Authors

Economics

Bernanke loosens further the monetary stance

On Wednesday December 12, 2012 Fed policy makers announced that they will boost their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion of mortgage debt a month.

This decision is likely to boost Fed’s balance sheet from the present $2.86 trillion to $4 trillion by the end of next year. Policy makers also announced that an almost zero interest rate policy will stay intact as long as the unemployment rate is above 6.5% and the rate of inflation doesn’t exceed the 2.5% figure.

Most commentators are of the view that the Fed Chairman Ben Bernanke and his colleagues are absolutely committed to averting the mistakes of the Japanese in 1990’s and the US central bank during the Great Depression. On this Bernanke said that,

A return to broad based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth.

Furthermore he added that,

The Fed plans to maintain accommodation as long as needed to promote a stronger economic recovery in the context of price of stability.

But why should another expansion of the Fed’s balance sheet i.e. more money pumping, revive the economy? What is the logic behind this way of thinking?

Bernanke is of the view that monetary pumping, whilst price inflation remains subdued, is going to strengthen purchasing power in the hands of individuals.

Consequently, this will give a boost to consumer spending and via the famous Keynesian multiplier the rest of the economy will follow suit.

Bernanke, however, confuses here the means of exchange i.e. money, with the means of payments which are goods and services.

In a market economy every individual exchanges what he has produced for money (the medium of exchange) and then exchanges money for other goods. This means that he funds the purchase of other goods by means of goods he has produced.

Paraphrasing Jean Baptiste Say, Mises argued that,

Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.[1]

Printing more money is not going to bring prosperity i.e. more goods and services. Money as such produces nothing.

According to Rothbard,

Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.[2].

Contrary to popular thinking there is no need for more money to keep the economy going. On this Mises argued,

The services which money renders can be neither improved nor repaired by changing the supply of money. … The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.[3]

Printing more money will only result in the diversion of goods from those individuals that produced them to those who have produced nothing i.e. the holders of the newly printed money.

According to Mises,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.[4]

What is required to set in motion a broadly based prosperity is to enhance and expand the production structure of the economy. Printing money, however, will undermine the expansion and the enhancement of the wealth generating infrastructure.

Now, if by means of money printing and the lowering of interest rates one can generate prosperity why after all the massive pumping by the Fed are things not improving? – The reply of Bernanke and his colleagues is that the pumping wasn’t aggressive enough.

We suggest that if Bernanke’s way of thinking were to be implemented he runs the risk of severely damaging the process of wealth generation and deepening economic impoverishment.

If money printing can create prosperity then why are all the poor nations still poor – these nations also have central banks and know well how to print money? A good recent example in this regard is Zimbabwe.

Even if we were to accept that the Fed ought to pump money to revive the economy, we are still going to have a problem here if banks were to refuse to channel the pumped money into the economy.

It must be realized that after being badly hurt in 2008 banks are likely to be reluctant to embark on an aggressive lending of the money pumped by the Fed.

For the time being, banks still prefer to sit on the cash rather than lend it out aggressively. (Embark on a large scale lending out of “thin air”). The latest data for the week ending December 12 indicates that the banks’ holding of excess cash increased by $25 billion from the end of November to $1.464 trillion.

We suggest that we should be grateful to the banks for resisting aggressive lending so far – it has prevented an enormous economic disaster. Obviously if the Fed were to force the banks to push all the pumped money into the economy then this could inflict severe damage which will take a long time to fix.

Summary and conclusion

On Wednesday December 12 Fed policy makers announced that they will boost their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion of mortgage debt per month. This decision is likely to lift the size of the Fed’s balance sheet from the present $2.86 trillion to $4 trillion by the end of next year.

The Fed Chairman Ben Bernanke, the initiator of this plan, is of the view that aggressive money pumping is going to strengthen US economic expansion. We hold that without the cooperation of banks the massive pumping of the Fed is unlikely to enter the economy.

We maintain that if banks were to push the money the Fed is going to pump into the economy this will inflict serious damage on the economy’s ability to generate real wealth.


[1] Ludwig von Mises, Lord Keynes and Say’s Law, The Critics of Keynesian Economics, edited by Henry Hazlitt, University Press of America 1983, p. 316.

[2] Murray N. Rothbard, Man, Economy and State (Los Angeles: Nash Publishing, 1970), p.670.

[3] Ludwig von Mises, Human Action: Scholar’s Edition, (Auburn, AL: Ludwig von Mises Institute, 1998) pp. 418.

[4] Ludwig von Mises, Human Action, chapter 36 The Crisis of Interventionism.

22 comments to Bernanke loosens further the monetary stance

  • Paul Marks Paul Marks

    “Helecopter Ben” is living up to his nick name – he appears to be determined to create “paper money collapse” (as D.S. would put it).

    Actually I wish Ben B. would throw money from helecopters. That, at least, would be less corrupt than expaning the money supply via the bankers and other such.

  • A big part of the problem with modern monetary economics is that it is predominantly myth driven.
    Here’s one of those myths.
    The Fed expands the money supply when it purchases Treasuries from the banks – increasing the reserve holdings of the banks, portending inflation.
    That is a myth.
    This is a fact.
    Reserves are not money.
    If they were money, they would serve as the “medium” of exchange.
    The nice chart showing the excess reserves of the banks looks like it shows excess “medium” of exchange – thus future inflation.
    If Helicopter Ben dropped $45 Billion per month in FRNs onto the population, that would increase the money supply, the exchange media and the relationship between debt and money.
    The latter only because they went directly to the population, and not through the banks.
    That would increase aggregate demand, that would CAUSE production to increase and that would put resources to use.
    It would not create inflation.
    We’ll never get a turnaround from the debt-saturation caused by fractional-reserve banking, where all money is issued as debt, unless we issue some money as equity.
    The central bank can not issue money today.
    It can only issue reserves – a license to issue debt, which are not money.
    An enigmatic circumstance exists that needs remedy.
    Only the government can do that.
    For the Money System Common.

  • Paul Marks Paul Marks

    Something has to be more than a medium of exchange to be money – it has to be able to serve as a store of value also (otherwise it is not much use as money).

    As for the Federal Reserve (and other Central Banks) it lends money (of a sort – which it creates from NOTHING) to banks and other such – who use it to buy government debt.

    After all it is less difficult to borrow (newly created) money from the Fed (or some other Central Bank) and then lend it back to the government (at a higher rate of interest) than it is to attract REAL SAVINGS and lend out these real savings to productive industry (deciding what factories are likely to be successful and so on).

    The government then uses this deficit spending to spend on lots of things (mostly transfer payments and wages).

    Alternatively the government could cut out the banks (and other such) and just print the money and spend it – but they like to have a fig leaf of respectablity (lots of smoke and mirrors to keep the population in the dark about the whole scam).

    How long can this carry on?

    Not much longer.

    For better or worse, breakdown is comming.

    But expect lots more clowds of smoke (complex double talk to obscure the process) before the end.

  • Money being a medium of exchange is the core of what money is. That it serves well as a store of value is dependent on proper management of the money system, so as to preserve its purchasing power.
    Can I assume that when you say the government could just print the money, what you mean is the government, and not the central bank?

    And in government spending that money into existence, is there a problem with that?
    If so, what is the problem?
    If not, then why shouldn’t they do it?

    When Lincoln issued Greenbacks, prior to the CB being involved, the GUV just printed them and spent them into existence and they circulated in the economy for well over a hundred years – providing both means for exchange and store of wealth for currency hoarders.

    Now, this seemed to work fine, so would it be considered a scam?
    Thanks.

  • Paul Marks Paul Marks

    Salmon P. Chase thought the Greenbacks were a scam – and he was the man who issued them (sometimes you have to do hard things in wartime – including cheat people).

    After the return to gold in the late 1870s the remaining Greenbacks were not that important – as you imply Joe, it is a numbers game. And their number was not extreme (not in the 1880s and so on).

    Of course (and this Lincoln bashers tend to ignore) the Confederates also issued fiat money – in fact they issued MORE of if than the Union did. And Confederate regulations were WORSE than than those of the Union (indeed soon most of what manufacturing and transport there was de facto nationalised in the Confederacy – rather like “War Socialism” in Imperial Germany during the First World War).

    Just as the Confederate income tax was higher (and more Progressive) than the Union war time income tax was. And the Confederates violated civil rights (and I mean for white people) MORE than Lincoln did. Indeed the rule of law soon broke down in every Confederate State – with the exception of North Carolina.

    I am no Lincoln worshipper (far from it – I strongly dislike Henry Clay Whigs with their corporate welfare, and that is exactly what Lincoln was) – but people have to be judged by the actual alternative (not a theoretical alternative). And the Confederates were more (not less) collectivist – on every count.

    As for the present fiancial system.

    The numbers are wildly against it.

    It is more like the Confederate financial situation – rather than the Union one.

    But the inflation is not open – because the monetary base has been increased to prop up the (long ago expanded) broad money of bank credit.

    Both the fiscal and monetary situation is hopeless – utterly hopeless.

    Everything now is just what tune to play as the Titanic sinks.

  • Paul Marks Paul Marks

    The real problem after the return to gold in the late 1870s was not the Greenbacks – it was the National Banking Acts (passed as a anther war time measure – but drawing on crooked court judgements from before the war).

    Insolvant banks were allowed to carry on trading (building bigger and bigger bubbles)and discounting the (crooked) debt paper of the big New York banks was actually made illegal.

    “Suspensions of cash payments” (and other contract breaking) was the order of the day, in every major (inevitable) crises.

    The financial system before the Federal Reserve (“private” is you like, although formal government ownership would not make any difference) was a mess – but the creation of the Fed made it even WORSE.

    The banks (and other such) moved even further away from dealing in real savings. Their fairy castles in the air got even wilder – as did their dependence on magic pixie dust.

    The financial system, today, is little else. As things have got worse and worse over the years.

    Hence my previous conclusion.

  • I think we should just trust Bernanke and co, Britney Spears-like. They seemed to know what they are doing, they wouldn’t bankrupt the world to gain money, privilege and power! Its getting just like the final chapters in Atlas Shrugged….

  • That would increase aggregate demand, that would CAUSE production to increase and that would put resources to use.

    Consumer demand (aggregate or otherwise) does not “CAUSE” production to increase. Only entrepreneurs who decide that the business climate is favorable to expansion and who make a conscious decision to retain a portion of their profits for reinvestment can do that.

    As John Stuart Mill wrote:

    What supports and employs productive labor is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when complete. Demand for commodities is not demand for labor. The demand for commodities determines in what partticular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour.

    Consumer goods spending is higher now than it was at the peak of the boom in 2007, yet that has not caused production to increase. The decision to purchase consumer goods and the decision expand production are two separate processes based on different criteria.

    Consumer spending can go through the roof, but, in the current political climate, very few entrepreneurs will decide expanion is a wise and profitable decision.

  • Paul Marks Paul Marks

    Yes Craig – although Mill was just getting that from J.B. Say (who was a lot better economist than J.S. Mill).

    We are seeing the final demented thrashing about of the “demand” fallacy – the idea that what is important in an economy is spending (“effective demand”).

    The Federal Reserve is now buying government debt – without even going through the farce of producing money (from nothing) and lending it out (on the understanding that the bankers and other such would lend the money back to the govenrment).

    It makes no real difference if a central “bank” does this stuff – or if the Treasury just printed money itself.

    Peronism (the “ideas” of General Peron – which have gripped Argentina once again) seem to be the future of the Western world.

    But it will be a brief future. For this system is destructive (incredibly destructive).

  • It makes no real difference if a central “bank” does this stuff – or if the Treasury just printed money itself.

    I agree, of course. One of the latest fallacies I’ve seen hit the discussion boards is how much better off we’d be if the Treasury controlled the money supply instead of the Fed. Why or how? I have no idea.

    • Well, if you read Soddy, Fisher, Simons, Knight or even Friedman, it is because the Treasury would issue new money when spending, therefore ending fractionally-reserved, debt-based money coming into existence.
      Money BEING money, savings can fund investment, ending the booom-bust extremism of modern economics.
      I think I linked to the IMF study based on the Chicago Plan proposal.
      No debt issued when money is issued.
      Money becomes permanent, not dissolved at debt-repayment.
      Banks do banking.
      Government does money-creation.
      That’s why.
      Thanks.

      • it is because the Treasury would issue new money when spending, therefore ending fractionally-reserved, debt-based money coming into existence.

        And, that’s just a different prescription for disaster. The Treasury would simply monetize government’s spending. And you think that’s good?

        I’m all over ending fractional-reserve banking, but this is just another method of allowing politicians to increase the money supply on whims.

        Thanks to you, too.

        • Regardless of who controls the money power, it will be either inflationary, deflationary or price-stable depending on how well the system of money creation, issuance and regulation is managed.
          Using von Mises definition of both inflation and deflation, the increase in the money supply is warranted by the NEED for money to provide the exchange required by an increase in the production and consumption of goods and services – colloquially, GDP.
          The key reason why Friedman supported the Chicago Plan and Fisher’s 100 Percent Money proposals for fiat money was the placement of a legal rule constraining the amount of money that could be created.
          This rule prevents the interference in money matters by any government official except those determined responsible for implementing the rule.
          If you don’t hate the government, then it seems workable, obviously even to conservatives.

          • Using von Mises definition of both inflation and deflation, the increase in the money supply is warranted by the NEED for money to provide the exchange required by an increase in the production and consumption of goods and services – colloquially, GDP.

            You are correct about von Mises’s definition of inflation and deflation. However, he also states [and, for what it's worth, I agree] that any amount of money is enough to support a national economy.

            It simply isn’t necessary to inflate the money supply to accommodate economic growth — or, in the case of GDP, economic activity. Prices will adapt to the existing supply. The very idea that more money is needed in times of growth is false.

            During the latter decades of the nineteenth century and the first of the twentieth, under the gold standard, prices declined at roughly 1% annually. Economic growth during this time was robust to say the least.

  • Paul Marks Paul Marks

    Craig.

    I suppose the only real difference would be that the banks (and so on) would make no money from lending money to the govenrment – if the Treasury just printed the money and spent it.

    But with interest rates this low – if the banks are dependent on this revenue stream they are f…..

  • Paul Marks Paul Marks

    Joe.

    Milton Friedman was a follower, in monetary policy, of Irving Fisher – and Fisher was rather bad on monetary policy.

    Frank Fetter showed where Fisher went wrong in theory (just as the same Frank Fetter had previously shown where Henry George went wrong on land).

    And 1921 and 1929 showed, in practice, that Fisher did not grasp reality (he was astonished by both busts).

    As for fiscal and monetary policy.

    The primary objective of monetary policy (for years now) seems to be to prop up the banks.

    I AGREE with you Joe – that is a crazy policy.

    Let the credit buhble banks go (go bankrupt – close their doors) – YES it will be terrible when they collapse. But they are going to collapse eventually anyway – the Central Banks are just prolonging the agony.

    As for fiscal policy.

    Government spending is out of control – totally out of control.

    And printing money to finance this spending will NOT solve the problem.

    The Welfare State is not sustainable.

  • Paul Marks Paul Marks

    Almost, but not quite, needless to say….

    An increase in the supply of money is NOT an increase in real savings.

    Trying to redefine the word “savings”, in order to pretend that borrowing is sustainable and is not greater that real savings, is one of the central errors of establishment “economics”.

  • Paul Marks Paul Marks

    Of course trying to make the “price level”, “stable” is the central error of the tradition of monetary economics that comes from Irving Fisher.

    It is not “just” that “price indexes” are rather absurd, it is also that concentrating on “prices in the shops” totally ignores some of the most important things that go on in civil society (the “economy” although the Greek word for “household” is wildly misleading for the science of exchanges).

    If someone says “prices are stable – so monetary policy must be fine” they have just made a (no THE) central error in monetary economics.

    • Maintaining the purchasing power of the currency is the most important function of a national monetary system.
      Price stability is mere econ-speak for the stable purchasing power of the currency which is what most hard currency advocates claim is only possible from metal or other backing.
      It was when we went off the gold standard that Fisher proposed his “stable-buying-power” standard as a replacement, with a monetary rule to achieve that standard.
      Again, only if you don’t hate governmental concepts can it make any sense.

  • Paul Marks Paul Marks

    Wrong on both counts Joe.

    “Maintaining the purchacing power” is just another way of saying “keeping prices stable” – it leads to folly (terrible folly).

    If people really are finding better ways of producing goods and services – then prices will (unless there is some other special factor) FALL.

    Not a sudden crash of prices – that means there was a credit-money bubble that has just burst, but a general decline over time.

    If everyone says “we have prosperity” and prices are NOT generally falling – then it is a very powerful hint that something is wrong.

    As for gold (or some other commodity) as “backing” for money.

    This is another terrible folly.

    Either the commodity IS the money or it is not.

    To treat it as “backing” in some sort of “standard” leaves things open for vast (“legal”) fraud – for bubble building.

    For example, the actions of the Benjamin Strong of the New York Federal Reserve in the late 1920s.

    After all he both said……

    Prices are stable – the Dollar is maintaining its “purchasing power”.

    And.

    We are on the gold standard (the important word being, of course, “standard” – this allowing his antics).

    So both of the things you mention were maintained.

    Even whilst Mr Strong was creating the credit money boom that made the bust of 1929 inevitable.

    • Wrong on both counts, Joe.
      Curses ! Foiled Again !

      Since I already said that price stability and stable purchasing power WERE the same thing ……
      well, that can’t be the point.

      To say that both/either “lead to terrible folly”, axiomatically, is untrue.
      Neither necessarily leads to anything.
      Both are what they are.
      In any period of stable purchasing power and prices, there is an absence of ‘folly’.
      Had we full reserve banking at the time, the bubble would have been un-fundable.
      Yet we could have those two tendencies all the same.

      Governor Strong was whistling aloud.
      Being on the gold standard did nothing to prevent the pending ravages of fractional reserve banking, which was what Fisher’s 100 Percent Money proposal was designed to prevent.

      Sectoral prices may rise, or fall, based on technology changes primarily, but general price stability and stable purchasing power are sound goals and satisfactory monetary-economic outcomes in themselves – all other things being equal.
      As for gold ‘being’ money, I have never seen a workable proposal for same.
      To me, there is a problem of a profound nature in having the national circulating media being also a commodity.
      Which is what we have now.
      I think both Austrians and reformers agree with Mervyn King’s comment that fractional-reserve banking is the worst system that we have ever had.
      The disagreement is that each sees the other as the only system that could possible be worse than the one we have now.

  • Paul Marks Paul Marks

    I disagree with the late Murray Rothbard on many things in both political philosophy and history.

    However, on money and banking I agree with his development and refinement (and that includes correcting things – improving things) of the ideas of Carl Menger, Ludwig Von Mises and so on.

    This does not mean expressing any opinion on the question of whether (or not) fractional reserve banking is “fraud” (that is a legal question – not a question of economics).

    But it does mean studying the ideas and suggestions of Rothbard and others made over the last half century.

    Sometime that Joe clearly (by his own statement) has NOT done.

    As Joe has now admitted to not doing the basic work of even looking at the proposals I, again, ask WHAT IS HE DOING HERE?

    And I repeat my opinion that Joe is a “troll” whose only purpose is to try and be as obnoxious as possible.

    To repeat the obvious…..

    ALL lending should be from real savings.

    One does NOT need a rising amnount of money in order to sustain a rising degree of economic development.

    An increase in the amount of money is NOT an increase in real wealth.

    And on and on…..

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please leave an intelligent and civil reply in your own name.