Bernanke’s Pickle

What a pickle Fed Chairman Ben Bernanke is in!

Mr. Bernanke is on record for unequivocally stating that he knows how to avoid a deflationary outcome. He cavalierly dismissed any possibility of that happening a few years back. He cited printing presses and helicopters as weapons to combat the evil dragon of deflation. Yet, after the greatest monetary and fiscal stimulus in the history of the world, nothing good has happened. Mr. Bernanke has used more helicopters than fans of “Mash” reruns have ever seen.

The Daily Reckoning described Mr. Bernanke’s plight:

The consumer price inflation level – as measured by the government – has now dropped down to 0.5%. And many economists think it will go negative soon.

Hmmm… This leaves Mr. Bernanke in a tight spot. It looks like deflation is happening here. And it is happening after Ben Bernanke has already used most of his tricks to stop it. The Fed is lending money at 0.25% interest – effectively zero. What’s it going to do next? Pay you to take the money?

If Bernanke allows deflation to happen…and persist…he will have Congress on his back. The Fed is supposed to be independent. But every Fed member knows which side his bread is buttered on. And no one doubts where the butter comes from – the US Congress and the administration. And everyone also knows that there will be mid-term elections this year.

We may be dropping into Mr. Bernanke’s hell of deflation. The system has been flooded with money and interest rates have been lowered to almost zero. Nothing is happening. This condition was believed impossible by Mr. Bernanke and many others. He was an expert on the Great Depression which, in his mind, was caused by falling prices and too tight monetary policy. He promised Milton Friedman that he would not allow the Fed to make the same mistakes again. Yet despite his unprecedented efforts, the downward bias to prices appears eerily similar.

As this crisis plays out, two sub-plots are apparent.

The first is the slow, but long overdue, death of the notion that an economy can be managed via macroeconomics. Both Keynesianism and Monetarism  are paradigms that don’t work and never worked in this regard. These “theories” were never properly assessed. Correlation was assumed to be causation. Yet, every statistics course emphasizes the difference: Roosters crow when the sun comes up; they don’t cause the sun to rise.

The second sub-plot is the tragedy of a supposedly intelligent, educated and decent man who knows something is wrong and is unable to fix it. It is painful to see Mr. Bernanke’s self-doubts overcoming what was once classic Princeton arrogance. Despite his training and polish, Mr. Bernanke is slowly becoming a caricature.  His “unusually uncertain” phrase is likely to be remembered as his legacy. What a contrast from the hubris with which he entered the job.

Mark Twain’s down-home wisdom appears applicable to Mr. Bernanke:

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so

As Mr. Bernanke searches desperately for a “solution” that is not there, either under his brand of magic or true economics, he becomes a tragic figure. He, in the eyes of the masses, is supposed competent and powerful. As our economy fails to respond, presumably it is due to errors of commission by the great Witch Doctor of the Fed.

Mark Twain again provides the appropriate description of Mr. Bernanke’s plight:

It is better to deserve honors and not have them than to have them and not deserve them.

While Mr. Bernanke will be the central character in history’s telling of our Greatest Depression, his predecessors are responsible for his coming infamy. They created the impossible situation in which he is trapped.

As matters continue to deteriorate pressure will mount politically. Mr. Bernanke will be forced to his “weapons of mass destruction” — tools never before used and likely not even imagined by clear-thinking economists. Mr. Bernanke will beat deflation, one way or the other. In doing so, the country will lose enormously. Perhaps everything!

Mr. Bernanke has defined his goal. He just hasn’t achieved it yet. He will! Prepare for high inflation, if not hyperinflation. It is likely that not too far down the road we will be wondering why we thought deflation was an evil.

We learned a new word in the late 1970s when the impossible, according to Keynesian theory, happened.  Stagflation was the simultaneous occurence of inflation and no growth in the economy. Enterprising wordsmiths should start working on the next new word to describe the simultaneous occurrence of depression and hyperinflation. Keynesians will tell you that is impossible. Time is likely to prove that it is not.

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