Bernanke fights phantom problem, ignores real one

August 27, 2010

U.S. Federal Reserve Chairman Ben Bernanke said in his Jackson Hole speech on Friday he would fight deflation — but he ignored the federal deficit. Even Japan has not experienced sustained deflation, while the U.S. deficit remains at record levels. Bernanke’s diagnosis and treatment of a phantom disease are unlikely to produce faster growth.

Sir Ralph Bloomfield Bonington, the quack in Shaw’s “TheDoctor’s Dilemma,” offered a single treatment for all diseases — to “stimulate the phagocytes.” In a similar vein, Bernanke appears to regard the anti-deflationary treatment that the Fed should have applied in 1930-32 as appropriate for all subsequent economic ailments.

The example normally used to illustrate the perils of deflation is contemporary Japan, which has suffered near-recession conditions since its bubble burst in 1990. However, Japan has not actually seen significant long-term deflation but only price stability. Its consumer price index, set at 100 in 2005, stood at 98.9 in 1992 and 99.2 in July 2010.

A more likely major contributor to Japan’s problems is its continual fiscal deficit, boosted by numerous so-called stimulus programs of wasteful spending. These have now pushed the country’s debt to 217 percent of its GDP, an alarmingly high level.

In Friday’s speech, Bernanke’s only reference to any kind of budget shortfall was to remark that “deficit management is a challenge to many countries.” He could have said much more about the specific U.S. problem, even at the Jackson Hole conference for central bankers. After all, at the 2004 iteration of the conference his predecessor, Alan Greenspan, led off his remarks with a lengthy disquisition on the long term financial burden of Social Security and Medicare — a problem that has worsened since.

Bernanke outlined in detail various possible ways in which the Fed could ease monetary policy further should deflation appear, and ended by reassuring his audience that “the preconditions for a pickup in growth in 2011 remain in place.”
The United States is not, however, currently suffering from deflation. Second-quarter GDP data showed prices rising, while consumer price inflation for the month of July was 0.3 percent. It is, however, facing a big deficit problem. The Fed chairman’s remedies are for the wrong disease.

Comments

good article..thanks..

Posted by gramps | Report as abusive
 

Agreed.

Don’t expect much from the from the people who brought you ‘Stimulus’, ‘Green Shoots’, and ‘Recovery’

When a remedy isn’t working, it’s not working. Applying more of it is unlikely to cure the patient, and in this case it’s visibly weakening the doctors.

Posted by yr2009 | Report as abusive
 

Yes … and can you venture a solution? “
All the participants in this “monetary System” are people.[and the odd, human programmed, bid bot] We can all agree that placing people within such a system makes some greedy. Greedy people with lots of money to buy the best in emergent technology, which allows them to side step control. It makes no sense to blame people for gaming a system that was designed to be gamed. In reality a spent piece of chariot trash; an empty belief system.

We cannot be easily awakened. The plutocracy form of government, has no need, nor the incentive to care. In a world where money is everything no one can escape the paradigm. The World is yet again, dividing into two blocs – the Plutonomy and the rest.

Sandwiched between these to extremely unsavory slices the monetary system presents the definite and undeniable prospect of world wide, cheap labor. More and more people will lose their Jobs For Money”, even a highly skilled medical surgeon will lose a “JOB FOR MONEY” to robotic technology. This ties the hands of any one wishing pay down debts, U simply do not have a tax base. This an ancient system and if “tinkering” were a solution, it would have played a role long before the fall of the British Empire.

This is threatening, but it need not be, since people within both blocs are problem solvers; people are curious, people are generous and capable. Nature presents us, a story of constant change, this is yet one, of many paradigm, changes.

“The new “plutonomy” doesn’t need us to make money. It doesn’t need us to spend money, apparently. “Emerging markets” are going to replace us any day now and then, as far as Wall Street is concerned, we can all live in tents under bridges. This is capitalism. It’s not their problem.”

So why must we be pathologically polite? Let’s simply turn the tables by adopting the life style of the plutocracy. The advanced future does not need a “job for money”. This is not easy to get your head around. Time and timing enters into it.

Imagine LIFE WITHOUT MONEY. The resource based group is the paragon of efficiency, and it all happens so fast, reason never masters nature, just tries to keep up, or synchronize with, the constant change, that nature’s information stream evokes. Now with this information stream a complimentary flow of problems presents. We take up our true vocations, of solving the constant flow of problems, not preoccupied with answers or beliefs but rather the stackable solutions. A job for money by comparison, is a waste of human life. A “job for money” is a contrivance, with a long beard[1850 B.C] … It was not a free choice; it was decreed upon mankind. The natural, system, over time, does not make promises it can not keep, this script is part of the CPU.

The ability to engineer genetic tissue, engineer fantastic robots, skin cells to neurons. With IT networks, it is estimated that there are over 1 trillion hours per year of cognitive surplus up for grabs. Passionate volunteers engaged in a colaborate management system, many participate in small ways. Anyone can submit a reasoned idea to the master database of catererized info where upon other people vote on its placement, or implimentation. The sum of all our desktops equals a super computer.

This powerful surplus can and will, change the world. We need only to direct it’s power to design a new paradigm. An incredible, new design resource, utilizing modern tools and the ancient and always present human motivation, will allow for a large scale effort to shift to a resource based, economic system. Not a panacea, just much, much, better. If not now, then when?

Posted by evolutis | Report as abusive
 

I wonder who authored this article.

I agree that the deficit is a bigger problem than deflation for now and the deficit should be the greater fear for the future.

Posted by breezinthru | Report as abusive
 

Americans who are upside down on their real estate and worried about having a job will not start spending money. Until we get the employment situation turned around, we can expect poor results and a continuing recession. For many Americans they are in a depression. Depends on what situation you are in at the time. It will take many years to solve these problems. And government has shot their wad and really can only make things worse by their continued idiotic intervention. Time to let the free market system work. It will be painful, but it is the only way to start solving our problems.

Posted by artie43 | Report as abusive
 

I agree with this story 110% Bernanke speech was useless. The purpose of his speech was to build confidence and in reality he built more doubt that the fed has no ammo just a bunch of scheme words to build hope. Hope will not resolve this economic recession, depression, deflation or inflation. We need leadership not a bunch of hope that change can be made. We really need change now.

Posted by DIAZYUMA | Report as abusive
 

I agree with this story 110% Bernanke speech was useless. The purpose of his speech was to build confidence and in reality he built more doubt that the fed has no ammo just a bunch of scheme words to build hope. Hope will not resolve this economic recession, depression, deflation or inflation. We need leadership not a bunch of hope that change can be made. We really need change now.

Posted by DIAZYUMA | Report as abusive
 

Why the confusion between monetary policy and fiscal policy? So long as ‘Hope ‘n’ change’ is in the White House and looking to bribe the voters, forget about any discipline on the fiscal front. Mr. Bernanke has no control over it.

Posted by Gotthardbahn | Report as abusive
 

Mr. Huchinson
I wish you would come down from your heavenly economic clouds to the working level Americans and soon realize that no JOBs, means eat off your savings, when no confidence in the job prospects, you slow down spending, the slow spending deflates the market, deflated market won’t produce profits but loss, and until the people who are hording our deflated money in their banks (similar to WWII Germany) become smart enough to lend money to spur small business growth, thus creating the middle class JOBs there won’t be any recovery!  Unless JOBs are created our economy will be taxied towards a cliff known as depression and more internal and external increase in the social entropy and disorder!  There is no such thing as healthy unemployment.  Unemployment breads lazy minds and bodies and is not good for our nation.  Do you understand this, or still think you should continue hiding behind your voluptuous vagaries!  

Posted by bbjoon | Report as abusive
 

@evolutis – Your dream of the future sounds nice but it also sounds something like world slavery. Unspecified rewards for unspecified effort. A world without money is very simply, a world without wealth. Things may have utility – but they would not be easily convertible or transferable into, or for, the acquisition of other things. And even very primitive cultures are cognizant of the concept of “wealth” and even “money”.

You want the ideal communist, technocratic world governing order and no such creature exists by a long shot. It sounds like John Lennon but forgets that John Lennon was a very wealthy man.

Somewhere, somehow, it would be run on abject slavery.

It would be a system that demanded utter submission to nothing. But it wants the miracle of the Loaves and the Fishes. If you want the moneychangers out of the temple, you may as well tear the temple down too or eventually it will fall for lack of repair. All that conspicuous display of material wealth just might also tend to become redundant as well, in your world of unbelieving believers.

What are “stackable solutions” that, your statement also suggests, don’t require “belief”? You seem to want ideas that are substantial as bricks and they never are.

Posted by paintcan | Report as abusive
 

You’re right, we need leadership, but not the kind you guys pine for. Eight years of that kind of leadership got us into this situation. And as far as those thinking that the “free market place” is the solution, I’d like to know where you caught glimpse of that? In a museum? You’re right a free, competitive market economy would help, but we don’t have one because the few mega-corporations in each industry pretty much control our government for self serving purposes through their lobbying and campaign contributions.

Posted by armoderate | Report as abusive
 

A couple of major differences :
1. Japan has no population growth to increase their tax base.
2. We are borrowing at record low interest rates, therefore deficit financing is not really a concern right now.

We need more stimulus, the sooner the better! Obama’s advisors may be right to keep the gates open for immigrants, they and the baby boom may be our only hope!

Posted by OptionAdvice | Report as abusive
 

do you really want to resolve the problem? … bring the factories back to american soil.
usa had lost one sector of the economy. Product maker

Posted by Carlangas | Report as abusive
 

Why is it so many people (OptionAdvice) think that a bigger tax base is the solution to all our problems? An increase in the tax base is short term at best.

The U.S. has finite resources, especially water and arable land. The greater the population the less resources for all, and our natural resources are stressed under the current conditions and policies. Water demand and pollution is going to get far worse before it gets better.

Population growth is a problem, not a solution to economic, environmental, and educational issues.

Posted by Andvari | Report as abusive
 

How are free market forces going to help the comatose housing and construction fields? It should be obvious that free markets failed those industries. The economy is on life support.

Free markets don’t pave the roads or build bridges either. A free market wouldn’t help infrastructural repairs and improvements unless every public street was a toll road. So many developing economies are not free market economies. They can’t afford the high risk adventure of it all. They also can’t afford the waste. Not even this country can afford the so called glory days of robber baron capitalism because we simply do not have the luxury and space to build e.g. multiple rail lines as was done on both sides of the Hudson River toward the end of the 19th century, by rival railroad magnates trying to put each other out of business? Only one of the lines survives today. I think the other died during or while it was being constructed. One line bought out the other.

There are also zoning and land use planning rules in place that prevent too much overt competition for and/or waste of municipal resources. People who know the ropes of local zoning issues can – and I have heard such complaints personally – that a rival business may come into their town and harm local businessmen. These boards are also not necessarily honest either. And land use rules can be used to prevent developers from offering housing options that may undercut existing and pricier development.

And if the first bailout money didn’t help – it seems to be because there is little left here to help. A service economy with little in the way of high value production of it’s own is a parasitic economy. And the only thing most of its participants can feed on are themselves.

And why would any consumer go the high priced and pretentious shop in the most expensive neighborhood in town to buy goods and services that might be got for a fraction of the cost in far less costly neighborhoods? To help them pay their outrageous overhead costs? To help them live securely in their pretensions?

And that describes the predicament of the USA and the developed world vis a vis, the vast majority of the rest of the world.

And not everyone on earth is going to submit for long to the role of laborers for the upper income buyers without learning a thing or two about the capabilities and weaknesses of those folks with money to burn. It must become very obvious that they can be such idiots with their incomes. So many actually count on that fact. Can’t say I’m exempt from that charge either, actually.

If it’s tight now, what will happen in a few more decades when the world population reaches a projected 9 bln?

Posted by paintcan | Report as abusive
 

I’m paying off my debt and not using credit cards. I save cash for vacations and go without if I don’t have cash. I’m learning new skills like gardening, rain water harvesting and automotive repair. I’m thinking of throwing my TV out and going low tech with books and magazines. I’m not spending UNLESS I ABSOLUTELY HAVE TO! I bought into the American dream once. Not again. I’m creating my own. One word of advice Fed/Guvment: if you are so worried about the defecit then cut dewfense spending and the 2 pre-emptive wars. Until you do that then you are not serious and are only creating a situation where others can take advantage (Hint: Politicians and the 1% ers). I go to restaurants, they’re packed, cars driving everywhere, smartphones abound. I want to yell: “HEY! There’s a great recession people! Somehow I wonder if there is, or is it something else manufactured so the banks can get their money back, and that corporations can reset their payroll expense.

Posted by Jonesy | Report as abusive
 

Again, we need to look at trade policy. Economic policy is more than just monetary policy.

Posted by murfster | Report as abusive
 

Our real problem is a lack of leadership in Washington. The Congress is too busy pole watching while the President looks in vain for ever harder to find common ground between the parties. As a result we have convoluted polices regarding foreign policy(war), trade, health care, education, infrastructure, energy and the environment.

It would probably be pointless to point out that realigning our commitment of resources to the above mentioned interests with a well thought out approach could solve much of our economic woes.

End the wars and invest in renewable energy, education, and a working health care system for all Americans would be a good start. Expanding and not simply rebuilding existing infrastructure would go a long way to attracting investment and industry to replace some of the jobs this nation has lost. Our communications and transportation systems have not kept up with the rest of the world.

When will we wake up and smell the coffee?

Posted by coyotle | Report as abusive
 

The behavior in government reflects the level of understanding and the moral and ethical value in the society that makes up the economy, – United States worries me!

Posted by virtue | Report as abusive
 

What if there were such a thing as the end of economic growth when a country reaches a certain level of development? Maybe the rich countries are approaching this moment given their slowing demographics and already high income per capita ? Maybe Japan was the first country to showcase this phenomenon. After all the Japanese households are not indebted. So, why don’t they spend more ? Maybe they don’t know what to buy since they already have most of what they need. How said that growth should be infinite ? Since our planet is finite it surely can’t be. So why don’t we start thinking about managing our economies and ways of life with zero growth ?

Posted by ClaudioBrussels | Report as abusive
 

I don’t know why the editors have chosen not to print this comment but here it is again.

How are free market forces going to help the comatose housing and construction fields? It should be obvious that free markets failed those industries. The economy is on life support.

Free markets don’t pave the roads or build bridges either. A free market wouldn’t help infrastructural repairs and improvements unless every public street was a toll road. So many developing economies are not free market economies. They can’t afford the high risk adventure of it all. They also can’t afford the waste. Not even this country can afford the so called glory days of robber baron capitalism because we simply do not have the luxury and space to build e.g. multiple rail lines as was done on both sides of the Hudson River toward the end of the 19th century, by rival railroad magnates trying to put each other out of business? Only one of the lines survives today. I think the other died during or while it was being constructed. One line bought out the other.

There are also zoning and land use planning rules in place that prevent too much overt competition for and/or waste of municipal resources. People who know the ropes of local zoning issues can – and I have heard such complaints personally – that a rival business may come into their town and harm local businessmen. These boards are also not necessarily honest either. And land use rules can be used to prevent developers from offering housing options that may undercut existing and pricier development.

And if the first bailout money didn’t help – it seems to be because there is little left here to help. A service economy with little in the way of high value production of it’s own is a parasitic economy. And the only thing most of its participants can feed on are themselves.

And why would any consumer go the high priced and pretentious shop in the most expensive neighborhood in town to buy goods and services that might be got for a fraction of the cost in far less costly neighborhoods? To help them pay their outrageous overhead costs? To help them live securely in their pretensions?

And that describes the predicament of the USA and the developed world vis a vis, the vast majority of the rest of the world.

And not everyone on earth is going to submit for long to the role of laborers for the upper income buyers without learning a thing or two about the capabilities and weaknesses of those folks with money to burn. It must become very obvious that they can be such idiots with their incomes. So many actually count on that fact. Can’t say I’m 100% exempt from that charge either, actually.

If it’s tight now, what will happen in a few more decades when the world population reaches a projected 9 bln?
Have to agree with the comment that corporate America is the piggy at the trough. And their people tend to take the biggest pieces of pie. Wealthy people tend to have an almost unlimited sense of entitlement.

Posted by paintcan | Report as abusive
 

This is after the president’s speech in New Orleans about government rebuilding the levies to prevent another disaster. Tell me if i’m wrong wasn’t the government who built the levies that failed? We are expecting the same here , we want the government to fix what they caused. Are the American people a bunch of a- holes.

Posted by Cosmo2000 | Report as abusive
 

No one likes deficits, especially large permanent ones. But those who would claim that reducing deficits are the cure for what ails the economy now have the burden of showing why a dramatic reduction in federal spending would not merely lead to more unemployment and reduced consumer spending, since most federal spending ultimately goes (directly or indirectly) to salaries and entitlements. Moreover, those who would cut the deficit have the burden of saying which programs that are large enough to make any difference)they would cut, and face the political reality that while spending is not popular, the programs it buys invariably are.

Posted by bbarnett53 | Report as abusive
 

I’m so sick of the parallels being drawn with Japan’s “lost decade.” (Soon to be two lost decades.) There are no lessons to be learned from Japan. The problem for Japan is that China has muscled in on its export business. The problem for the U.S. is that imports dwarf our exports. The U.S. needs to focus on restoring a balance of trade by reducing imports. Which is exactly what Japan and China don’t need. Sooner or later there’s going to be a global smack-down.

Posted by Pete_Murphy | Report as abusive
 

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