Bernanke the Sophist: The Deception Behind QE
(May 16, 2014)
Bernanke's legacy: a deceptive case for a failed policy.
Sophistry: the use of fallacious arguments, especially with the intention of deceiving. The Federal Reserve's core policy of quantitative easing (QE) is based on a deceptive but appealing argument voiced by former Fed Chair Ben Bernanke.
Longtime correspondent Harun I. explains the fallacy of Bernanke's case for QE.
Most times I leave people to their flawed ideas because in most cases, it is not what you believe that is most important but that you live in congruence with your beliefs. But this came up in conversation the other day, and since this belief is affecting us all, it must be examined.
Bernanke in 2001:
"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost [emphasis is mine]. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.”
I pointed out what should have been obvious: There is nothing limitless and therefore nothing can be made in unlimited quantity. And since whatever material is being used in the conversion is not unlimited, it is now subject to the scarcity laws of supply and demand. For example, if lead was successfully converted to gold, lead, which exists in limited quantities will appreciate in value. Lead would have to supply the demand for its current use and now the conversion of gold which still has many important uses. Effectively, lead becomes the new money.
I went on: Didn’t we learn this lesson from ethanol? Corn is something we consume or use as feed for livestock. The second we decided to divert that output to our gas tank, its price appreciated.
In the next paragraph of Bernanke the Sophist’s speech, I will interject some clarification (in the interest of calling a thing what it is).
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press [deficit spending, borrowing money at interest from banks it is supposed to regulate] (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars [destroy the value of labor: force the same expenditure of calories for fewer calories in return] as it wishes at essentially no cost.
By increasing the number of U.S. dollars in circulation [by forcing people to work the same or harder for less], or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services [he is kind enough to state it plainly right here: reduce the value of labor (energy expended)], which is equivalent to raising the prices in dollars of those goods and services [forcing people to work the same or harder for less].
We conclude that, under a paper-money system, a determined government can always generate higher spending [force people to work the same or harder for less by deficit spending, borrowing money at interest (which becomes a perpetual debt) from banks it is supposed to regulate] and hence positive inflation.
The implied conclusion is that to increase productivity (have stable prices and full employment) we must decrease the ability to buy products. Or, to have a normal and vibrant economy we must decrease living standards. Great. We can all be chuffed to bits that he’s cleared that up. In 2001, Bernanke the Sophist explicitly laid out the blueprint for too many promises. The Bail-In was already stated as policy over a decade ago. Why is everyone so surprised about the growth the wealth gap?
Why is there so much angst directed at the wealthy? It is government policy to reduce purchasing power.
If I am hired as a fiduciary, my first duty to protect my client’s wealth, to make sure his $50 million buys as much ten years from now as it does today. He doesn’t really care about becoming more wealthy. Governments hate this because they need that purchasing power. In general, the poor and middle class have no means to escape government’s exponentially growing need for revenue, nor do they understand the subtleties with which government bleeds them of their purchasing power.
As I have stated, the effects of Bernanke’s (the Fed) (and government’s) rather specious reasoning are already causing the disintegration of this “system”. It never mattered what pill was chosen (green or red). Illusions, the red pill, are necessarily ephemeral. We can never get around the physical laws of nature that bind human activity and therefore bind human interaction.
Thank you, Harun, for this explanation of Bernanke's legacy: a deceptive case for a failed policy.
Administrative note: email responses will be near-zero for the next week or two.
Thank you for your understanding.
Get a Job, Build a Real Career and Defy a Bewildering Economy (Kindle, $9.95)(print, $20)
Are you like me?
Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.
And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.
Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.
So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.
It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.
I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a
Bewildering Economy. It is rare to find a person with a mind like yours, who can take
a holistic systems view of things without being captured by specific perspectives or
agendas. Your contribution to humanity is much appreciated."
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
"You shine a bright and piercing light out into an ever-darkening world."
Or send coins, stamps or quatloos via mail--please request P.O. Box address.
Subscribers ($5/mo) and those who have contributed $50 or more annually (or made multiple contributions totalling $50 or more) receive weekly exclusive Musings Reports via email ($50/year is about 96 cents a week).
Each weekly Musings Report offers five features:
At readers' request, there is also a $10/month option.
What subscribers are saying about the Musings (Musings samples here):
The "unsubscribe" link is for when you find the usual drivel here insufferable.
Dwolla members can subscribe to the Musings Reports with a one-time $50 payment; please email me if you use Dwolla, as Dwolla does not provide me with your email.
The Heroes & Heroines of New Media:
oftwominds.com contributors and subscribers
All content, HTML coding, format design, design elements and images copyright © 2014 Charles Hugh Smith, All global rights reserved in all media, unless otherwise credited or noted.
I am honored if you link to this essay, or print a copy for your own use.