Note to Ramesh Ponnuru: Listen to Bernanke

[Spengler]

Note to Ramesh Ponnuru: Listen to Bernanke on the Spengler Blog


by David P. Goldman


Ramesh Ponnuru, one of the smartest conservative commentators, finds some of the arguments for a second round of quantitative easing "persuasive." A 2% inflation rate wouldn't be so bad if the Fed could achieve it, he observes today at the NRO site.

But read what Bernanke actually said:

Stock prices rose and long-term interest rates fell when investors began to anticipate this additional [quantitative easing] action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Just the opposite occurred: Stock prices since have tanked and long-term interest rates have risen. That began in earnest at last week's G20 meeting in Asia, when some of America's biggest creditors (the ones who have been buying US Treasuries at a $900 billion annual rate this year) said they might impose exchange controls to keep out the septic tide of dollars.

Bernanke (and the economists Ramesh is reading) think in terms of a closed-economy, one-period model: force a negative rate of return on cash and investors will shift their portfolios into stocks and long-term bonds, creating the wealth effect of which Bernanke wrote. But this is NOT, NOT a closed economy. The US is part of the world economy and the dollar is the world's reserve currency. Shoving more and more money into the world market--increasing the dosage of amphetamines because the patient remains unresponsive--has consequences. These might include exchange controls and severe damage to free markets.

When investors see that sort of thing happening, they decide to accept a small negative return on cash in order to avoid a big negative return on risk assets. And that's what we saw when the world refused to foot the bill for QE2--also known as Titanic One, as I said last night on CNBC's The Kudlow Report.

[Walter Sobchak]

Many years ago, when I took introduction to economics at the U of Chicago in the mid-1960s, Milton Friedman explained the Fisher equation to us. M*V = P*Q, where, M is the quantity of money, V is the velocity of money, P is the price level, and Q is the quantity of transactions. Mr. Friedman said at that time that V is exogenous to the system. and is based on the banking system and social habits.

Since that time, a lot has changed. The banking system has assumed a completely different configuration than it had 45 years ago. E.g., there were no interstate branch systems back then. Money market accounts were invented. Credit cards expanded greatly and debit cards have become nearly universal. Then there are the revolutions in communication and computation.

I would argue that V is not only mutable, but, in an inflationary environment, it could increase quickly and exponentially. This means that if there are excess reserves and currency in existence, and inflation is perceived to be a problem, increasing V could turn it into hyper-inflation in a heartbeat.

It seems to me that the Fed is putting more gasoline into the tank and praying that no one throws in a match. I don't think it is wise.

Nassim Taleb doesn't think it is wise either.

Nassim Taleb: "The Fed's Business Is Price Instability"
Submitted by Tyler Durden on 11/12/2010 11:44 -0500

... I don’t mind someone saying this is a policy, these are the risks, these are the returns, let’s see how it works. Bernanke does not seem to be taking that approach. He is someone who talks about returns without talking about risk. It’s identical to a pilot who is talking about speed -- not talking about safety. The measures he is using, this quantitative easing, may work but should it fail the risks are humongous.”

* * *

"You short an out of money option on hyperinflation…The point is that you may print, print, print or do these devious methods to hide that you’re printing, but it won’t have any effect. Just like a ketchup bottle that you pour and nothing comes out. And then you make a statement like Bernanke saying you have evidence that this is working, that there is no risk, and then suddenly, just like an out of money option, the whole ketchup coats your French fries, everything, the whole table, your face, everything.”

* * *

“Assuming there is a very small risk, who is bearing that small risk? Retirees. The debasement of the currency is something that would be borne by those who were the victims will not be the ones who benefited from the crisis. The thing is that you’re trying to print money to bail out those who have made mistakes by taking a mortgage that they shouldn't have taken…and by bankers. Who is paying the price? Retirees. And you’re debasing the currency and people who hold your currency. It’s an insult to those who have bought dollars in the past."

* * *

"People want a free lunch. It reminds me of people who lose money in the market and when I was an option trader, people would call me up and ask for a magic way to make their money back. That’s what the Obama team is doing. Instead of accepting that we have a risk problem, we have lost money, and you don’t double up with future generation’s money either by increasing deficits and or debasing the currency. You have to face the saying that there is no free lunch."

[Michael]

Perhaps, the Fed believes it can curb runaway inflation by raising interest rates and selling off its holdings of government stock. I do not say this is right, but it may be partof their thinking

[Simple Minded]

Many years ago, when I took introduction to economics at the U of Chicago in the mid-1960s, Milton Friedman explained the Fisher equation to us. M*V = P*Q, where, M is the quantity of money, V is the velocity of money, P is the price level, and Q is the quantity of transactions. Mr. Friedman said at that time that V is exogenous to the system. and is based on the banking system and social habits.

Since that time, a lot has changed. The banking system has assumed a completely different configuration than it had 45 years ago. E.g., there were no interstate branch systems back then. Money market accounts were invented. Credit cards expanded greatly and debit cards have become nearly universal. Then there are the revolutions in communication and computation.

I would argue that V is not only mutable, but, in an inflationary environment, it could increase quickly and exponentially. This means that if there are excess reserves and currency in existence, and inflation is perceived to be a problem, increasing V could turn it into hyper-inflation in a heartbeat.

It seems to me that the Fed is putting more gasoline into the tank and praying that no one throws in a match. I don't think it is wise.

Excellent points! V is the key. The Elliott Wave Theorists claim the dominant social mood of either optimism or pessimism is the prime mover. Pessimistic people don't spend, don't invest, and don't borrow. They reduce spending and pay down debts. Expectations are the cause and inflation or deflation are the effects. This makes more sense to my simple mind than a purely mechanical effect created by the quantity of money or available credit. Once the herd is spooked, it could move rapidily in either direction.

A. Gary Shilling sums his view:
Nine Causes of Global Slow Growth in Future Years
1. US consumers will shift from a 25 year borrowing and spending binge to a savings spree. This will spread abroad and curtail imports that other countries depend upon for economic growth.
2. Financial deleveraging will reverse the trend that financed global growth in recent years.
3. Increased govt. regulation and involvement in major economies will stifle inovation and reduce efficiency.
4. Low commodity prices will limit spending by commodity producing lands.
5. Developed countries are moving toward fiscal restraint.
6. Rising protectionism will slow or even eliminate global growth.
7. The housing market will be weak due to excess inventories and loss of investment appeal.
8. Deflation will curtail spending as buyers anticipate lower prices.
9. State and local govts. will contract.

I surely don't know....

[Frodo]

Of course Ben Bernanke understands that the U.S. is an open economy. QE will make the exchange rates more favorable to exporters, which will increase jobs in the export sector and in industries facing competition from imports.

This is really quite simple. You really shouldn't accuse Ben Bernanke of not understanding economics.

[Frodo]

Perhaps, the Fed believes it can curb runaway inflation

Runaway inflation? Inflation hasn't been so low in 80 years.

[Terry]

With the printing presses running into over drive we will eventually get inflation, the official figures don’t show it, you only need to walk around the malls and see how far prices have risen since the summer. The one development which is occurring now is that the US and all importing economies are importing inflation. Just as 5 to 10 years ago we imported low inflation we are now importing high inflation. The growing middle classes in Brazil, China and India are now in the market for consumer goods, which pushes up the prices for these goods in the US. So inflation is here even though the statistics don’t show it.

[Frodo]

With the printing presses running into over drive we will eventually get inflation, the official figures don’t show it, you only need to walk around the malls and see how far prices have risen since the summer.

If prices have risen so much, the official figures would show it.

The one development which is occurring now is that the US and all importing economies are importing inflation.

Inflation hasn't been so low . . . I shouldn't have to repeat myself so much.

Just as 5 to 10 years ago we imported low inflation we are now importing high inflation.

See above.

The growing middle classes in Brazil, China and India are now in the market for consumer goods, which pushes up the prices for these goods in the US. So inflation is here even though the statistics don’t show it.

Yeah, and it's a hundred degrees outside even though the thermometer doesn't show it.

[CognitiveDistoibance]

Official figures ... figure.

The CPI Is Broken. Here's Why.

...

Any index that is 40% fed by problematic information will be at least 40% problematic in its result. Make no mistake: The implications of a poorly calibrated CPI are huge. If the CPI is used to make decisions on topics as important as inflation, and it's not accurately capturing the financial realities of Americans, there's a big problem. I believe housing lies at the root of the CPI's troubles.

Gee, with the serious deflation going on in housing, at 40% that would be more than enough to bury a whole lot of inflation in like, everyday recurring expenses.

[Marcus]

. . like, everyday recurring expenses.

Gas here just went up four-cents a gallon.

[Simple Minded]

. . like, everyday recurring expenses.

Gas here just went up four-cents a gallon.

Did ya ever notice that old people are obsessed with the price of gasoline?

It is one of their favorite subjects!

[Simple Minded]

Official figures ... figure.

Gee, with the serious deflation going on in housing, at 40% that would be more than enough to bury a whole lot of inflation in like, everyday recurring expenses.

CD, you nailed it! You realy are a fart smeller (ooops, dyslexia...). Hopefully the politicians will catch on soon.... unwarranted optimism?

I think we will see significant inflation in the price of small necessities (food, clothing, energy, etc.) and significant deflation in the price of large items (cars, land, houses, etc.) usually bought with a loan.

Pessimistic people do without!

Gramma: "If you never try it......... you'll never miss it!"
Dad: "You want what? Then get a job!.......Well, then learn to do without!"

Weird, it is almost like their generatons had...... been there, and done that! I think your grandchildren will be a lot like your grandparents.....

http://www.youtube.com/watch?v=hzElnBgsr0s

[Marcus]

. . like, everyday recurring expenses.

Gas here just went up four-cents a gallon.

Did ya ever notice that old people are obsessed with the price of gasoline?
It is one of their favorite subjects!

Too funny, SM . . at $3.78/gallon you'd take notice too regardless of how wet behind the ears you might be.

********************

CD: Well-noted. Always did figure you for a pretty "smart feller."

[Alexis]

at $3.78/gallon you'd take notice too regardless of how wet behind the ears you might be.

$3.78 per gallon... doesn't that translate into 0.76€ per liter?

You don't know your luck ! Here the lowest price for gas is more like 1.40€ per liter.

[Marcus]

at $3.78/gallon you'd take notice too regardless of how wet behind the ears you might be.

$3.78 per gallon... doesn't that translate into 0.76€ per liter?

You don't know your luck ! Here the lowest price for gas is more like 1.40€ per liter.

That's the price here where I live in Alaska, Alexis. Prices in the lower-48 are less. We're a spoiled bunch, we Americans; if we had to pay your prices, we'd squall like stuck hogs and riot in the streets.

In so many ways, we haven't a clue . . . where's AzariLoveIran when we need him?