Telling It Like It Is To Bernanke

[Toro]

Did you read the article I linked that a very learned and well credentialed economist wrote? Did you read the two links from the Fed itself? Until you educate yourself, you really don't know what you are saying here.

In the Carter administration in the 1970's, interest rates soared to double digits along with double digit inflation. This, along with price controls, literally brought the U.S. economy to its knees and cost Carter any chance in a re-election bid. In the Reagan administration we saw those interest rates come down along with inflation. And with historically low interest rates now, we have much lower inflation than we had then.

This exactly proves the point being made. Inflation came down because Volcker raised interest rates up to punishing rates. Only after inflation came under control did interest rates fall. During that time, gold was crushed, silver was crushed, oil was crushed, as were other inflation indicators. Those inflation indicators have been sky-rocketing this decade, as have others such as real estate, which went to idiotic levels. The relationship is causal.

Some inflation is normal and necessary and inevitable. No inflation means we are in recession. When products don't sell and prices fall because of that, we are in depression.

Again, this is incorrect. Inflation was high in the 1970s and we were in a recession. Inflation was much lower, if non-existent in some economies for long periods of time during the 19th century, which was a time of growth that rivaled the 20th century. At times in the 19th century, there was inflation and recession and during others, there was deflation and expansion. It is our experience with the Great Depression which has coloured our perception of deflation, and economists today are scared witless of deflation because of the enormous amount of debt that has been built up into the system. There is nothing inherently wrong with deflation as long as real costs are falling. Technological innovation by its very nature is deflationary because it makes stuff cheaper. This seemed lost on the central bankers during the 1990s, or if it wasn't, then surely it was the pathological fear of deflation due to the debt problems which caused them to avoid it all costs.

Did it occur to you that the cost of that Similac went up sharply during the time that interest rates had been steadily rising? Higher interest rates can increase the cost of doing business and result in higher prices. Lower interest rates generally do not.

I'm sorry, this is simply incorrect. Higher real interest rates dampens business as the real cost to borrow is high. Thus, there is less economic activity and price increases are muted.

As for the weaker dollar, the Europeans hate it, but for the Americans, it sure isn't all bad. As one economist recently quipped, if the dollar falls much further, our competitors will be outsourcing jobs to the United States. And wouldn't that be a hoot?

No, a falling dollar isn't all bad all the time. But there is no place on earth that has consistently improved its standard of living over time by continuously devaluing its own currency, at least relative to other fiat currencies.

 

[Toro]

I wonder how well Roberts was quoted here and how well his message has been interpreted. This would be same Roberts who said:

http://www.nationalreview.com/reagan/roberts200406101413.asp

We are not talking about the destruction of the dollar here. We are talking about allowing an overvalued dollar to fall so that we are more competitive with our trading partners. Read again the article from the economist I posted. He said the dollar has quite a bit more value it can give before the dollar is in any kind of trouble. I see no reason to disbelieve him based on what I have read from others, including Dr. Roberts.

On the contrary, the dollar has become very undervalued relative to other currencies, at least outside of Asia, which is causing problems in the global economy.

We may have seen the bottom in the dollar last week.

 

[Toro]

china wont be sending us manufacturing jos until they have broken america enough to have the same conditions and wages they have there he quiped...what hoot that will be



The father of Reagonomics and former Wall Street Journal editor Paul Craig Roberts has warned that the collapsing dollar will eventually cripple the European economy and may even return the world economy to a barter system as financial chaos ensues.

Roberts served as an Assistant Secretary of the Treasury in the Reagan Administration and is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service.

Speaking on the Alex Jones Show yesterday, Roberts cautioned that "The loss in value of the dollar is becoming so rapid it's alarming....we've got unmanageable trade deficits, budget deficits, the economy is set for recession, the wars show no end."

Asked how bad the dollar crisis can get, Roberts responded, "It can get awfully bad - the trouble is where can they go?"

"If China removes the peg and all the surplus dollars drive up the value of the Chinese currency then given our dependence on China....it's going to drive the prices up here a tremendous amount and Americans don't have any discretionary income left," said Roberts.

"At some point the foreigners will stop financing our budget and trade deficits - then we're going to have a massive crisis the likes of which we've not experienced....if you're totally dependent on imports of manufactured goods and you can't pay for them, what do you do?" asked Roberts, explaining that the only recourse would be to print more money, pushing the dollar down even further.



Citing the fact that the dollar had lost more than 60 per cent of its value against the Euro since 2001, Roberts said that the flight from the dollar could eventually wreck the European economy because it would cripple their exports.


Asked how low the dollar could go, Roberts said that there was a limit because "There's simply so many dollars, there's not enough room in other currencies to absorb them - at some point the flight of investors from the dollar to the Euro will cause amazing troubles in Europe - they won't be able to export anything because the prices are driven up so high."

Roberts said investors will eventually desert the Euro as a safe haven from the dollar and the same process will cause a crisis in Britain as the pound is devalued due to exports being hit.

"Wages are being frozen, profit margins are shrinking, exports are down - so it's starting to impact on Europe," said Roberts.

Roberts warned that the potential destruction of the dollar as the world's reserve currency could eventually return us to a system of barter, completely altering the landscape of the economic structure as we know it.

This is alarmist. Roberts has become a shrill hysteric, and will be wrong as were past mongers of doom such as Ravi Batra.

 

[Foxfyre]

It is true that lower interest rates and a weaker dollar do not always extrapolate into more money being printed. However, it certainly has been the case in the United States over the past decade.

Of course, it is enormously beneficial for consumers to have lower interest rates in the near term. But, if that's always the case, why not set the interest rate to 0% all the time? Because such irresponsible monetary policies would be ruinous to the economy, as it has been in places like Latin America in the past, and is in Zimbabwe today.

As Milton Friedman said, inflation is everywhere and always a monetary phenomenon. And the Fed controls the money supply through interest rates.

http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mac/1970s/Money.supply4.html

Milton Friedman is(was) one of my all time heroes and I'm pretty sure he would agree with the other PhD economist I posted yesterday.

As to whether the dollar is undervalued, there are definite differences in informed opinions about that. I do know an overvalued dollar is far less in our interests than a more realistically valued one.

I am a bit dubious about the one-man, apparently uncredentialed, blog and his graph that you posted.

I rather think the explanation at this site is more clear, more accurate, and more illustrative, along with its graph:

http://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedurl=/2005/0502.html

 

[Toro]

Milton Friedman is(was) one of my all time heroes and I'm pretty sure he would agree with the other PhD economist I posted yesterday.

As to whether the dollar is undervalued, there are definite differences in informed opinions about that. I do know an overvalued dollar is far less in our interests than a more realistically valued one.

I am a bit dubious about the one-man, apparently uncredentialed, blog and his graph that you posted.

I rather think the explanation at this site is more clear, more accurate, and more illustrative, along with its graph:

http://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedurl=/2005/0502.html

The graph I posted comes from data right from the Fed. This is not some unknown fact. M3 was exploding. It still is, apparently, but we'll never know because the Fed stopped publishing the data last year. Hmm, I wonder why?

That graph from the link is M2. That is different, you understand. The problem with using M2 is that it doesn't capture dollars held by offshore entities, i.e. the People's Bank of China, a fairly important fact since something like $2 trillion has been created and held by offshore entities. Often, the funds owned by foreign central banks are held at US banks. This doesn't show up in M2. Also, it doesn't account for dollars held offshore by foreign central banks, who buy dollars from local entities and print local currencies, which increases the local money supply and inflates consumer and asset prices.

As for your Ph.D. line, apart from having a degree in economics and a bookcase full of economics texts, I work with Ph.D.s in economics and am constantly reading what economists are writing for my job. And if you are well versed at least on the basic arguments, you'd understand that a fatal flaw in Friedman's view of the world is that the Chicago School views all markets as rational. Thus, any asset market price is the fundamentally rational price and asset bubbles cannot and do not happen (or rarely happen). Thus, inflation is primarily reflected in consumer prices since asset prices can rarely, if ever reflect inflation. The Austrian School argues otherwise and states that inflation can occur in asset markets. The majority of economists, but certainly not the overwhelming majority, would probably agree with the former. However, as a practioner in the real world of asset prices, and as someone with a degree in economics, I would say that belief is dead wrong, and the realities of inflation most closely resembles the Austrian School.

And a highly undervalued currency is as problematic for an economy as a highly overvalued currency because it creates inflation, encourages the mis-allocation of resources and erodes productivity over time.

 

[Foxfyre]

The graph I posted comes from data right from the Fed. This is not some unknown fact. M3 was exploding. It still is, apparently, but we'll never know because the Fed stopped publishing the data last year. Hmm, I wonder why?

That graph from the link is M2. That is different, you understand. The problem with using M2 is that it doesn't capture dollars held by offshore entities, i.e. the People's Bank of China, a fairly important fact since something like $2 trillion has been created and held by offshore entities. Often, the funds owned by foreign central banks are held at US banks. This doesn't show up in M2. Also, it doesn't account for dollars held offshore by foreign central banks, who buy dollars from local entities and print local currencies, which increases the local money supply and inflates consumer and asset prices.

As for your Ph.D. line, apart from having a degree in economics and a bookcase full of economics texts, I work with Ph.D.s in economics and am constantly reading what economists are writing for my job. And if you are well versed at least on the basic arguments, you'd understand that a fatal flaw in Friedman's view of the world is that the Chicago School views all markets as rational. Thus, any asset market price is the fundamentally rational price and asset bubbles cannot and do not happen (or rarely happen). Thus, inflation is primarily reflected in consumer prices since asset prices can rarely, if ever reflect inflation. The Austrian School argues otherwise and states that inflation can occur in asset markets. The majority of economists, but certainly not the overwhelming majority, would probably agree with the former. However, as a practioner in the real world of asset prices, and as someone with a degree in economics, I would say that belief is dead wrong, and the realities of inflation most closely resembles the Austrian School.

And a highly undervalued currency is as problematic for an economy as a highly overvalued currency because it creates inflation, encourages the mis-allocation of resources and erodes productivity over time.

Then why not post a graph from the Fed from a source that isn't a one man blog posted by a guy who seems to have no credentials at all?

I am not going to try to discuss the intricacies of economics with you, Toro. I am not a degreed economist and other than a few college courses, I am mostly self taught on that subject. I do trust certain sources for basic reliable information, however, and I mostly trust sources who put the facts out there in simple, basic language and terms that even I can understand. So unless you have substantive information to show that the sources I posted are incorrect, I will stick with my present conviction that all isn't doom and gloom and the sky isn't falling.

 

[Nevadamedic]

I think Ron Paul is wrong about the issue(s) he was addressing. Low interest rates helped many millions of Americans refinance their homes and/or move into better ones and that, plus more favorable tax policies, stimulated the economy that has increased wages and personal wealth. The 'housing bubble' fiasco occurred mostly through unwise speculative investments and ignorance of home owners signing the loans. The fix comes through application of fair trade practices which would require lenders to provide full disclosure as to the risks of ARMs and what they should expect from them. People who did not take the ARMs and took fixed rates benefitted enormously.

As for the low dollar, there are many informed opinions who do not see that as a negative thing despite the angst of the Europeans and Japanese who view it as disastrous:

It's easy to tell when Ron Paul is wrong, he opens his mouth.

 

[Mr.Conley]

It's easy to tell when Ron Paul is wrong, he opens his mouth.

Really?

I guess that means we outta all be pro-choice. Ron Paul is pro-life afterall, but, as you've clearly demonstrated, everything he says he supports is wrong. Kinda makes me wonder why you are pro-life though... oh well.

Thanks for the info!

 

[Toro]

Then why not post a graph from the Fed from a source that isn't a one man blog posted by a guy who seems to have no credentials at all?

The Fed doesn't post a graph on the Internet. Others have constructed it.

Here is the data from the Fed, which is the sum of the M3 components inputted into the graph above.

http://www.federalreserve.gov/releases/h6/HIST/h6histc.txt

 

[Paulie]

It's easy to tell when Ron Paul is wrong, he opens his mouth.

That WOULD be about all you could contribute to a thread like this.

Not about to embarrass yourself by actually attempting to discuss the economics, huh?