Bernanke and Obama's Spending Schemes Could Ruin U.S. Economy 25 comments
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In a recent talk he gave at the London School of Economics Bernanke basically laid out the thinking behind his monetary strategy with the statement: "Put out the fire first and then think about the fire code." This is code for flood the US economy with dollars and then worry about the inflationary consequences for the country. No wonder he saw nothing wrong with letting the monetary base explode by 107 per cent (from just under one trillion dollars to nearly three trillion dollars) from 8 August last year to 9 January.
It appears that Obama1 thinks that Bernanke is a genius who will save his economic bacon by underwriting his irresponsible spending schemes. According to this story line the banks will start running down their excess reserves, the economy will begin to recover and unemployment will fall: revenues will rise and Obama's reckless spending binge, funded in part by severe cuts to the nation's defences, will be kept afloat.
But what about inflationary pressure from Bernanke's reckless monetary policy? No problem. As inflation begins to accelerate he will slow it down by gradually withdrawing money from the economy by selling Treasury bonds. Moreover, this monetary tactic will have little or no effect, so they think, on the dollar. In their eyes the US will remain a save haven for foreign investors. Hence this 'defensive' demand for dollars will act as a barrier to a significant devaluation. In addition, countries with large dollar balances (think China with its trillions in greenback) will not be eager to drive down the value of their 'fixed' dollar assets by dumping greenbacks. How wonderfully ingenious! Obama gets the best of both worlds and a second term. Best of all, the Democrats get a permanent majority.
There is just one problem. There is no way this scheme can possibly work. What it does stand a good chance of doing, however, is wreaking absolute havoc with the economy and exchange rates. The fundamental problem is that as a true believer in the Keynesian cult Bernanke has no real understanding of money, and certainly no grasp of capital theory.
Let us assume that all goes, at least initially, as hoped and that the banks start lending and business starts borrowing. The banking system operates on a 10 per cent required reserve ratio. What this means is that even if only half of the newly expanded monetary base was fully loaned out this would increase the money supply by about four trillion dollars. In other words, the monetary base is so huge — thanks to Bernanke — that running down excess reserves by a comparatively small amount could lead to a massive credit expansion.
(It needs to be stressed at this point that neither Obama nor Bernanke are relying on the so-called stimulus to rescue the economy. Obama's big spending program2 is intended to entrench big government behind the smoke screen he calls a stimulus while Bernanke's monetary shenanigans are meant to be the real driving force behind economic recovery).
The fatal flaw in this monetary scheme is Bernanke's failure to understand that money is not neutral. He, along with virtually all other economists, assume, tacitly or otherwise, that the money supply affects only the level of prices while individual prices are determined by the forces of supply and demand. As such, it is not possible for monetary expansion to create malinvestments that will have to be liquidated at a later date.
The concept of neutral money is another dangerous fallacy and one for which America is currently paying a high price. Money enters the economy at various points where it then raises the demand for goods. The result of this demand ripples out to the rest of the economy. By this means those who receive the new money first are the winners. The last ones to get the money are the losers. This is called the "Cantillon effect"3. If the new money enters the economy through the capital market, due to interest rates being forced below their market clear rates, then the demand for capital goods will be disproportionally increased. We call this the "Wicksell effect".
The result is that a boom is triggered, the higher stages of production are over-extended, malinvestments are created, the boom comes to an end, unemployment rises and malinvestments emerge in the form of idle capacity. This is a brief sketch of the classic boom-bust cycle.
Should all of the new money enter the economy at the lower stages of production, consumption will be greatly increased at the expense of the higher stages of production, where the marginal productivity of labour is invariably higher because of the ratio of capital to labour. The result is that investment moves into the lower stages of production where investments tend to be less time consuming and hence labour productivity is lower, meaning real wages would have to fall.
Therefore it does not matter at which points Bernanke injects new money into the economy because his injections will immediately act to distort the nation's production structure. The larger the injections and the longer they continue the larger will be the distortions. Now these injections are like a monetary magnet in that they continue to attract resources. Because of the nature of inflation these expanded economic activities will require more and more money to maintain themselves. In addition, the monetary expansion will eventually fuel further rises in domestic prices as aggregate monetary demand rises.
Should some clever little central banker get it into his head that he can control the situation by simply slowing down the rate at which the new money is injected into these economic activities, he will find himself sorely frustrated. As soon as he tries it economic activity will begin to slow, output will fall and unemployment will rise. This will happen as surely as night follows day. But this is the good news. The monetary injections will have raised nominal incomes which in turn will raise the demand for imports and exert a downward pressure on the dollars.
With surging prices at home and a depreciating exchange rate, foreign holders of greenbacks might just decide that they have had enough and start a run on the currency by dumping their dollar balances, forcing the fed to raise interest rates and trigger a recession. (And let us not forget the damage that will be done when the Bush tax cuts expire. This will be the biggest tax hike in US history and it will be Obama's baby). If you think this is pretty ugly, then it is my melancholy duty to inform you that there is even worse to come.
Fed figures reveal that in the first quarter of 1980 "household debt service payments and financial obligations as a percentage of disposable personal income" was 15.9 per cent. This figure had risen to 19.05 in the third quarter of 2008. There is no doubt that the US has been on a massive borrowing binge, one that was fuelled by the fed's irresponsible monetary policy. (It only has two monetary stances: tight and loose, with loose being the norm. From October 1997 to January 2009 it expanded the money supply by about 120 per cent4). This suggests that the rise in interest rates would also set off a financial bloodbath among debtors.
And why would America be in this mess? Because Bernanke designed a Machiavellian monetary policy intended to support Obama's fanatical worship of Big Government.
1. Obama is so ignorant of the economic history of the 1930s that he really believes that Roosevelt's "initial steps did actually work". The problem, according to this great economic historian, is that Roosevelt went for "a balanced budget, and then what you had was a recession within a depression." Pure unadulterated drivel by a complete economic ignoramus. (see here and here) This is so bad he must be getting it from Krugman - or should that be Bernanke?
2. A great many Americans are beginning to wake up to the fact that Obama conned them. This spending package is the bigest barrel of pork in American history and is part of a strategy to make the Democrats a permanent majority in government. By the time this lot got through with the economy, Argentina would look like an economic miracle in comparison.
3. This problem was heavily discussed during the Bullion Controversy that Walter Boyd's open letter to Prime Minister Pitt started in 1801. It's a great pity that the world's central bankers are completely ignorant of this extremely important episode in the history of economic thought.
4. Austrian definition of the money supply: Cash, demand deposits with commercial banks, and thrift institutions, government deposits with banks and the central bank.
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When you put that much bias and emotion into a financial article, many of us will simply line the birdcage with it.
Put your thinking hat on a little tighter.
Get Central Bankers out of the counterfeiting business with the Treasury Department and start following and doing what the U.S. Constitution and Article 1 Section 8 instructs should be done.
Use the Gold Standard and get rid of Federal Reserve Notes and start having the U.S Government Treasury print United States Notes backed by gold and or silver reserves only producing allotments as needed to balance goods and services.
Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking, the IRS, Ben Bernanke and the entire Federal Reserve System.
Use the $900 Billion dollars on paying off the mortgages of defaulted loans of American homeowners so they can be bailed out just as the large banks and large corporations.
It's not all the American homeowner's fault because the BIG DOGS at the top of the food chain got greedy like the good folks at Enron and all the Bernard Madoffs out there who have no remorse for ripping people off.
Let the huge banks liquidate into bankruptcy and start from scratch.
Prosecute the frauders and incarcerate them.
They (frauders) should not be exempt from having justice served them because they hold power center positions.
The Tom Daschles of the world have to follow the laws of the land just as
regular and common men and women of this great naton we live in called United States of America.
Oh well anyway...... Keep praying for America and budget your soon to be extinct Federal Reserve Notes.
Stepbear7
Yes, we are likely heading for hyperinflation because of these policies and yes Bernanke and the Obama team do not have a solution. Fact is, I am pretty sure there is no solution at this point that restarts the economy, saves the banking system, saves homeowners, and makes it "all better" without massive dislocation. We either kill the dollar or let bankruptcies take their course on a massive scale and accept whatever social disorder that brings about. Unfortunately the latter is not a politically acceptable solution so politicians do what they always do - fudge and try and mollify voters in the hopes that everything will somehow work out. It won't work out this time and the consequences will be appalling. Most likely we will get the worse of both worlds, a depreciated currency, hyper inflation and a breakdown socially.
Take a guess as to how much money disappeared when the stock market crashed in October. Here's a hint: it's a much larger number than the money the government is injecting into the economy. People harping on about spending as if it's going to create hyperinflation aren't seeing the big picture. We're in much more trouble from deflation, and that will continue for some time. The trick is timing the end of the stimulus.
did help people.) All this spending obama wants is just to control power
for years and years. He is a smart man but a socialist. People who
voted for him want entitlements. My daughters roommates at college
voted for him because they thought he was going to pay off there
student loans.
Flash back to the neo-con's answer to 1970's stagflation and Milton Friedman's Shock Economics Theory he plied so well in South America for right wing fascists.
Roll tape a bit forward to the Gipper. Cut taxes, spend on defense out the wazoo, run record deficits, de-regulate markets and watch Uncle Milties' magic work.
While every right wing neo-con tape loop is buzzing with out-of-control GSEs, we all seem to conveniently ignore how all of this silly and frightening theoretical economic approach played out around the world through the likes of the IMF, World Bank, Halliburton, and their ilk.
Look at any country where this supply-side, trickle down, deregulated gambit has played and look at how eeiry is the similarity between those countries and this one:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit moe than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $1.4 Trillion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.
It wasn't because Clinton was an economic genious. He simply returned out-of-control revenue reduction (tax cuts) back to the Reagan rates and chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
As for trusting in the markets to right the ship....?
On Feb 04 02:31 AM thebigpayoff wrote:
> These people make me sick!!!!! Not one of them have the brains to
> balance a check book let alone figure out the mess we are in now,
> not to mention, they are the same ones that got us into this mess.
> The entire package should be scrapped before the Senate even gets
> to vote on it. Will they listen to what we want, the ones that put
> them in office? No way. They will push this plan through, because
> they would look like fools if they did now, after all this, "We need
> to act now" crap. They want to gain total control over every institution,
> and rule in a Mao type fashion. Obama's entire cabinet is dropping
> like fly's. They can't even remember to file their tax's, and they
> are going to fix everything? Give me a break. I say cut tax's, drop
> capital gains tax, and save the billions you want to throw away,
> and let the cards drop where they will. We will get by fine thank
> you.
Flash back to the neo-con's answer to 1970's stagflation and Milton Friedman's Shock Economics Theory he plied so well in South America for right wing fascists.
Roll tape a bit forward to the Gipper. Cut taxes, spend on defense out the wazoo, run record deficits, de-regulate markets and watch Uncle Milties' magic work.
While every right wing neo-con tape loop is buzzing with out-of-control GSEs, we all seem to conveniently ignore how all of this silly and frightening theoretical economic approach played out around the world through the likes of the IMF, World Bank, Halliburton, and their ilk.
Look at any country where this supply-side, trickle down, deregulated gambit has played and look at how eeiry is the similarity between those countries and this one:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit more than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $1.4 Trillion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.
It wasn't because Clinton was an economic genious. He simply returned out-of-control revenue reduction (tax cuts) back to the Reagan rates and chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
As for trusting in the markets to right the ship....?
On Feb 04 10:52 AM thebigpayoff wrote:
> russ, You better wake up from the Obama dream you are still in since
> the election. This is not from Limbaugh, this is the voice of angry
> American's that don't want communisum, and don't like being taken
> to the cleaners, and lied to. I, and many other American's don't
> want any part of Obama's plan. I don't need to be told what is good
> for me, and told how to live my life, and will fight it as long as
> I can breath, or my mind go's from old age, which ever comes first.
New Dallas digs, a few thousand Paraguayan acres for another compound if things get a bit to uncomfortable for Bush, and a nice new 40 million dollar private jet with taxpayer bailouts anyone?
It constantly amazes me how those who profess a belief in unfettered capitalism or pie-in-the sky Libertarianism can't even recognize what's in their own self-interest.
On Feb 04 01:41 PM wheresmymoney wrote:
> I agree that Obama has conned the public, but I knew that when I
> voted for McCain. His bailout stimulus package is so loaded with
> pork it should "OINK!!!! How about the hidden 5 billion to go to
> Acorn the voter fraud group that got Mr. Obama elected! How is that
> going to create jobs or stimulate our ecomomy? He owes them, that
> is why he snuk that in under another title. Since only a small amount
> of the bailout goes to create jobs, how will the other money given
> to stupid groups like birth control, etc. create jobs? Then the jobs
> Mr. Obama wants to create rebulid the roads and bridges are a joke
> also. Can you see all the computor nerds or stockbrokers laid off
> from Wall Street or other companies, going out and fixing a road
> in all types of weather, etc? Do you think they would in reality
> be able to do a job like that? I think not! What we need is less
> goverment like Regan said, less taxes, get a flat tax and ablolish
> the IRS, that would stimulate the economy! Obama doesn't have a clue
> what to do, and then when the Democrats in Congress write up this
> pork laden bill that hardly helps anyone, Obama supports it. It must
> be scrapped and rewritten totally. Obama is getting a bad start and
> then yesterday he said he screwed up, nice language for somone who
> the press writes up as such an eloquent speaker. Without his speeches
> written for him, at press confrences when he has to adlib and answer
> questions he doesn't speak so well. He is a con artist and can't
> be trusted, he flip flops on everything so much. He is from the corrupt
> state of IL. and part of Mayor Dailys political machine that is mobbed
> up. Emanuel also is one of Mayor Dailys boys, and yes "thebigpayoff"
> I am from Chicago and Ill. I know how corrupt this state is and always
> was. No one cared about Obamas radical friends and now they don'
> care if his cabinet is tainted with people who are above the law.
> This whole bailout is a joke and needs to be rewritten to get rid
> of ALL THE PORK and ridiculous crap that wont stimulate the economy,
> create jobs, or help the housing market.
“Critics of the Austrian school contend that its methods consist of post-hoc analysis and do not generate testable implications;…” (Wikipedia); it is easy to be right in theory if you never have to prove it in practice, and vitrol is often single minded in its world view.
At the moment a bright open mind leads rather than a facile crumdugeon who only reguritates a colonial era economic school of thought.
The only way anyone could have done better in the last three years (financially) would have been to be in a short position within just about every market sector and out of the real estate market altogether . If that was your strategy, then I applaud your farsightedness. However, if that was your position, then you were making a solid bet against the value of Bush's neo-con policies.
You can't have both, but feel free to take him into your bosom if that makes you happy.
On Feb 05 02:25 AM thebigpayoff wrote:
> mediapro, I don't know about everything you stated, but I've done
> better during the last three years than I have during my entire life.
> Bush, good or bad? I liked him.