How glorious and wonderful is the appointment of Ben Bernanke? Not at all, because his theory is wrong. It is not possible to isolate the monetary effect on individual prices of goods, so the whole idea that one can measure and somehow stabilize the price level is preposterous. Such a policy runs the risk of tampering with the free movement of relative prices, which leads to instability and the weakening of the process of wealth generation. FULL ARTICLE
Source link: http://blog.mises.org/4265/the-ascension-of-bernanke-into-the-clouds/
The Ascension of Bernanke Into the Clouds
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Great picture! Worth a thousand words.
What about an inflation target of zero?
The only consolation is that basically the Fed is going to keep doing what it’s already been doing. Well, guess that’s not much consolation, is it?
John,
If by “inflation target of zero”, you mean that the Fed doesn’t print out any money, that is a good goal. However, if you mean that they try to prevent the price-level from growing at all (or changing), that is bad, because it’s hampering with the market, and will imply various monetary manipulations.
Although preferable to what we now have, having the Fed not print out any money is not desireable for two reasons:
1. As Walter Block and William Barnett II have shown, there is an optimal level of money supply. That is whatever amount of money (namely, gold) is produced on the free market through voluntary ventures. See Barnett, William II; Block, Walter. On the Optimum Quantity of Money.
2. If the Fed did actually stop printing out money — completely — this would lead many to believe that it’s “ok” to have a Fed, because, after all, it’s doing a great job. However, if ever such a miracle were to happen, it would be as temporary as the Fed chairman in charge of it.
3. Fractional reserve banking.
Sincerely,
Dave H.
Yes…..
These folks are dangerous. The amount the economy can deflate is the amount of the loss in supply of money. This is positive. I want more buying power with the same salary.
More over, the Fed did not cause the Great Depression by cutting cash. The cut in case raised the value of money. Consumers then started buying foreign stuff that was in the short term cheaper. The local manufacturers compalined an the Congress made the tariffs that really caused the depression as the resulting trade wars killed very profitable international trade.
Agreed, the graphic artist(s) at Mises.org deserve accolade.
David,thanks for the answer on the “zero inflation” and the reference. I am going to study that a little.
I am quite convinced that the Fed can only hurt the economy. I can actually envision life without central banking. I just cannot see how to make the step.
An analogy would be: I understand that I am a drunk and I understand that it is possible not to be a drunk but I just cannot stop drinking.
How would you make the step to shut down central banking?
Can somebody please explain why someone of this mindset (someone who ignores the time structure of capital) would think deflation is bad? After all, price means nothing to them going up, so why should it mean anything going down?
Bernanke praised Milton Friedman for claiming that the fed did not print enough paper money during the early 1930′s . . . . a claim that Murray Rothbard debunked and refuted. So we have a Fed Chairman who believes in debunked and refuted economic and monetary theory. He may be the fed chairman who realises his greatest fear . . . and sets off a chain of events that culminate in an unexpected episode of deflation.
Harry Valentine
John,
Just like the drunk trying to dry out, it’s going to be terribly painful. But I think the way to do it is to follow Rothbard’s plan of exchanging FRNs for gold.
Of course, the ratio of gold to FRNs at the current price of gold (POG) is nowhere near where it would need to be in order to make that work, but I think there could be a way to bring the POG up to parity…
If all assets belonging to the Federal Reserve System were to be liquidated, and the proceeds used to buy gold on the open market, the POG would go through the roof. When the POG is high enough (does anyone know what the current figure would have to be?), every US Dollar would be transformed into a 100%-backed receipt for whatever weight of gold it would represent, and the Federal Reserve would cease to be. If the Fed does not have enough assets to sell to bring the POG up high enough to cover all the USD in the world, then the federal government could start auctioning off its assets.
Of course, there would also need to be legislation repealing legal tender laws and outlawing fractional reserve deposits, or else the drunk would soon fall off the wagon.
Can the “gold” strategy be implemented by one country alone? Could the US do it alone? Could Canada do it alone? What is the best writing on the topic of transition from central banking to gold standard? Thanks to all for your answers; it’s a fascinating subject.
John Christopher,
I, like you, have trouble envisioning a rational, planned, changeover. What I think will happen, and I don’t know when (perhaps 50 years from now, for all I know), is that the present system will crash and burn. What I hope will happen then is that the state will wither crash and burn, and free people will return to honest money by natural happenstance.
The King is dead, long live the King!
Same bad Fed, same bad master, different name.
Yancey, as frightening as your ‘crash and burn’ senario seems, I think it will happen sooner than 50 years, it may be the only way to stop the madness. After the Anglo-American Sino war, I think the ‘state’ will have even more power and the decay will be even faster.
Our best bet is to stock up on gold, as expensive as it is now — that’s nothing compared to what it will be. Of course, the ‘state’ will curtail and abolosih your legal acquisition of gold and you will have to resort to the black (read free) market.
Anyway I wonder if we’ll feel the VolkerGreenspanBernanke transition? (is trasition the right word or would continuation be better?)
Pardon my ignorance, but what about having the fed set interest rates as a strict function of rates observed in the markets? How would Austrian economics judge such an idea?
“In response, Wall Street became very excited and pushed the Dow Industrial average up by almost 1.7%.”
This is a common fallacy called “Cum Hoc, Ergo Propter Hoc”. I witnessed the same fallacy on both Bloomberg and CNBC.
The only reason why market indices such as the Dow 30 go up is because the supply of the underlying stocks in the respective indices is less than the demand for the same stocks.
I have never seen Bernanke or any other prospective Fed Chairman on a supply/demand graph.
Sorry, I meant to say, “supply went down relative to demand”.
Well well, how interesting that we have Big Government liberal Paul Krugman (as opposed to his Big Government conservative counterparts, contradicting himself in his op-ed piece “Bernanke and the Bubble.”
First he praises Greenspan for his clairvoyance, wondering if Bernanke will exhibit such magical powers, then he turns around and warns of the financial “reckoning day” (wonder where he came up with that term: http://www.lewrockwell.com/thornton/thornton15.html) that lies just around the corner.
But one good thing: Krugman’s now joined the contrarian (i.e., Austrian) club, leaving one to wonder how long it will be before one of his neocon counterparts follows suit.
In any case, man the lifeboats.
I meant to say that Krugman’s joined the Austrians insofar as he’s seeing financial meltdown in the offing. Beyond that, of course, he’s as Keynesian as ever and will propose all manner of government intervention to undo the effects of prior government intervention, which will then require…
Mises refuted the price stabilizationist nonsense over 80 years ago(see his discussion of price indexes and Irving Fisher’s plan in The Theory of Money and Credit). In America’s Great Depression, Rothbard brilliantly demonstrated that the 1920′s version of price stabilization by the Fed did not save us from the crash of ’29 or the rapid implosion of the entire banking system starting in ’31.
The problem with such a policy is not simply a question of masking relative price differences by keeping prices “stable” and thus causing a misallocation of producer goods and actually creating instability (i.e. the classic Austrian boom and bust cycle); the problem also involves what the Federal Reserve will do once the crisis is manifest.
At least Greenspan, for all his faults, could see some danger in the existence of price bubbles in producer’s goods. He was willing to jaw-bone about “irrational exuberance” and engineer “soft-landings” at the expense of the strict CPI target of 3% of the monetarists.
On the other hand, Bernanke has a monomaniacal fixation on the CPI index. His bias seems to be to enforce price targets no matter how swollen a credit bubble gets. Even worse, Bernanke calls for gradualism in fighting inflation, while taking the “helicopter” approach to preventing price declines by any means necessary. That is, Bernanke has an inflationist bias in enforcing the 3% rule.
If we had to relive 1931 again, there is no doubt that a Bernanke-led Fed would shovel out the cash, but it is equally clear that we would get what Mises called a “crack-up boom” and a hyperinflationary collapse. Let’s all fervently hope that we never have to witness helicopter money in action.
Let’s all fervently hope that we never have to witness helicopter money in action.
I believe that this is already what we are already witnessing, quite literally, with the showering of money on the Deep South by helicopter, truck, train, boat and bus in the guise of hurricane relief. The next disaster is already being planned and the money is already being printed: the War On Chicken Flu. That’s on top of the War On Terror, War On Drugs, War On Poverty, War On Discrimination, War On Downloading, War On Health Care, and the War On Schools, to name a few. Er, sorry, that last one should be the War On Stupidity, a.k.a. No Child Left Behind.
I now present for your amusement, http://www.adamsmith.org/blog/index.php/blog/individual/the_greenspan_legacy/“>some utterly ludicrous comments on Alan Greenspan, presented by the Adam Smith Institute. The blog author seems to be entirely undecided if these statements are true or not – which were dragged up from some kind of British socialist rag called “The Times”:
Fiat money thus severed one of the most durable links between man and nature and gave governments — and the central bankers whom they appointed — the freedom to manage their economies without regard to external forces and to create standards of value that philosophers and economists had previously ascribed to God … But if Mr Volcker was the man who showed that pure paper money was compatible with stable prices, it was Mr Greenspan who took the next and even more important step: he showed that a central bank that had successfully tamed inflation could then move on to maximize economic growth and minimize unemployment, while always ensuring that price stability was maintained.
I hope that the next intellectual feat accomplished by the Federal Reserve Bank, or the Adam Smith Institute, or perhaps both working in tandem, is to continue severing links between man and nature, perhaps freeing us from the need to breathe, or eat, or build shelters over our heads.
Evidently Dr Madsen Pirie believes that such feats are possible, as long as it is “done independently of the political process by people motivated, honest and beyond political influence.” That’s probably where the Adam Smith Institute sees its job.
Fortunately, and once again proving the superiority of blogs over almost any other medium, the gong of reality is given a solid whack in the comments section:
We are now being told that logic can be stood on its head yet again. A boom based on consumer credit and national debt is supposed to be a good thing when we all know that every time in recorded history when deficit spending has been used to finance current consumption inflation followed by disaster has resulted.
With libertarians like the Adam Smith Institute, who needs statists?
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