the Fed's checkbook in an unprecedented fashion, and while he claims to be "saving" the financial system, in reality he is destroying it. He has kept the failed firms afloat, thus preventing the necessary transfers of resources from lower-valued uses to higher-valued uses. (Like Krugman and his boss, President Obama, Bernanke seems to believe that government can create wealth by transferring resources from higher-valued to lower-valued uses, the reason being that government can order any set of values into existence by sheer coercion.)

Although Bernanke and others arrogantly dismiss the rise in commodities like gold, silver, oil, and agricultural products as having nothing to do with the Fed's overt policies of inflation, it is clear that the markets are ignoring these "experts," paying no attention to the men behind the curtain. People are making their own decisions with their own money, and more and more they are voting Bernanke and his declining dollars off the island.[1]

So, trillions of dollars later, with the dollar hopelessly debased, we find we are no better off than when we started, and the necessary asset liquidation has barely begun (thanks to Bernanke). While Krugman and others claim that Bernanke has saved the economy from sliding into depression, I think he has merely guaranteed that things are going to get a lot worse.

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See William L. Anderson's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
14 May 11, 15:49
The Liars Club Blues

My personal opinion is that Bernanke, Obama-Inc, and their news media accomplices all have and have had for a long time a very good and realistic understanding of the actual economy (as opposed to lie-based propaganda fantasy that they try to foist onto a seemingly gullible public). What I don't really understand is who is the target of their deception and exactly what they are trying to accomplish with their gibberish. Obviously the long term unemployed workers, poorly paid part time workers, etc. are not going to swallow this hogwash.

However they are continuing with their activities (propaganda, QEn propping up of banks and the stock market, market manipulation, social programs for the poor, etc.), so what they're doing must be working for them. What have they accomplished?

Well, the banking system is in fairly good shape (not healthy, but very profitable); the stock market prices are inflated; the upper 1% of the population is getting more and more wealthy; and the social situation, while not happy, is at least peaceful.

But there are storm clouds on the horizon. For example, the US has badly abused the privilege of having the dollar be the international currency, and many countries are taking temporary countermeasures until the international community can work out a permanent solution.

But the big problem is the US economy cannot be sustained (i.e. it will crash) without QE support. But if QE support is continued, the dollar will inflate, and sooner or later, the dollar will crash. I think that both Obama and Bernanke are acutely aware of this dilemma. My guess is that they will stop QE until the economy starts to go into the tank, at which point the will again start and continue QE until the dollar crashes and the economy goes south all by itself.


NadePaulKuciGravMcKi
18 May 11, 20:26
RATM

nader paul kucinich gravel mckinney baldwin

Remember everyone in the media that lies to you.

Remember everyone in the government that lies to you.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in