Thursday, July 22, 2010

Bernanke can't find the keys to his helicopter

So now we have Bernanke's testimony before Congress that, despite last month's disastrous economic news, the Federal Reserve has no plans to do anything to help the economy. In 2002, Bernanke claimed that it was impossible for the money supply to go into free fall as long as the central bank was willing to print as much money as needed and push it into the economy, even if it required dropping money from helicopters. Today, the money supply appears to be in free fall thanks to so much money disappearing into the Federal Reserve as reserves (at which point it disappears from the economy), but Bernanke appears to have lost the keys to his helicopter, and Congress -- by not passing any successor to the now-dwindling stimulus bill -- appears to have shot holes in the helicopter's fuel tanks anyhow.

We are in monetary deflation right now according to every measure that counts, to the point that even some right-wingers are starting to panic. What is confusing most people is that prices are not going down. But price deflation (and wage deflation is a subset of price deflation) is just one possible side-effect of monetary deflation, and, as we discovered during the Great Depression and as I've mentioned here before, price deflation is a *lagging* indicator of monetary deflation. The reason being that companies will *not* voluntarily sell goods at less than what it costed to manufacture them. Period. If there is not enough money circulating in the economy to buy all of the goods and services companies offer for sale, they will not lower prices beyond what it cost to make them (which would be losses, which would look bad and drive down their stock prices) — instead, they’ll voluntarily choose to instead accept fewer sales, and lay off the people not needed at the lower volume. In other words, the first symptom of monetary deflation is *GDP* deflation (of which employment deflation is a subset), not price deflation — and we’re seeing that in spades.

Given that we *know* GDP deflation is the first major symptom of monetary deflation (and note that “mattress money” — money on file at the Fed as reserves — basically does not exist as far as the economy is concerned, since it’s not being used for fostering commerce in the economy), and given that we *know* that price and wage deflation is a lagging indicator, not a leading indicator, of monetary deflation, any sensible central banker would be revving the helicopters big-time right now given last month’s disastrous economic news. But what we have now not a sensible central banker but, rather, a “reasonable” central banker, one who is in thrall to the “reasonable people” who rule Washington, who make decisions not based upon facts and analysis, but upon “truthiness” — i.e, emotional reactions from the gut based on seemingly plausible but long-disproved superstitious beliefs like “no pain no gain”.

In other words, we are so f*cked….

-- Badtux the Sore-cloaca'ed Penguin

8 comments:

  1. Isn't it the Congress that needs to stimulusize the economy? If there's no commerce going on, as in jobs creating wealth from raw materials, what good is just printing money?

    I guess some inflation will convince some people to spend some money, but not much if they're unemployed or fear losing their job.

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  2. If Bernanke dropped $1B in $100 bills over the 4th Ward of Houston (notorious ghetto), what do you think would happen to that money? Will it be spent, or will it be shoved under mattresses?

    My guess: A significant proportion would be spent. People there have enormous un-met needs, and any additional money they get will go to buying a (newer) old car to get to work, towards their darlin children's braces, or other things that they wish they had money for but never have had before.

    But you *are* correct that at the zero bounds, printing money has very, very little utility. I talk a bit about that in Sunday's column. You'll have to wait around to read that one ;).

    - Badtux the Queued-up Economics Penguin

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  3. There is a lot happening and not happening.

    M1 has increased substantially - by about 23.5% since Dec 2008. The increase was steepest the first year or so, but M1 is still going up vigorously - measured conservatively, since May '09 by almost $11 Billion per month.

    http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

    Part of the problem is the collapse of the M1 multiplier, from 1.6 in '08 to 0.8 now. Money is DOA.

    Corporations are hording cash, and banks are accumulating cash reserves in ridiculous quantities.

    First step - Fed should stop paying interest on
    (not just excess, but) all reserves, today - this minute.

    Second step - we need fiscal stimulus. Some people are arguing that monetary policy can be helpful at the 0 bound, and maybe so - though I don't see it. (But I aint no ekonomyzt.)

    This really aint rocket science, though. The relevant lessons were learned almost 80 years ago. The gov't needs to say (per Krugman, natch) the deficit is a concern for another time. Right now we need to have people a) working and 2) buying stuff.

    Capitalism need spending, but Keynes is dead and nobody wants to think about the demand side. If people don't spend, 'cuz they can't, and businesses don't 'cuz they won't, and banks stop functioning as financial intermediaries (from your AEI link - which I scooped you on, BTW - I linked to it 11 days ago) and Gov't won't step up to the plate because everyone is eskeerd of Austrian and austerian asshats, then - yeah . . .

    WASF,
    JzB

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  4. So yeah, we need wunna them stimulus checks liked they did a few years back.

    I've been trying to wrap my head around Modern Monetary Theory. Yeah, I know it's relatively simple, but so am I when it comes to concepts with numbers & stuff in it. But Mr. Badsnark seems to have completed the course w/honors.

    And stop picking on the city, if not the ward, of my birth. What are you, a wise guy?

    Although, come to think of it, St. Joseph's Hospital might be in the 4th Ward, or at least very close to the boundary.

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  5. Tux -

    This is bad news, and totally off topic. But you do need to know abut it.

    http://www.huffingtonpost.com/2010/07/22/penguins-stranded-on-braz_n_655965.html

    lo siento,
    JzB

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  6. My small business melted-down about a year ago because of the "credit-freeze" and the consumer spending pullback. I'm jobless & bankrupt, so I sure can't do anything to help get the economy on its feet. The bright side of being too broke to pay taxes to the Feds is that at least I'm not helping pay for the war(s).

    About deflation: It is inevitable that as wages fall then prices are eventually going to have to come down also. I know businesses will resist lowering their prices as long as they can, so as to keep profit margins high but there's no other way of generating sales. Also, my experience right now is that discretionary items like food from Arby's is dropping in price- not officially because that would panic the stockholders- but unofficially, in the form of sales & special deals. The non-discretionary items like car insurance are holding or still going up in price.

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  7. Colonel, yep, prices will eventually fall. But prices falling is a trailing indicator, *after* economic output as a whole declines as a response to monetary deflation. Prices typically fall as old inventories at the old price are cleared out. And Arby's prices would likely fall even faster than most prices, because their inventory turns over every week (I hope! There shouldn't be any months-old inventory in Arby's, right?!).

    The simple fact is that the Austerian "economics" notion of perfect price elasticity is utter nonsense. If conditions are such that you're forced to sell your inventory for less than its cost, you're out of business anyhow. See -- Pets.com. There *is* price elasticity in the economy -- eventually prices *do* go down -- but let me leave you with this experiment: Follow the price of a barrel of oil for a few months. Follow the price of a gallon of gas for those same months. YOU WILL SEE THAT VERY SAME LAG! Because the price of a barrel of oil will go down... but prices at the pump will *NOT* go down until the inventory in their tanks goes down and they refill at the lower price, because businesses are NOT in business to lose money. The same applies everywhere else -- prices don't go down until inventory turns over. That's just how this reality (vs. the Austrian reality where unicorns are real, cotton candy grows on trees, and prices are perfectly elastic) works.

    - Badtux the Economics Penguin

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Ground rules: Comments that consist solely of insults, fact-free talking points, are off-topic, or simply spam the same argument over and over will be deleted. The penguin is the only one allowed to be an ass here. All viewpoints, however, are welcomed, even if I disagree vehemently with you.

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