Lost in Translation
Bernanke's failure to pin himself down to a firm definition of exactly what he means when referring to the gold standard leaves his writing flawed from a scientific standpoint, says Cyd Malone. Science requires exactitude, consistency, and clarity; all are inseparable from its very nature. Science defines its terms clearly and sticks to them — if you can't do that then it isn't science. The gold standard is the essay's whipping boy, its harmful effects his main warning, yet like "enemy combatant" it is loosely defined, at best. FULL ARTICLE
Comments (24)
Quote from FED chairman Bernanke’s prepared remarks before the Senate Budget panel with my comments in brackets (( ))
“Official projections ((not sure)) suggest ((don’t know)) that the unified budget deficit may ((or may not?)) stabilize or moderate ((now what?)) further ((how long?)) over the next few years (when?)). Unfortunately (fortuna strikes)), we ((who are “we”?)) are experiencing ((what??) what ((what now?)) seems ((to me, to you or to whom?) likely ((by how much and after what you have said before how does he know?)) to be the calm before the storm (poetry)).
Full text: http://money.cnn.com/2007/01/18/news/economy/bernanke_testimony/index.htm
posted yesterday at my blog:
www.continentaleconomics.com/blog
antony
Published: January 26, 2007 8:56 AM
Furthermore, by failing to explain exactly what the gold standard was designed to do, Mr. Bernanke makes the error of holding up the "Great Contraction" as terrifying and inexplicable — when it was nothing more than the gold standard's protective mechanism kicking in.
And just what is the "protective mechanism" that's "kicking in".
By not taking a few paragraphs to explain to the reader how the gold standard of pre-1914 was different from the gold exchange standard that prevailed post-1914 (or how either system was designed to operate), he mistakenly condemns gold-based money for performing the very function it was designed to do — destroy counterfeit currency.
You are a stickler for definitions. What is "counterfeit currency"?
Mr. Bernanke's insistence on using mathematics to study human behavior — backed up by arbitrarily chosen data of admittedly poor quality — has led him not only to condemn gold-based money for doing exactly what it is supposed to do, but also to trumpet a rather odd solution to the problem of curing depressions.
And just what exactly is "gold-based money supposed to do". If it is to give a media of exchange a base (which is to give it integrity, is it not?), then if gold is not suitable for such a base (as I will illustrate) what else might give exchange media integrity?
The belief that aggregate demand needs to be stimulated by raising the price level is as absurd as believing that filling a rowboat with water will keep it from sinking — it defies one of the most basic laws of economics. And defying that law is at the heart of Mr. Bernanke's argument.
I know you are a stickler for definitions. What is "one of the most basic laws of economics" you refer to here? Is it supply and demand? If it is, the supply of media of exchange is meaningless as that is just a supply of promises to repay a loan.
the gold standard's greatest benefit to the working masses — a falling price level during periods of economic depression.
So, you can't have rising prices during periods of economic depression if you're on a gold standard?
it must be that the law of economic science that states that a falling price leads to a greater demand (and a rising price to lower demand) is not a law of our science any longer, else his argument against gold-based money falls apart.
What if you see prices of computers falling consistently while at the same time coming out with more powerful features. If you postpone a computer purchase in the face of this, what does the "law of economic science" have to say about it?
------------------------------------
You correctly illustrate that Bernanke is out to lunch. But you, too, are out to lunch to think that a media of exchange must be backed by something precious to have integrity. Further, to suggest it be backed by gold is downright foolish.
If you took all the gold in the world and divided by all the people, you have less than once ounce (about $645) per person. You can't have a media of exchange in such short supply that each person has only $600+ dollars to work with.
Anticipating a common retort: But you just make an ounce of gold worth $15,000 or $100,000, or whatever it takes. This is just nonsensical since it also costs about $600+ dollars to dig up the dirt and turn the gold contained in it into something that is shinny and yellow.
For example, in a speech last November Dallas Fed president Mr. Fisher stated that the Fed miscalculated its favored "core PCE" inflation gauge by 0.5% in early 2003, causing them to create more money and credit then they otherwise would have.
This statement; the techniques Bernanke uses to determine how much money to print; and your criticism for abandoning the "gold standard" (which you also don't define by the way) show that none of you know what you're talking about.
The equation a manager of a media of exchange must manage is:
DEFAULTS = INFLATION + INTEREST.
Management means measuring DEFAULTS and adjusting INTEREST such that INFLATION remains 0.
We know that no one in control has a clue about this because, while they'll collect and analyze data on INTEREST and INFLATION until the cows come home, there is nowhere that you or anyone else can go to find DEFAULT experience.
Respectfully,
Todd B. Marshall
Plantersville, TX
Published: January 26, 2007 11:44 AM
Todd Marshall, in order to be sound, money must be a good (commodity) produced my the market and used as a medium of exchange. For numerous reasons, gold has assumed this roll and has done so for millennia. But given its growing scarcity, other metals -- silver, copper, even zinc -- could be "monetized" along with gold and more than make up for its scarcity.
As for a "manager of a media [sic] of exchange," history has gone out of its way to prove that no such person or persons can "adjust interest [rates] such that inflation remains zero." Indeed, they have no incentive to, since creating money out of this air and charging interest on it assures that more and more of it will be created and that inflation with be the inevitable result.
Published: January 26, 2007 11:59 AM
This article is rather condescending in tone, considering Beranke's experience and credentials. The entire piece seems to be overly simplistic in its analysis, focusing on a single (simple) equation: inflation = higher prices, and thereby inflation (increased money supply) cannot reasonably be thought to stimulate demand. Yet there is more to the picture than that!
What about employment? What about income levels? What about asset appreciation? It is the RATIO of income and/or wealth to prices that determines if the prices are stimulative of consumption or not. If prices go up 5% but my assets and income go up 5% as well, I don't suffer. An economy in a panic, where people are losing their jobs en masse, is not likely to generate much demand. This is partly real, but perhaps mostly psychological (even those with jobs and income quit buying, fearing they'll be next--which their actions ensure is the case). An increased money supply may cause prices to rise, but if it simultaneously prevents panic and thereby keeps people working and buying, then the net effect is that it DOES stimulate demand.
For example, suppose the Fed were faced with a highly leveraged hedge fund whose position had gone sour. They could let it unravel and as a result, panic to set in throughout the market, with people and institutions dumping their stock, etc. This would eventually trash the economy and jobs. OR, the Fed could "print money" to bail out the hedge fund. If this has the effect of preventing panic, it may in the end be the most stimulative approach. (This says nothing about the wisdom of such a choice, especially in terms of future hedge fund behavior).
Published: January 26, 2007 12:05 PM
I hate Ben Bernanke. He deserves to be arrested for his work at the Fed. He deserves to be publicly tarred and feathered for his economic method.
Published: January 26, 2007 12:26 PM
Anyone who becomes the head of the FED cannot openly believe that the FED is the problem that it pretends to cure. Just consider the prestige and other awards that come with the job. That's a mighty incentive to keep the company line, just like his predecessor who used to rail against the FED (but later simply said he was wrong when he was younger).
If someone like Rothbard, or any other Austrian were to be offered the job, they would have to try to close it down to be honest with themselves. And unless they lied to congress, who just loves the FED (Ron Paul being the token exception) how could they ever get near the job. As Milton Friedman used to say: Can cats bark?
Published: January 26, 2007 12:47 PM
i came on the blog to rec the article on bernanke's essay's and to say "props" to LvMI for putting The Monetary Sin of the West and The Peoples Pottage on the home page... and then I read this very embarrasing post by Mr. Todd B. Marshall of Plantersville Tx. Did you take your Meds today?
"If you took all the gold in the world and divided by all the people, you have less than once ounce (about $645) per person. You can't have a media of exchange in such short supply that each person has only $600+ dollars to work with."
That is probably the dumbest thing I've read in '07. Everything about your post was embarrasing to read. May God have mercy on your soul. Posting things that stupid is a sin.
Published: January 26, 2007 1:19 PM
To those who believe that it is the purpose of the FED to "control" inflation, stabilize the economy, prevent panic, etc:
Well, yes the FED would certainly like to keep the appearance of doing all that. No one is served by a depression. I mean, Ben Bernanke could lose his job if a depression occurs.
That being said, when large amounts of wealth are concerned it is wise to consider possible ulterior motives. Let's consider an illustration. Let's suppose that I can instantaneously double the money supply and distribute the new money to a few close friends (of course keeping a considerable cut for myself). Immediately after the new money is created, the same amount of goods and services exist as the moment before. However, twice the money now exists. Once the economy has adjusted to the new monetary base, prices will rise significantly. Most people are worse off because of the arrangement. However, my friends and I are now quite wealthy.
The federal government (with the FED as its accomplice) partially maintains its spending in this manner. In real terms, it is a tax. Yet the FED's actions are actually marketed as to everyone's benefit.
That's the worst view of the deal. Even considering the most positive view, let's assume that all inflation of monetary supply is benign. When new money is pumped into the economy, it takes awhile for the economy as a whole to adapt to the new money base. People think they are richer than they really are. They start up new projects. In the end, what really matters are the actual resources (goods, services, people, etc.) that exist to complete the projects. Eventually, it becomes evident to most people that those real resources don't exist. The result is contraction and dislocation. Some projects must be terminated. Mind you, some are ones that might have been viable. But since the new money was distributed arbitrarily, it's hard to say which projects will have been favored.
To regular mises.org readers, this principle of "mal-investment" has been discussed at length. It's a classic example of a statist intervention causing a problem (inflating the money supply) and needing to intervene more to fix the problem.
Published: January 26, 2007 1:41 PM
To take the other side of the math question: you can learn interesting things from a study of math. If you build upon this journal article, http://www.mises.org/journals/qjae/pdf/qjae9_2_1.pdf , with the assumption that for every good, an alternative good (not existing at the time) can be imagined, you get the conclusion that the number of potential goods is always 2 to the power of every existent good. Implication: the number of goods for which there is a potential demand always outstrips the number of goods produced. The "imagined goods" cannot be put in a central planner's system of equations because they don't exist yet. So, central planning will always be defeated by the fact that potential demand outstrips supply; all it would take for real demand to outstrip supply would be one of those "potential goods" being, or becoming, a good that people would pay for. There's no way to confirm, or deny, the possibility without an existent market.
This conclusion dovetails quite nicely with the subtext of Elisabeth Tamedly's book, Socialism And International Economic Order: that the alpha and omega of any form of socialism is demand restriction. So math [specifically, number theory] ain't that useless - if used properly. (Admittedly, I continually have a hard time with that conditional.)
Published: January 26, 2007 2:09 PM
Correction: if the alternative goods are re-combinations of all existent goods so as to make new ones, the the 2^n relationship, with n being the number of existent goods, would exist. If simple alternativization, and nothing more, is all that's done, then the number of potential goods would be 2*n. Either way, potential demand always outstrips the number of existent goods, and will always do so as long has human beings have the capacity for constructive imagination, even at the pastiche level. Even imagining one additional good has the potentiality of wrecking a central plan.
[I did note that I have a hard time with this stuff.]
Published: January 26, 2007 2:21 PM
There is an additional factor that was operative during the depression that I don't hear much about. Namely, that the effects of increases and decreases in money supply do not have symmetrical economic effects. In other words, it may be easier for an economy to adjust to higher than lower prices.
From a personal point of view, which is probably more universal than me, I would prefer my income to rise than fall. I would actively resist a fall in my nominal income, even if I observed other prices falling. I might punish politicians who didn't "do something" about my falling income even as other prices fell.
Resistance to nominal price drops was widespread during the depression, both on Hoover's and Roosevelt's watch, and Rothbard among others noted that this resistance, in the form of legislation, helped prolong the depression. I haven't seen anyone address the core of this very human reaction.
Published: January 26, 2007 3:12 PM
Mr. Bernanke has the best intentions at heart. Unfortunately, this first essay failed to shine any light in the darkness because
he is paid to lie by people whose destructive banking practices need to be protected from scrutiny. The banking business is more or less legal, but the bankers suspect it wouldn't be if the truth were widely known.
The issue I have is with the rampant dishonesty used to protect secrecy. I don't like liars. I am grateful for the few people with the knowledge and courage to spread the truth about economics. There sure are a lot of economists who will lie for profit.
Published: January 26, 2007 3:45 PM
posted by Todd B. Marshall:
If you took all the gold in the world and divided by all the people, you have less than once ounce (about $645) per person. You can't have a media of exchange in such short supply that each person has only $600+ dollars to work with.
Anticipating a common retort: But you just make an ounce of gold worth $15,000 or $100,000, or whatever it takes. This is just nonsensical since it also costs about $600+ dollars to dig up the dirt and turn the gold contained in it into something that is shinny and yellow.
Well, it is nonsensical to just assume that the price can be fixed at "whatever it takes," which tends to imply a political motivation in the valuation rather than a market valuation. If everyone on earth has one ounce of gold, and there is no more gold to be had, then the market will revalue that gold from the current spot price to one which more accurately reflects economic circumstances. Surely you are not saying that the basics of supply and demand do not apply to money, especially not to commodity-based money?
Regarding the second sentence, I don't understand the correlation between production cost and market value you seem to be making -- that because the production cost is one number, the market value cannot be another? In an aside, you're vastly off the mark on current gold production prices, which are under $300 per ounce. Read the financial statements of any gold mining company. Smelting and mint procese add trivially to the production cost -- nowhere near $300+
This statement; the techniques Bernanke uses to determine how much money to print; and your criticism for abandoning the "gold standard" (which you also don't define by the way) show that none of you know what you're talking about.
A single statement from one opinion piece by one contributor to a site demonstrates that no contributor to that site knows what he is talking about? Come to think of it, I think I can name one recent poster who fits that description ...
Published: January 26, 2007 4:44 PM
"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill."
-- Charles A. Lindbergh, Sr. , 1913
When the Money Kings wanted a "puppet, they drafted Thomas Woodrow Wilson from Princeton. Almost a 100 years later, they needed another "puppet" and drafted Ben Shalom Bernanke from Princeton, too.
"From now on, depressions will be scientifically created."
-- Congressman Charles A. Lindbergh Sr. , 1913)
To me, that explains the World Wars, the Great Depression and the nonsense since 2001.
Published: January 26, 2007 4:53 PM
After some further mathematical fat-chewing, I have collated these points, worth pondering upon:
1. If the total number of produced goods is a set, then the total number of goods reachable by combining one, more or none of the existent goods is equal to all possible subsets of that set of n goods, or 2^n potential subset-goods. This total must be greater than n, as Cantor proved.
2. n of those goods already are produced. One of these goods is the "null-good," or nothing, for which a potential demand can exist. In the real world, though, such demand would be sporadic at best. (There are, after all, very few John Cages, and even his "no-song" contained two noises.) This means that there are (n + 1) goods that would not be potential goods, with potential demands attached to them.
3. Thus, the total number of potential combination-goods in an economy, which a centrally planned economy cannot encompass because of the potentiality of the goods in question, is 2^n - (n + 1), or 2^n - n - 1. This equation gives the number of goods which "exist" only as potential demand for them, a demand that may not be realized if each of these potential goods is assembled, but which also might be realized. In a planned economy, there's no way of telling.
4. The interesting point about the equation 2^n - n - 1, the one that I wanted to pass along here, is that it's equal to zero if n = 1. In other words, in a one-good economy, there are no potential goods. Here's one good hunch as to what that "one good" is, in the mind of the socialist: money.
5. Remember the "good of no goods" mentioned in (2)? If the one and only good that's worthy of notice is money, then the one and only thinkable alternative to it is: no-money, or the abolition of money. If the one and only good in the mind of a socialist is money, then the one and only alternative that is thinkable to such a person is the nullification of money - the null-good as null-money.
6. Of course, that one-and-only good can be labor. In that case, the only thinkable alternative is no-labor, or leisure.
Published: January 26, 2007 7:12 PM
Or another answer to the ounce of gold given to everyone of $600 could be well if you're talking of 2007 U.S. dollars then that sucks but then again if you're talking of 1900 U.S. dollars then that would have been around 1.5 to 2 years wages for the average worker (I think) which would be pretty sweet.
But I'm sure it's been said before the difference between gold/silver and paper money is the ability to print more paper money causing hyper-inflation. Gold and silver can't be mined in a way to cause any real inflation. Simple.
On the other hand, the magic I presume of a true gold standard is presumably one of wealth equating with actual equity-style production. And presumably if debt is allowed it would only loaned to someone with a quite good chance of creating wealth and repaying that loan (without having inflaton help them). With these two features combined the chance for prices to climb artificially high (with a subsequent bust) would be none and buckley's. Ultimately I'd guess this would likewise ultimately mean the price of anything will reflect its true worth allowing people to seriously gauge investment oppurtunities and allow seamless wealth creation for all. No?
Published: January 26, 2007 10:52 PM
It would remove a major source of falsification of economic value. Ultimately, the discovery of a good or service's "true worth" is a discovery of the best approximation to people's subjective valuations of said good or service though the value-for-value exchange process. Until reliable and accurate mind-melds comes along, that's the best approximation that can be sought.
Published: January 26, 2007 11:58 PM
Cyd,
You can't be serious. Talk about mis-representing someone's argument.
"Mr. Bernanke warns of the 'economic damage inflicted by falling prices,' which...have been shown to cause a collapse in economic activity, as proven by the bankruptcy of IBM, Dell, HP, and Microsoft caused by the large fall in the price of home computers over the last decade."
Are you reading the same article that I am? To me, it seems obvious that Bernanke is arguing that the deflation is caused by a collapse in aggregate demand. This is very different from a decline in prices due to technological innovation like the one you describe. One is accompanied by falling output, the other is accompanied by an increase.
But the particular negative consequence Bernanke was concerned with was that once deflation presses nominal interest rates to zero, the obligation of borrowers grows with deflation. The financial wows of these borrowers can further worsen the recession.
You may find an intuitive description of Bernanke's argument's here: CLICK HERE
Whether you agree with this story or not is best the point. It is much more subtle than the strawman you set up it in its place. I would think you should re-write your article after you get a better understanding of your subject, but I think the best I can hope for is that you might do try harder next time. Of course, I wont hold my breath.
Published: January 27, 2007 12:03 AM
As has often been said, a basic problem in this area is the difference between "gold based money" and gold as money.
If people choose to use gold (or any other commodity) as money, that is fine. Mr A will contract to pay Mr B a certain weight of gold of a certain degree of purity in exchange for such-and-such an amount of goods and services.
Or Mr A will lend Mr B a certain amount of the commodity money, with Mr B agreeing to pay the money back (with a rate of interest at a mutually agreed level) at a certain time.
If a certain amount of gold of a certain purity is called a "Dollar" or a "Pound" (or whatever) this is also not a problem.
The problem comes when we get gold (or silver, or whatever) "based" money. If a "gold standard" means "we are going to print lots of Dollars even though we do not have the gold we say these bits of paper represent" that is going to lead to problems.
And if people say "we are going to make loans we do not have even have Dollar notes in the vault to cover them" (the fractional reserve shell game), this is also going to lead to problems.
As for the Great Depression.
There have been many credit-money busts in American history (for example the late Murry Rothbard wrote about "The Panic of 1819" - so it is hardly just a recent problem).
The last one before 1929 was the bust of 1921. Even before World War One there was a lot more "money" about than there was gold in the vaults (at least under the official exchange rate), but the First World War (or rather government policy during the war) pushed things wildly out of line.
In 1921 there was a partial correction - i.e. there was a crash as the credit money bubble went pop.
So why did not the crash of 1921 lead to a Great Depression? Why, instead, was the economy well on the way to recovery within six months?
"Monetary policy" is not the reason.
The reason is that (the oft attacked) President Harding did nothing (other than cut government spending). Whereas the so called "do nothing" President Hoover in 1929 actually did a lot - President Hoover worked hard to PREVENT wages and prices adjusting to the bust.
The government acted in the belief that by trying to prevent wage cuts they were "protecting demand" and "saving the economy" - in reality they were destroying it.
[Real wages can only improve over time on the basis of solid economic development (not credit money bubble booms) and neither wages and prices can be "protected" at a time of crash - without causing great harm. Of course by "real wages" I mean what wages can buy, although Austrian school people reject the idea of some simple "price level" (to be calculated via an index) it is plain that there have been times in history when prices of most things that people buy have fallen so that even with money wages staying the same real wages have improved.]
As things got worse so President Hoover and Congress acted more and more - for example there was the big increase in import taxes in 1931. And (contrary to their intentions) the economy got worse still.
For those who do not know the history of this period (and even more for those people who THINK they know it) Murry Rothbard's "America's Great Depression" is a good place to start.
Published: January 27, 2007 8:05 AM
To claim to be a student of the Great Depression and not mention the Smoot-Hawley tariffs, or Herbert Hoover's response of massively increasing income tax rates, is just astonishing. The top rate went to 63%! And there was no tax withholding. Just write a big check the following year. Run on the banks, anyone?
Copper, Silver, and Zinc all oxidize over time (think rust) and would be much less useful as a store of value and would all cause serious difficulties compared to gold as a monetary standard.
The idea that someone who thinks that continuous inflation is good for an economy, or that a stable dollar is not good for the economy, is heading the Federal Reserve is amazing.
Published: January 27, 2007 8:08 AM
The point of "going over the obvious" (as many people will think I have done above) is that, to many people, it is not "obvious".
The world is full of people (often well off people or people with lots of qualifications) who think that government can "protect wages" or should "stimulate demand during a recession" and so on.
The next credit money bust (and, of course, there will be one) will set off yet more such demands.
Of course, I should have typed "we are going to make loans although we do not have even notes in the vaults to cover them" - I missed out the word "although".
I will not go into the area of "it is malinvestment not over investment" here. Nor will go into the area of examining how borrowing for direct conumption (rather than any form of investment) can take the lead in a certain form of credit money boom.
Also the actual history of the late 1920's credit money expansion is interesting (basically the Governor of the New York Federal Reserve worked to increase the money supply in order to prop up the artficially high exchange rate of the Pound to the Dollar, because the British were not willing to accept that we had inflated more than the Americans in World War One and therefore that they pre War exchange rate was no longer correct - i.e. nothing to do with the "evil of the gold standard" and everything to do with a phony exchange rate of the Pound to gold and to the Dollar set in 1925). But one does not need to know the details of the history.
It is enough that people know two things.
Firstly that "the bust is caused by the credit money boom - do not have a phony boom and you will not have a bust".
Secondly that if you do have a credit money boom and then a bust - prices and wages must be allowed to adjust.
If they are allowed to adjust, yes there will be unemployment and falling output for awhile - but then the market WILL "clear".
If the market is not allowed to work (i.e. if government granted union power or direct government interventions prevent the ajustment of prices and wages) the fall in output and the rise of unemployment will be much worse - and the problems will last much longer (till when and if something comes along to break through and allow the adjustments to be made).
Published: January 27, 2007 8:29 AM
JohnG:
You win the prize. The money supply was not cause the major cause of the depression. Stupid tariffs and labor laws caused the depression. The tariff shut down most international business leaving domestic business starved for parts and technology from outside the country and left consumers with fewer choices and less quality.
Add in other stupid ideas like minimum wage, make work and pro-union legislation and you have labor prices going up with profts going down combined with not external competition. In other words you get a rapidly slowing economy.
Published: January 27, 2007 12:36 PM
Bill,
Tariffs raise the price of domestic goods. Labor regulations and unions raise the price of labor. So, shouldn't we expect prices during the Great Depression to, well, go up?
Because that isn't what happened. Prices fell sharply at the start of great depression until 1933, after which they rose only slightly before falling again in 1937.
http://research.stlouisfed.org/fred2/series/CPIAUCNS?&cid=9
Clearly, your story does not explain all the facts. What are you forgetting? What would cause prices to fall?
Published: January 27, 2007 6:48 PM
To All:
As always, I thank you for your comments of whatever variety. In particular, I noted the comments written by “Student” who, I can attest from his words, has actually read Mr. Bernanke’s essay in question. (Kudos to you, Student!) He writes…
Are you reading the same article that I am? To me, it seems obvious that Bernanke is arguing that the deflation is caused by a collapse in aggregate demand. This is very different from a decline in prices due to technological innovation like the one you describe. One is accompanied by falling output; the other is accompanied by an increase.
But the particular negative consequence Bernanke was concerned with was that once deflation presses nominal interest rates to zero, the obligation of borrowers grows with deflation. The financial wows of these borrowers can further worsen the recession.
…and he is correct, up to a point. Mr. Bernanke did argue that “net creditors do gain from deflation and…the non-indexation of financial contracts…might in some way have been a source of the slow adjustment of prices”. Mr. Bernanke argues that the gold standard – adhering to it – prevents the political class from responding to “the complaints of debtors to intervene in the economy”. (p.33)
Yet Mr. Bernanke states in a footnote on page 32 that “non-indexation of financial contracts…is reasonable if the monetary authority is expected to keep inflation stable – an understandable assumption given the restoration of the gold standard”. (Emphasis mine.) In other words, we wouldn’t have gotten into this mess if the political class hadn’t been playing with the printing presses.
Deflation is not caused by a collapse in “aggregate demand”, falling prices are a monetary symptom, nothing more. Mr. Bernanke argues specifically that “reflating prices” was the key to getting the economy going again; in my opinion an incorrect argument.
Be that as it may, his thoughts on “debt-deflation” were a sideshow, and one he refuted himself in the above footnote.
Published: January 29, 2007 3:23 PM