Another Reason To Be Happy Hamilton Is Leaving the Ten Dollar Bill

When the Federal Reserve System Chairman who helped convince the intelligentsia that the only thing we have to fear is deflation itself and gave us quantitative easing for who knows how long

says he is "appalled" at the prospect of Hamilton's portrait leaving the ten dollar bill.

In a reversal of the old Debbie Boone line, it must be right if Bernanke feels it is so wrong. Bernanke's case for Hamilton is a list of how Hamilton worked to bring more of the economy under the sphere of the state and its central bank. That has not worked out so well.

Bernanke On the Defensive

Perhaps due to essays like mine, Ben Bernanke is on the defensive asserting that the Federal Reserve "didn't throw savers under the bus" as it drove the Federal Funds rate to virtually zero. Bernanke cites unnamed economists who argue that the natural rate of interest has fallen over the past two decades. On the one hand, I suppose we should be thankful that Bernanke recognizes there is something like a natural rate of interest that is not controlled by the Fed. On the other hand, the idea that it is zero seems unlikely. In light of Austrian Business Cycle Theory, it is not true that holding the interest rate artificially low promotes a healthy economy. Here is another example of how Fed rhetoric does not match economic reality, the subject of my contribution to The Fed at One Hundred: A Critical View of the Federal Reserve System.

Why Yellen and Bernanke Should Be Sleeping Better

Consumer prices rose in March at an annual rate of 2.4%, according to the BLS. As a writer at Bloomberg News reveals, "The Fed’s goal of 2 percent inflation has proved elusive as the economic expansion was slow to gain momentum." The writer reminds us that the goal of the Fed is to perpetually shrink the purchasing power of the dollar. She also reveals the standard Keynesian mindset that economic progress means higher prices due to the economy being "overheated." In fact this could not be farther from economic reality. Economic expansion, by definition, means increases in output. As the supply of various goods increases relative to demand, their prices fall not increase, as more eager sellers bid down their selling prices. Economic expansion makes society better off, because consumers enjoy the opportunity to buy more goods at lower prices. All of us, thereby have the ability to achieve more of our ends. If prices are on the rise--and they are--this is due to the Fed's bankrolling monetary inflation, not due to any real recovery.

Peter Klein on Bernanke's Lack of Tapering

My friend and economist (some of my best friends are economists) has a few remarks about Bernanke's recent announcement that the FED will not begin tapering down its balance sheet that it has built up during its grade experiment in quantitative easing.


As always Klein presents some provocative insights about where we are economically, namely in the first stages of another cluster of destructive malinvestment.  Wouldn't it be better, he asks, if capitalists and entrepreneurs could make investment and production decisions based on economic fundamentals and not have to forecast what one uber powerful central banker decides to do? He also comments on the Name-the-Next-Fed-Chairman game that is so popular these days. Klein is Executive Director and Carl Menger Research Fellow for the Ludwig von Mises Institute.

Bernanke Is Flexible on How Much to Hamper the Market

Ben Bernanke yesterday told Congress that he had no set time table about when to increase or decrease its bond purchases. What that means is that the FED remains untethered by sound economics as it seeks to promote economic recovery. Of course, Bernanke is not completely  flexible. He would never, for example, argue for a gold standard or for ceasing and desisting open market operations. On the contrary, given the FED deflation phobia, Bernanke's statement implies more of the same: an inflated monetary base, money pumping, and the audacious hope that massive excess reserves can be unwound without making price inflation worse or interest rates seriously increase.

What needs to happen, of course, is what I told the Sound Money Institute: Drastically cut government spending, reduce regulation, including Obamacare, stop subsidizing financial  institutions, stop inflating, and allow market participants to sort out which assets are productive and which are not, so they can be directed toward their most valued use, as determined by people in society.

Bernanke Is Killing Savers

Financially that is. Interest rates hit another all time low this past Monday. Yield on the 10-year Treasury note reached a whopping 1.46%. The average interest rate on a 5-year CD was 1.09%. It is as the Fed passed out to all of its governors t-shirts that read, "PLEASE do not save and invest."

10 Year Treasury Rate data by YCharts

Sadly, increases in savings and investment is precisely what an economy trying to recover from a bad recession needs more than ever. The malinvestment that culminated in the bust of 2008-09 resulted in massive capital consumption. What the economy needs is for our stock of productive capital to be rebuilt. This can only occur out of savings and investment. If the Fed is basically telling people not to save by keeping interest rates so low and by attempting to prop up unwise investments, we have should expect nothing other than anemic economic performance in the near future.

Jim Grant on Capital Account

Last Thursday, the ever-interesting and insightful Jim Grant, editor of Grant's Interest Rate Observer and author of one of my favorite books on economic history, Money of the Mind, was the guest for the entire Capital Account hosted by Lauren Lyster. Lyster's delivery is occaissionally over the top, but Grant is always worth listening to. In this interview he explains the importance of interest rates and how, despite paying lip service to market prices, Ben Bernanke manipulates the ratio of inter-temporal prices--the interest rate--every day. On top of that, Grant routinely sports top-drawer neck wear.

Have a Look:

Bernanke Tells Students We Need More Consumption

In his series of lectures entitled The Federal Reserve and the Financial Crisis he is delivering at Georgetown, Chairman of the Federal Reserve, Ben Bernanke keeps pitching them. In his first lecture, "The Origins and Mission of the Federal Reserve," he explained his views on the nature of central banking and his thoughts on the gold standard (he does not like the proposition).

In his second lecture, "The Federal Reserve after World War II" delivered Thursday, Bernanke said that U.S. households need to spend more on consumption in order to continue economic recovery.

“Consumer spending is not recovered, it’s still quite weak relative to where it was before the crisis. In terms of debt and consumption and so on we’re still way low relative to the patterns before."

This is the sort of analysis that is natural for people who mistake GDP for economic activity. Certainly increased consumption spending will boost GDP, but more consumption will not provide for sustained recovery. After the initial round of consumption, where will we get more consumer goods to consume again? Only if they have been produced. The larger the percentage of our income we spend on consumption, the less we save and invest and the lower our productivity.

After a period of capital consumption due to malinvestment encouraged by the central bank, the only way for the economy to get back on its way to economic expansion is via capital accumulation. That requires more saving not less, which means less consumption not more. Perhaps one of the reasons we got into the crisis is that people took on too much debt and engaged in too much consumption, while the Fed bank rolled the whole thing. If so, getting back to pre-crisis levels of debt and consumption is the last thing we need right now.

Amity Shlaes on the Meddling Fed

Readers of this blog know that the negative consequences of Federal Reserve driven inflation is a not infrequent topic for discussion. Amity Shlaes, columnist for Bloomberg, has just identified another way Ben Bernanke's Fed policy makes things worse. In her words Bernanke "tarnishes trust" with a new case in point being a white paper authored by the Fed Chairman. In the paper, Bernanke calls for banks to essentially rewrite mortgage rules in numerous ways in mid-stream, so that reducing borrower burden trumps the right of banks to foreclose.

Shlaes also nails a very important point.

The more general problem is that the Fed -- the bank, in game terms -- has been playing so prominently in the first place. Even if the new paper is only recommending what other authorities have already said, its very publication represents another signal from the Fed that it will keep its hand perpetually and unpredictably in the game, even in periods of recovery like the current one. Monopoly works best when the bank has no discretion: It pays $200 as you pass Go, and otherwise mostly keeps quiet.

Finally Shlaes rightly concludes that the Federal Reserve needs to just get out of the housing market and out of the "rest of day-to-day commerce." The more the Fed meddles, the longer the market is hampered. The longer the market is hampered, the longer it will take to get back on the path to true recovery.

Ron Paul Is Right To Criticize the Fed

Congressman Ron Paul

I have criticized a number of politicians and other members of the ruling class for not understanding what got us into our current economic mess and, consequently, for not knowing how to get us out of it. Readers of this blog will remember my criticisms of Ben Bernanke's monetary policy and President Obama's fiscal stimulus plan. I have also criticized the previous Bush Administration for setting the stimulus body in motion, for starting the commotion.

In yesterday's Wall Street Journal, however, there is an op-ed from Congressman Ron Paul. He is the lone presidential candidate who surely gets it right. The Fed is to blame for the financial crisis. Paul gets it right because he uses the best economic framework when analyzing economic policy. Citing Ludwig von Mises and F. A. Hayek, he draws on Austrian, causal-realist economics to explain how and why business cycles occur:

The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

Because Paul rightly sees our central money printing organization as the chief economic culprit, he also rightly calls for abolishing this important tool of the leviathan state. He concludes his essay by noting that giving a central bank monopoly over our monetary system is the antithesis of liberty:

What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

No other economic candidate even comes close to Paul's understanding of economic theory and policy.

Twisted, That's What You Are

The latest shoe to fall in the effort to appear like he's doing something to help the economic is Ben Bernanke's plan Operation Twist. It is a policy last tried by the Fed in the 1960s and is actually named for the Chubby Checker hit record. The Fed is basically re-balancing their portfolio to buy longer-term bonds with earnings from selling short-term bonds. The goal, ostensibly, is to lower long-term interest rates so as to encourage borrowing, thereby stimulating credit markets.

It will not have much effect on the money supply, because what the Fed giveth in open market purchases of long-term debt, it taketh away by open market sales of short-term debt. It literally only changes the types of assets held by the Fed. It does not alter the quantity.

Given that it will not actually affect the money supply, why would the Fed be doing this. On NPR this morning, an analyst said that it might help some people on the margins borrow money to finance a house. This is needed because evidently a 4.09% interest rate on a 30 year fixed mortgage is just too high. The analyst, recognizing the unlikely event that the plan will result in droves buying homes with newly borrowed money, said that it might help a few people move into larger homes that they could now afford with lower interest rates. And isn't that what we exactly what we need?!?. In a society drowning in debt, isn't the very best thing we can do is to encourage those on the margins to borrow even more money to get into a larger house? Are you kidding me?!?!

I think that the plan is a demonstration that Bernanke is grasping at straws. He recognizes that with short-term interest rates at or near zero, the only thing he has left is to try is to push already historically low long-term interest rates even lower. How's that malinvestment thing in short-term capital markets working out for you? Really, well lets do the same thing for long-term capital.

It's twisted. That's what it is. Forget Cubby Checker. Where's Stan Ridgway when you need him?

The Fed's Secret $1.2 Trillion in Loans

Bloomberg's "Inside Track" provide a sketch of where the money went when Bernanke's Fed went on its lending binge from August 2007 through April 2010. The numbers are, well, numbing. And it was not just American banks who were lining up for the cash. Several industrial companies got Fed money and billions wer even lent to foreign banks.


"Inside Track" reports that "The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup Inc. took $99.5 billion and Bank of America Corp. $91.4 billion. . . ." It is moves like this that enshrines 'too big to fail" as national policy.

QE Infinity

Ben Bernanke has announced that the Fed will hold interest rates at record lows until at least mid-2013. Predictably stock prices rose. It is clear now more than ever that the Fed sees its job number one as supporting security markets. Damn the malinvestment - Full speed ahead! The markets again put their faith in a man who has been wrong so many times before.



Perhaps be should be listening more to those who get it right: economists in the Austrian, causal-realist tradition. As Mises put it, for instance, back in 1931,

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.

A Structure Is Only as Durable as Its Foundations

Almost two weeks ago I had the privilege of speaking at a supporters reception hosted by the Institute for Principle Studies (IPS). IPS is a research and educational organization analyzing public policy from a distinctly Christian world view. At the reception I briefly explained my conviction that our current economic problems are due in large part to ideologies and ethics built on faulty foundations. A building supported by a crumbling foundation will not have very long to stand. So it goes with economic society.

We see evidence of this from the mouths and pens of well-respected members of the economics profession. It was Ben Bernanke who, fearful of deflation in the middle of last decade, convinced then Fed chairman Alan Greenspan to pursue serious monetary inflation during the mid-2000s. Paul Krugman continually calls for ever greater government spending to get us out of our current economic banana. To do his part, current Fed chairman Bernanke has increased the monetary base by $1.4 trillion. Recently, Christina Romer argued that if you want to reduce the budget deficit, raising taxes would be less painful than lowering government spending, because the multiplier is smaller for taxes that it is for government spending.

The common ideology that drives all of the above is what Robert Higgs called vulgar Keynesianism. In a nut shell, this economic ideology asserts that the economy is driven by spending--especially consumer spending. Additionally, the economy is conceived as merely the sum total of various aggregate variables. The simple Keynesian system asserts that Aggregate Demand = C + I + G, where C is consumption spending, I is business investment in physical production, and G is government spending. In equilibrium, this aggregate demand is equal to output, or aggregate supply equals aggregate demand.

As Higgs notes, one of the major failings of this conception is that all spending is considered equal. $1 million spent on baseball tickets is economically equivalent to $1 million spent on desktop computers. $1 million in corporate subsidies is equivalent to $1 million spent on housing construction.

Another key part of vulgar Keynesian ideology is that the chief end of the state is to provide full employment. If there is a drop in consumption spending or business investment that is significant to push us to an equilibrium income too low to sustain full employment, the state should stand by ever ready to fix the problem. It should either increase government spending, or increase the money supply to lower interest rates, thereby increasing business investment. Both would raise incomes and therefore also increase consumer spending. Because spending is spending, there is no concern that the money is spent productively.

When weighed in the scales of sound economics and ethics, vulgar Keynesianism is found wanting. An important reason why is that this pernicious ideology dehumanizes economics. It fails to recognize that all economic phenomena is the result of actions by persons made in the image of God. Human beings are rational actors who therefore engage in purposeful behavior. They are not merely cogs in a machine.

Our contemporary policy makers act as if they think they are economic masters of the universe. It is as if Geithner can pull the spending lever in just the right way and Bernanke can raise the monetary thermostat to just the right level so that all things will be coming up roses and daffodils. The economy, however, is not a hydraulic machine made up of inanimate cogs and tubes. It is a vast network of voluntary exchange by people who have wills that are free to do what they want.

Economic policy prescriptions are truth claims. As such, they are only as good as the economic theory upon which they are founded. Because economics is the study of human action, economic theory is only as good as the conception of human action upon which it rests. Likewise, an understanding of human action will only be as good as one's understanding of the nature of man, which means that, ultimately, sound economic policy advocacy depends to a greater extent than most people realize on our philosophy and theology. If we get our anthropology wrong, our economics will be less than satisfactory, which will lead, at some level, to errors in economic policy. 

The Fed Says Let the Bad Times Keep Rollin'

The Federal Open Market Committee announced yesterday that they will keep up record monetary stimulus after QE2 finishes. They correctly see that the economy is still stagnant and unemployment is still high. Ben Bernanke says the pace of recovery is "frustratingly slow." In a moment of honestly he revealed, “We don’t have a precise read on why this slower rate of growth is persisting.”

An important reason the Fed remains mystified is its basically Keynesian economic framework. This framework leads them to think spending, and especially consumer spending, is the driver of the economy. The monetary base remains at historically high levels, because the Fed thinks that by pumping such a large amount of money into bank reserves, banks will feel comfortable to lend, entrepreneurs and potential home buyers will feel comfortable borrowing, and spending will increase across the board. This, so the theory goes, will boost incomes and national GDP. It is the theory that we can achieve prosperity through printing press.

In fact, what drives the economy is voluntary savings and investment which funds capital accumulation, entrepreneurial activity, and research and development. Artificially lowering interest rates during QE ad infinitum merely perpetuates capital malinvestment, retarding productivity and prosperity. 

Also yesterday the always interesting James Grant provided some expert commentary on Fed policy on "In Business with Margaret Brennan" on Bloomberg TV.



He notes that what the Fed has in fact achieved through QE2 is a weaker dollar, a higher gold price, slower economic growth, and higher price inflation.. Additionally the Fed has managed the artificially prop up stock prices. In speaking to that consequence, he surmises that either the Fed owns the stock market or the stock market owns the Fed.

Dow Jones Index in Longest Slump Since 2002: What Gives?

Bloomberg News reports that the previous six weeks of continual stock market declines constitutes the longest slump since 2002. Longer even then anything in 2008. How is this possible? If Keynes, Bush, Obama, Romer, Paulson, Geithner and Bernkanke were right, this should not be happening. Over the past four years, the U.S. Government and its sponsored agencies have undertaken unprecidented fiscal and monetary stimulus. The media championed their moves as bold leadership made by people who were not going to sit on their laissez-faire hands while the financial system imploded. They said that government deficit spending would get the economy moving again by putting cash into hands of consumers, boosting consumer spending which supposedly makes up 70 percent of the economy. When GDP numbers increased, it was taken as a sign that the government experts were right, having saved us from financial Armageddon.

It turns out it just is not so. As I have written before, money cannot buy prosperity. Savings and investment and wise entrepreneurship? Yes. Inflation and government spending? No. We should not confuse GDP growth with economic prosperity.

Monetary inflation via credit expansion, which is the Federal Reserve's bread and butter, was able to prop up the financial system for a couple extra years. Doug French reports, however, that there is still trouble with a capital T which rhymes with B and that stands for Banking System. Increasing statistical evidence is mounting indicating that, even according to official numbers, the economy is not functioning well enough to put people back to work.

This is because credit expansion funded by monetary inflation instead of voluntary savings does not contribute to capital accumulation, but capital consumption through malinvestment. It funds an inflationary boom which makes it look like things are better than they are. As soon as the flow of new money slows, however, economic reality reasserts itself and several projects that looked profitable are revealed to be unsustainable and must be liquidated, ushering in another recession.

Thus it appears that the stock market may be running out of steam because of perceptions that the QE2 money has run out and Bernanke is not yet willing to commit to QE3. Without the artificial stimulus, the market may be correcting itself to expectations more in line with economic reality.

In his book, Money, Bank Credit, and Economic Cycles, Jesus Heurta de Soto explains how government intervention in the money market can manipulate the stock market. He writes:

Only when the banking sector initiates a policy of credit expansion unbacked by a prior increase in voluntary saving do stock market indexes show dramatic and sustained overall growth. In fact newly-created money in the form of bank loans reaches the stock market at once, starting a purely speculative upward trend in market prices which generally affects most securities to some extent. Prices may continue to mount as long as credit expansion is maintained at an accelerated rate. Credit expansion not only causes a sharp, artificial relative drop in interest rates, along with the upward movement in market prices which inevitably follows. It also allows securities with continuously rising prices to be used as collateral for new loan requests in a vicious circle which feeds on continual, speculative stock market booms, and which does not come to an end as long as credit expansion lasts. As Fritz Machlup explains:

If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, the boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted.

Therefore (and this is perhaps one of the most important conclusions we can reach at this point) uninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis (pp. 461-62).

These words of Heurta de Soto are, as they say, as timely as today's headlines.

James Grant on the Fed and Our Prospects for Inflation

As I've said before, I think James Grant is one of the best financial commentators working today. He is always full of insight, turns a phrase better than anyone in the business, and has a knack for using the fascinating historical anecdote in just the right way. He also tends to bring a proper sense of moral unction to issues of monetary policy. On top of that, you can count on his displaying proper neck wear.

He was recently interviewed by Consuela Mack of Wealthtrack and was as thought-provoking as usual. (Note: You'll have to wade through an opening commercial to get to the program).



Grant ably explains that real inflation is not rising prices, but an increasing money stock. He rightfully criticizes Fed Chairman, Ben Bernanke for seeking to prevent what every consumer wants: lower prices. He also notes that whenever the money supply increases, prices are higher then they otherwise would be somewhere. If not in housing, then in commodities, food, energy, or equity stocks.

Thornton on The Lehman Brothers Plan: What to Do in a Recession

In chapter 13 my book Foundations of Economics, I discuss the issues of recession and inflation. Following Mises and Rothbard, I explain that recessions are the necessary consequence of inflationary booms. I also lay out what I believe to be the best policy for economic recovery possible. Economic theory teaches that in order to recover from a recession and quickly as possible, we should stop inflating, reduce government spending, cut taxes, and allow the market to freely operate.

In an excellent essay on Mises.org, Mark Thornton comes to the same conclusion. He does so in the context of the Lehman Brothers' bankruptcy and therefore designates his recovery prescription, "The Lehman Brothers Plan."

Government should balance its budget. There should be no new credit expansion by the Federal Reserve. Most importantly, government should not meddle in markets to try to soften the consequences of the correction. Specifically, that means no bailouts, stimulus packages, or new public-works projects. Do not prop up wages. Allow competition to lower the prices of land, labor, and capital. The only positive steps for government to take are implementing tax cuts and spending cuts, eliminating regulations, and allowing free trade.

He also does a masterful job concisely responding to claims that such a policy would hurl us into a deflationary death spiral. Treat yourself to Thornton's masterful economic commentary.

Ritenour on The Matter at Hand

Earlier this month I was a guest on WGRC's The Matter at Hand. WGRC is a Christian radio station that broadcasts over seven frequencies and reaches thirteen counties in central and eastern Pennsylvania. Don Casteline interviewed me about general economic conditions, price inflation, the CPI, our government budget woes, and our willingness to save. We discussed these issues within an economic and Christian ethical framework. They kindly have allowed me to post a recording of my segment on this blog. You can listen to it by clicking here.

The Core Inflation Fudge

Over at Forbes Brian Domitrovic has caught on to what I've been saying about inflation. He reports that Ben Bernanke's handlers have told the Fed Chairman to stop using the term "core inflation" (as opposed to overall inflation), and instead use "headline inflation" versus "underlying inflation."

Domitrovic then goes on to explain what verbal subterfuge it all is. He writes:

[T]he consumer price index for the first quarter of 2011 came in at an annual rate of 6%. This is a level last hit for the year in 1982 and was the very rate in 1976 and 1977: the bad old days of stagflation. And wouldn’t you know it, our GDP and employment growth stinks right now too. If they make a TV program about our day and age, they should call it “That ’70s Show.”

He is especially to be commended for identifying the cause of higher overall prices: increases in the stock of money.

Central bankers’ prodigality has caused this situation. Quantitative easing and such leads people to doubt the value of the dollar and makes producers mark prices up. Yet the Fed’s tactic in the face of this reality is to play word-games. Inflation is not beginning to ravage the land, the argument runs, in that “core” – ok, “underlying” – inflation isn’t so bad. If you take out food and energy, “headline” stuff, everything’s normal.

Well I guess so then. But nourishment and movement are precisely the two things that Aristotle said distinguish animals first from rocks and then plants. These are not trivial categories of goods, as nobody needs to be told. And it’s not just food and energy. Look at raw materials beyond those used for energy: all up in price. Gold leads the way at $1500 an ounce.

My only quibble would be to note that it is not only doubts about the future value of the dollar that causes producers to increase their minimum selling prices. It is also, primarily, actual increases in the demand for goods as people spend the new money that has been created.