The Bernanke Bust

[hoost]

I came across this article yesterday and found it interesting.

The Bernanke Bust

We think this kind of monetary largesse guarantees an economic bust. In fact, given the size of the monetary surge so far, it's quite possible that the bust will rival the size and intensity of housing boom-bust turned Great Recession. Worse still, we could be looking at something even bigger than that.

It makes a pretty bold prediction that I thought would be fun to look back on later as the future unfolds, especially given the recent Austrian/MMR-MMT debates on the forum.  We'll see if these guys have it right or not. 

The interesting thing, and one that HB pointed out a lot, is you may think you know what will happen, but even if you do know what will happen you might not always know when it will happen.  They also suggest a when, but not necessarily a date:

Don't tell me what; tell me when, right? Enter the trigger that will turn the Bernanke boom to bust: a cessation, even a marked deceleration in the rate of money creation.

Further:

You might ask, What if the money supply continues to boom ad infinitum, even if that simply means Chairman Bernanke is the last man standing at the printing press? Could the Bernanke bust then be avoided? Delayed yes, avoided no. The endgame in this case would be a bust too; only this one would be the result of an inflationary collapse of the US dollar.

Again, pretty bold predictions.  Should be interesting to keep an eye out for either of these "triggers" and see if things play out like they say they will.

[Gumby]

It's hard for me to take Austrians seriously when they think that Bernanke has the ability to cause rampant inflation — when in fact he can only conduct swaps with the private sector.

If you can grasp the idea that Treasuries represent our private sector's savings (they certainly represent MY savings) then it becomes clear that the Fed doesn't really have the power to create much inflation — other than making an environment that's more favorable to private credit creation.

How long have Austrians and Monetarists been predicting high inflation for now?? It's a string of 30-somewhat years of bungled inflation calls. While Austrian economics has a lot to offer, I think you'll find a lot of it requires one to "keep waiting, you'll see" to maybe see their wild predictions come true. Frankly, I don't see how people have that kind of faith when those predictions almost never seem to come true with developed currency issuers. Not that anyone can predict the future, but I'd much rather have a clearer perspective about what's more likely to happen next year...

[moda0306]

Gumby,

Another one of those mental tests I like to do to "prove out" the importance of balance sheets, not just M1 or M3...

Imagine there was another $1 Trillion of QE.  A bunch of bonds yielding 0-.5% were traded for pure cash.

Now imagine that another $1 trillion of stimulus checks were sent out today.  That's about $9,000 to each household in the country.

Which would have a greater affect on inflation?

The latter.

[MediumTex]

If money doesn't get into the hands of consumers there won't be won't be any serious inflation.

I think that's what inflationists have been missing for years.

If you look at the inflation of the 1970s, one feature of it was that wages were rising.  In more recent times, wages have barely moved at all for many workers.

[Gumby]

Which would have a greater affect on inflation?

The latter.

Good one.

I also find that Austrian economics is steeped with political rhetoric and political agendas.

I don't like to generalize, but I see the richest of Austrians as having donated lots of money to create an "institute" devoted to Ludwig von Mises where the supporters dress up in bow-ties and hold soirées to the tune of their Bösendorfer piano, along with an elaborate website, in order to convince people that the government should spend less — thus preserving the own amassed fortunes in the process.

I know that's a terrible generalization, but I think there is a grain of truth in there. Spend a few minutes looking at old articles on mises.org and you'll find lots of monetarist-esque Bernanke and Fed bashing, with wild claims of hyperinflation just around the corner to convince people to support Austrian-friendly policies. It's total BS. Hyperinflation isn't going to come from the Fed.

I'm all for a smaller government, but the private sector's savings (i.e. Treasuries) come from government spending. People who say we need to save more and have the government spend less are talking out of both sides of their mouth.

[moda0306]

I'm all for a smaller government, but the private sector's savings (i.e. Treasuries) come from government spending. People who say we need to save more and have the government spend less are talking out of both sides of their mouth.

Well investment creates savings, but investment, in aggregate, won't occur unless there is sufficient demand.  If ther's evidence against this, I'd love to see it.  Are there historical instances where aggregate demand is 80% of capacity and significant aggregate investment occurs?

Seems to me that would be akin to a factory adding on an addition and hiring new workers (to simply do more of what's already being done) when the existing factory is only at 80% of capacity... seems a bit off to me.

[Gumby]

Well investment creates savings, but investment, in aggregate, won't occur unless there is sufficient demand.  If ther's evidence against this, I'd love to see it.

Yeah, but investment via ballooning private credit isn't exactly a good thing. It tends to lead to a 1930s/2008 style crash.

Are there historical instances where aggregate demand is 80% of capacity and significant aggregate investment occurs?

No idea.

[hoost]

My main point for posting this here is to make note of this prediction, and also point it out to the MMR'ers (success  ), so that we can see what happens.  HB always said that most people making predictions cherry pick their predictions and results; I wanted to bring this guy's predictions to light here ahead of time so that we can watch and see if there's any credence to it.

I've read some background information from him before, and the line of logic makes sense to me.  Bear in mind that this guy actually writes for Forbes, not the Mises Institute.  Mises just picked up his article and reposted it.  The basic premise is that increasing the money supply (as defined below) causes booms, and when the rate of increase of the money supply slows, a bust results.  The current rate and magnitude of increase in the money supply (as defined below) is roughly equal to that which preceded the housing bust.  He thinks that if the rate of growth slows, the result will not be good.  For me, I'm not sure; like I said, the line of reasoning is intuitive to me.  We'll see how it holds up in the real world.

Reference:  Austrian Money Supply - Michael Pollaro

[hoost]

I also find that Austrian economics is steeped with political rhetoric and political agendas.

I don't like to generalize, but I see the richest of Austrians as having donated lots of money to create an "institute" devoted to Ludwig von Mises where the supporters dress up in bow-ties and hold soirées to the tune of their Bösendorfer piano, along with an elaborate website, in order to convince people that the government should spend less — thus preserving the own amassed fortunes in the process.

I think there is a lot of my-side bias here.  I'm not going to disagree, but I will point out that this is probably true of any cause, economics related or otherwise, anywhere.

The richest of Republicans and the richest of Democrats (whatever other groups you want to place people in) are doing the same thing (whether they're standing around pianos wearing bow-ties may vary depending on the cause).

This is not unexpected or even necessarily bad.  People can and should support things that they believe in.  People will support things they view are in their best interest.

[hoost]

If you can grasp the idea that Treasuries represent our private sector's savings (they certainly represent MY savings) then it becomes clear that the Fed doesn't really have the power to create much inflation — other than making an environment that's more favorable to private credit creation.

I'm all for a smaller government, but the private sector's savings (i.e. Treasuries) come from government spending. People who say we need to save more and have the government spend less are talking out of both sides of their mouth.

It still seems to me that you are suggesting that the government creates wealth by spending money into existence.  I don't understand that.  As I understand it, the government can only transfer wealth.  It doesn't make the pizza bigger, it just changes the size and distribution of the slices.

[Gumby]

If you can grasp the idea that Treasuries represent our private sector's savings (they certainly represent MY savings) then it becomes clear that the Fed doesn't really have the power to create much inflation — other than making an environment that's more favorable to private credit creation.

I'm all for a smaller government, but the private sector's savings (i.e. Treasuries) come from government spending. People who say we need to save more and have the government spend less are talking out of both sides of their mouth.

It still seems to me that you are suggesting that the government creates wealth by spending money into existence.  I don't understand that.  As I understand it, the government can only transfer wealth.  It doesn't make the pizza bigger, it just changes the size and distribution of the slices.

What I'm saying is that government spending has created $15 trillion of real savings for the private sector (not talking about private credit that must be repaid). But, those savings represent real goods and services that people created with their own blood, sweat and tears.

[Gumby]

I also find that Austrian economics is steeped with political rhetoric and political agendas.

I don't like to generalize, but I see the richest of Austrians as having donated lots of money to create an "institute" devoted to Ludwig von Mises where the supporters dress up in bow-ties and hold soirées to the tune of their Bösendorfer piano, along with an elaborate website, in order to convince people that the government should spend less — thus preserving the own amassed fortunes in the process.

I think there is a lot of my-side bias here.  I'm not going to disagree, but I will point out that this is probably true of any cause, economics related or otherwise, anywhere.

The richest of Republicans and the richest of Democrats (whatever other groups you want to place people in) are doing the same thing (whether they're standing around pianos wearing bow-ties may vary depending on the cause).

This is not unexpected or even necessarily bad.  People can and should support things that they believe in.  People will support things they view are in their best interest.

Right, but MMR doesn't have a political bias because it is a framework for fiat money that can be used to support conservative/liberal big/small goverent initiatives. It just describes how the system works in terms of spending/savings/assets/etc. There are conservative MMRers (one could argue Cheyney understood MMR based on the things he said) and liberal MMRers. Austrian economics has a specific agenda tied to it in that all government spending is bad (which makes no sense when you realize that the government creates real private sector savings).

Now MMT does have a liberal political bias because it recommends the Job Guarantee as a way to maximize productive capacity in the private sector. MMR has no such recommendations, and that's why I prefer it. You can come up with any plan you want with the knowledge it gives you. Whereas Austrian economics has a very specific agenda that made more sense when our country was revenue constrained.

[Pointedstick]

If you can grasp the idea that Treasuries represent our private sector's savings (they certainly represent MY savings) then it becomes clear that the Fed doesn't really have the power to create much inflation — other than making an environment that's more favorable to private credit creation.

I'm all for a smaller government, but the private sector's savings (i.e. Treasuries) come from government spending. People who say we need to save more and have the government spend less are talking out of both sides of their mouth.

It still seems to me that you are suggesting that the government creates wealth by spending money into existence.  I don't understand that.  As I understand it, the government can only transfer wealth.  It doesn't make the pizza bigger, it just changes the size and distribution of the slices.

As an Austrian, I used to believe this too. The key thing to understand is that going off the gold standard broke many of the monetary rules that traditional Austrian economics relies on. The government is not able to create real wealth (it is a parasite after all), but it is able to create money that is more stable than private credit. In a world where the currency is not backed by anything other than promises, it's better to have it backed by the promises of a sane government than by the promises of a corrupt, virtually-nationalized banking industry.

However, this whole new monetary system ceases to work the more insane the government is. When the government creates dramatically more money than there is real wealth in the private sector, or when the government actively harms the private sector and destroys real wealth, then you have a recipe for social misery and hyperinflation e.g. Zimbabwe.

The big problem with MMR in my eyes is that by adopting the whole "governments ought to do X" fallacy, it does not acknowledge just how insane most governments actually behave. The Governments of the United States, Japan, the UK, etc. are, despite their flaws, shining exceptions in a world full of dramatically worse governments populated mostly by thugs and killers who view their posts as protected positions from which to steal and murder. I have lived in an African country where this was very much the case for example, with police and soldiers being indistinguishable from organized crime. The government systematically oppressed the weak at every turn and confiscated as much of the private sector's wealth as it could, funneling the money into purchasing arms to fight off revolutionaries and rebels and further oppress the people.

I worry that MMR requires governments to fundamentally behave in a manner contrary with their existence, and that this will eventually be the doom of this fragile monetary system that is based on promises of promises and expectations of government wisdom and competence.

[moda0306]

The idea of "printing wealth into existence" definitely is a bit unsettling.  I think it becomes more clear when you look at the world of financial assets & contracts as kind of a "accomidating" force to the production of real wealth.  In this world, one entity's asset is another's liability, so they may cancel out in some ways, but the loan that occured hopefully resulted in the production of a better widget factory....

The next step is to realize that having a buffer stock of uber-safe clearing assets called dollars (and treasuries) helps the more productive-type financial assets seek out more productive activity as there's more reasonable assurance of stable demand for the productive output of the investment.  In that sense, and since our factories are under capacity and there is a will to save well in excess of investment (which can't happen without gov't deficits or trade surpluses), these paper assets induce the creation of real wealth well within the capacity of our productive private sector.

That's kind of the round-about way of getting to the idea that the gov't can "print" wealth into existence... it's not about the gov't or the paper so much as it is about the economy being well under capacity with a will to save in excess of investment... the conditions of the private sector, not the gov't's legislative fiat, is what makes the new dollars very valuable.  As MMR folks would often agree, it ALL comes down to the productive nature of the private sector... they're just willing to acknowledge observations about supply/demand equilibriums that the Austrians don't like to, as they view all decisions made by people as being the thing that they most want to do with their time/money in that instance, and they HATE to acknowledge the nature of systems vs individuals... which I can understand on some level, as looking at society as a system can lead to some bad moral decisions, if history serves as an example.

[Gumby]

The big problem with MMR in my eyes is that by adopting the whole "governments ought to do X" fallacy, it does not acknowledge just how insane most governments actually behave. The Governments of the United States, Japan, the UK, etc. are, despite their flaws, shining exceptions in a world full of dramatically worse governments populated mostly by thugs and killers who view their posts as protected positions from which to steal and murder. I have lived in an African country where this was very much the case for example, with police and soldiers being indistinguishable from organized crime. The government systematically oppressed the weak at every turn and confiscated as much of the private sector's wealth as it could, funneling the money into purchasing arms to fight off revolutionaries and rebels and further oppress the people.

I worry that MMR requires governments to fundamentally behave in a manner contrary with their existence, and that this will eventually be the doom of this fragile monetary system that is based on promises of promises and expectations of government wisdom and competence.

I think you are confusing MMT and MMR. MMT requires governments to act responsibly to enact the MMT agenda (i.e. the Job Guarantee). But MMR just describes how the public, private and foreign sectors help or hurt each other. Whether governments choose to use that information responsibly or not does not add or take away from MMR.

[Lone Wolf]

Austrian economics has a specific agenda tied to it in that all government spending is bad (which makes no sense when you realize that the government creates real private sector savings).

Do you think that perhaps the use of the term "government spending" is counterproductive to your message?

Many people that use this terminology are recommending tax cuts as their preferred form of "government spending".  The trouble is that almost nobody thinks "tax cuts" when they hear the words "government spending".  They think of new government programs, the growth of the state, bombs, bullets, stimulus, bailouts, waste.

[Pointedstick]

Austrian economics has a specific agenda tied to it in that all government spending is bad (which makes no sense when you realize that the government creates real private sector savings).

Do you think that perhaps the use of the term "government spending" is counterproductive to your message?

Many people that use this terminology are recommending tax cuts as their preferred form of "government spending".  The trouble is that almost nobody thinks "tax cuts" when they hear the words "government spending".  They think of new government programs, the growth of the state, bombs, bullets, stimulus, bailouts, waste.

I think this is very true.

[Gumby]

Do you think that perhaps the use of the term "government spending" is counterproductive to your message?

Perhaps. But, the idea that government spending is always bad is still false. There are wise ways for governments to spend their money. Whether governments choose to spend wisely or not does not add or take away from MMR. For better or for worse, MMR just describes how the public/private/foreign sectors interact with each other. MMR doesn't have an agenda. You can make it conservative (spend Bush/Cheyney style) or you can make it liberal (larger government). You can't do that with Austrian economics since it has a specific agenda.

The trouble is that almost nobody thinks "tax cuts" when they hear the words "government spending".  They think of new government programs, the growth of the state, bombs, bullets, stimulus, bailouts, waste.

True. Though, government spending can also mean building bridges, schools, hospitals, court houses, roads, police stations, a citizens dividend (where individuals get to decide how they spend money given to them by the government), etc. But, let's not overlook a key point here. All the tax cuts in the world would not provide growing stable/risk-free savings for a country if the deficit spending did not exist in the first place and continue to happen. Eventually you'd need to continue deficit spend since taxes would be cut to zero and private sector debtors would be unable to make private credit interest payments without resorting to an infinite level of fragile private credit, which would eventually dry up. In other words, you can't rely on private credit and tax cuts to create stable, risk-free savings over the long term. I believe MMR would say that it helps to have a nice mixture of Treasury debt and private credit to create private sector savings. Both of these would tend to grow over time in a healthy economy.

[moda0306]

LW & PS,

I agree with that... Gumby & I, as well as MMR, are pretty avidly against tax hikes.  However, one thing I think that splits anti-austerian MMR folks from Austrians in terms of the preferance for tax cuts vs spending is a few things....

1) Austrians tend to think that supply-side incentives will work in a demand-side recession, while MMRists see (I'm generalizing here, as MMR actually doesn't have a stated political agenda) that as pushing on a string, and sees our current spending (plus a boost in infrastructure spending) as essentially keeping demand up high enough to prevent a recession.  If both taxes on capital and spending were slashed in the hopes that it would spur more private sector investment instead of growth of gov't, I'm extremely skeptical.  Demand would plummet, and aggregate investment is built on aggregate demand.  MMRists (usually) look at safety net programs that are counter-cyclical to boot as demand-insurance... and expected future stable demand factors in greatly into the choice to invest.  If someone can point to me an instance where the private sector invested to a great degree when demand was 80% of capacity of the economy, I'd love to see it... it just doesn't make sense.  And to clarify my point more, people are demanding less because their financial balance sheets & debt service considerations don't allow them to demand more.  Slashing SS, medicare, other safety nets, etc, is only going to exacerbate that.

2) MMRists (usually) see that we can expand the treasury's balance sheet greatly, with a relatively even mix of tax cuts and spending increases, without necessarily expanding the role of gov't.  We can improve our freeway interchanges and roads and parks greatly now instead of waiting until 2016.  These are things gov't already does... but would just improve sooner than later.  Austrians see the expansion of the treasury's B/S as inherantly equaling greater gov't role in our lives.  

So I think this is why some believe, despite not being full-on Krugman Keynesians, that we can't slash spending now... because that spending is a stabilizer that is a source of much of the demand in the private sector, and to add to that we can even increase spending (and public investment) without really fundamentally changing what the role of gov't is... just moving forward what they would do anyway.

[Gumby]

Also... I would just add that many people — of all different political backgrounds — are simply using MMR as a way to attempt to forecast the future of the economy for various countries around the world. In other words, whatever kind of spending the government does or doesn't plan on doing, here's how it will affect the economy and interest rates so people can invest accordingly. The results have been very good for those who use MMR that way. MMRers aren't necessarily politically swayed one way or another. You can be a conservative MMRer (cheering large defense spending, tax cuts and a small government) or a liberal MMRer (cheering larger government and lower taxes).

As I said earlier, MMT does have a political agenda (i.e. the Job Guarantee), so you tend to find very liberal MMT blogs out there with some mixed prescriptive messages.

[moda0306]

I'd add that we also have to look at our role as reserve-currency issuers accross the world... there is and has been huge demand for stable currencies, elsewhere.  The dollar can buy SO MUCH in many countries, where the simple idea of a compact piece of wealth that doesn't deteriorate to nothing after one year is a luxury.

To meet this role, as well as serve our own needs, it probably has taken and will take much larger deficits than normal.

All in all, we CAN have a safety net AND a free, productive country.  Is it a free lunch?  Mostly, no, because there's nothing free about getting up at 6:00 AM to go build a bridge or teach chemistry to a class of 15 students instead of 30.  There's nothing free about close-to-full employment.  Some safety nets are, but these act as general economic demand/supply stabilizers as they do "welfare" to the lazy.  Remove all unemployment, welfare, medicaid, SS, etc today, and you'll have a HUGE collapse in demand... investors will NOT be pleased with their ROI a year from now and will NOT be in a position to invest in diddley squat until demand & existing investment comes into equilibrium, which would be a nightmare of a transition and good for almost nobody but wealthy bondholders.

[MachineGhost]

To say MMR is politically neutral is false.  MMR is implicitly statist.

So the issue with MMR is it exposes the machinations of political money for all the do-gooders to exploit.  The more this occult knowledge becomes public, the more and more do-gooders will come out of the woodwork and find their new rationale in MMR to impose their top-down, utopian visions upon society.  With no reserve constraints, the path of least resistance is hardly in the direction of being a true conservative.

This I suspect is the real source of unease for many.

[Pointedstick]

To say MMR is politically neutral is false.  MMR is implicitly statist.

So the issue with MMR is it exposes the machinations of political money for all the do-gooders to exploit.  The more this occult knowledge becomes public, the more and more do-gooders will come out of the woodwork and find their new rationale in MMR to impose their top-down, utopian visions upon society.  With no reserve constraints, the path of least resistance is hardly in the direction of being a true conservative.

This I suspect is the real source of unease for many.

I'll agree that one can use MMR to come to statist conclusions e.g. that the government must spend ever more on whatever one happens to believe is most beneficial to oneself er um I mean all of society of course . But I think the real issue here is that the economy itself is implicitly statist in our current system due to the amount of built-in government manipulations resulting from a sovereign fiat currency, a triple-level regulatory nanny state, a whole raft of loan guarantees and subsidies, you name it. Since the system was deliberately set up for the government to play a large role, is it really statist to take an honest look at how a it actually works and conclude thusly?

Thought exercise: Could one, using MMR, come to the conclusion that savings could in theory be facilitated by the government ceasing the whole bond-issuing charade and creating a new type of U.S. savings account that was backed by "the full faith and credit of the United States", gave a high rate of interest, returned all the deposited money back to the citizens in the form of quarterly or yearly checks (like what Alaska does with oil profits), and paid any withdrawals back using newly-printed money? I.E. could safe national savings be accomplished without the need for the government to spend?

Of course, I don't tend to trade much in oughts, especially where the government is concerned because it always does what it wants, not what I'd prefer it to do.

[moda0306]

MG,

So if the truth lends itself to a particular line of thinking among the population, then let's limit the exposure to the truth... or at least the inconvenient ones... so we can continue to yammer on about the evils of gov't, debt, and coercion without anybody questioning us, because we've already concluded that we're morally right, so any actual systems knowledge that would lead people to dispose of some of their utilitarian (as opposed to moral) fears of government should be disregarded based on the potential negative consequences of the public having that knowledge.

I've actually read a detailed, extreme libertarian strategy believing this to be the case: Because democracies are inherantly immoral, illegitimate, and coercive (in their eyes), libertarians need to lie to the masses to get them to vote in a vision that is significantly more conservative than they would have if they'd known the truth.

I tended to think this was an extremist viewpoint. I'm starting to wonder.  If MMR is "inherantly statist," then I'd also insist that a political ideology that tries to fix the Tragedy of Commons by issuing deeded private property (to some, but not others) that was never anyone's to begin with is also inherantly statist.  I'd add that gov't reinforcing the current holding of claims on wealth, built not just on good ideas and hard work, but centuries of slavery and theft, is inherantly statist.

I'm not advocating full anarchism so much as pointing out that it's the logical conclusion of all the moral bickerings of libertarianism that try to completely ignore observations on macroeconomics and the government ever being able to accomplish anything productive or good in any way, shape or form.  Of course, the ultra-libertarians don't like that, because they all like their country estate, and most of them even like freeways pretty well, even if they think the private sector could somehow organize the whole system better.

[moda0306]

I'll agree that one can use MMR to come to statist conclusions e.g. that the government must spend ever more on whatever one happens to believe is most beneficial to oneself er um I mean all of society of course . But I think the real issue here is that the economy itself is implicitly statist in our current system due to the amount of built-in government manipulations resulting from a sovereign fiat currency, a triple-level regulatory nanny state, a whole raft of loan guarantees and subsidies, you name it. Since the system was deliberately set up for the government to play a large role, is it really statist to take an honest look at how a it actually works and conclude thusly?

Yes... even if you disagree with the system, one still has to acknowledge that when the gov't is 1/3 of the system, the act of removing it entirely is going to have some crazy consequences none of us could predict, and that some things done in the context of the knowledge that the gov't IS there doing things that they aren't going to stop doing does each individual a lot of good.  It certainly has for me... whether or not anyone else learns MMR, I'm probably going to be better off for having the knowledge of the system I do.  It doesn't help, as individuals, to try and make a moral stand every day of your life, refusing to participate in aspects of society that involve government as much as possible.