Guest Post: Does the Iranian Government Have A Right To A Nuclear Bomb?

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

As Reuters reported last week, the United Nations nuclear watchdog, the International Atomic Energy Agency, has confirmed that while the Iranian government is still enriching uranium at an increasing rate, there is no evidence of a weapons program under development.  Iran’s supreme leader Ayatollah Ali Khamenei still maintains that the nuclear program is entirely peaceful.  According to a recent Wall Street Journal article, senior Obama administration officials say the 2007 intelligence report which confirmed that Iran’s government put a stop to its efforts to create a nuclear bomb in 2003 is still accurate.  Just last February, U.S. Defense Secretary Leon Panetta also confirmed that the government is not pursuing a weapons program.

The nonexistence of a nuclear weapons program hasn’t stopped the neoconservatives in Congress and the press or the Obama administration from denouncing Iran publicly in the name of American hegemony.  Republican presidential candidate Mitt Romney remains willing and eager to use military force to halt the country’s nuclear development.  At a speech before the Veterans of Foreign War convention in July, Romney called the prospect of Iran having a nuclear weapon the greatest “danger in the world today” and castigated President Obama for not doing more to stop the continuing enrichment.  The Obama administration hasn’t been sitting idly by however when it comes to Iran.  Under pressure from the American Israel Public Affairs Committee, perhaps the largest pro-Israel lobbying group in Washington, Obama signed into law the United States-Israel Enhanced Security Cooperation Act in July which would give “a blank check drawn on the U.S. taxpayer” to Israel “to maintain its qualitative military edge” according to former CIA officer Philip Giraldi.  With Israel Prime Minister Benjamin Netanyahu playing a game of nuclear blackmail with the White House in an effort to goad Obama into launching a preemptive attack on Iran, U.S. National Security Director Tom Dinilon reportedly presented an attack plan to the war-ready Netanyahu recently.

Should Netanyahu pull the trigger and strike Iran before the U.S. elections as he is rumored to be determined to do, it is highly likely that both President Obama and the U.S. Congress will come to the rescue by ordering the deployment of the military.  The Israeli news source Yediot Ahronoth recently reported that the White House told the Iranian government they would not assist in an Israeli strike if American interests were let be in the Persian Gulf yet the Obama administration has denied the allegation.  The U.S. military literally has the country surrounded with bases; as if already prepared for a full blown assault.  A campaign in Iran will be added to the lengthy list of Middle East excursions this decade that include Afghanistan, Iraq, Yemen, Somalia, Pakistan, and Libya.  The drums for war are indeed being pounded upon not by the general public but by well-connected interest groups looking to profit from bloodshed.

The United States isn’t the only country whose leaders are opposed to Iran’s government possessing nuclear arms.  The European Union’s embargo of Iran’s oil exporters came into effect on July 1st in an effort to curb the nuclear program.  In fact, many Western nations including Canada and Japan have colluded to ban their citizens from doing business in Iran.  Following the U.S.’s lead, it has been decided by the power players in the international community that Iran is not allowed to have nuclear arms.

The idea that the U.S. government should be the sole decider of what governments are allowed to own what weapons is demonstrative of the hegemonic desires of the ruling establishment.  It is automatically assumed that because the government of Iran refuses to bow down to the American empire, it should be stripped of its sovereignty.  There is no consideration of the question at the heart of the matter:  should people have the right to own nuclear weapons in a free society?

It is certainly not outside the bounds of moral considerations to agree that people should have the right to defend themselves from harm’s way or if they feel genuinely threatened.  This includes the right to own small arms for defensive purposes.  Denying someone the right to own arms is denying them the right to protect their own life.  In the context of violent behavior, the act of simply owning a firearm or weapon in no way constitutes a threat towards another.  In a society where property rights are respected and upheld, gun control is a coercive intrusion into peaceful living.

But does the notion that man has a natural right to own the means to protect his life apply to nuclear weapons?

At first glance it may appear so since the mere possessing of a nuclear bomb does not constitute a threat toward anyone.  There is a clear difference between owning a gun and a thermonuclear device however.  As Murray Rothbard explains:

…while the bow and arrow and even the rifle can be pinpointed, if the will be there, against actual criminals, modern nuclear weapons cannot. Here is a crucial difference in kind. Of course, the bow and arrow could be used for aggressive purposes, but it could also be pinpointed to use only against aggressors. Nuclear weapons, even ‘conventional’ aerial bombs, cannot be. These weapons are ipso facto engines of indiscriminate mass destruction.

Nuclear weapons are bound to kill innocents just because the radius of damage is so encompassing.  Since they can’t be pinpointed, nuclear weaponry can’t be used purely for defensive purposes on Earth.  The only plausible scenario for the justified stockpiling of a nuclear bomb is if there exists a threat beyond Earth.  Economist Walter Block calls this the proportionality thesis.  Because the universe is conceivably wide enough where the setting off of a nuclear device may not harm an innocent person, ownership of an atom bomb can be permissible.

Nuclear weaponry has only one function; the annihilation of vast amounts of people and property.  There is no other use.  In a free society on Earth (which is thus far the only planet known to have the resources to sustain rational beings like humans) there would be no need for anyone to own nuclear arms.  For the state that operates off of the power-lusting of its controllers, the incentives change.  Through educational indoctrination and media propaganda the nation-state becomes synonymous with its inhabitants.   Americans, Canadians, Brits, etc., are affiliated with their government even when certain atrocities are committed solely by individuals of authority.  This mistaken identify provides the perfect cover for the various political classes to scheme for further power grabs.  Wars between states are often fought not for the defense of the citizenry but for other motives outside of protecting life.  They are neither an economic stimulant nor a dignified crusade; they are destructive and horrifying.  War is really mass murder financed through violent means; both of which are unlawful under natural law.  Ultimately it is the various minions of the state seeking national glory and resources located in the jurisdiction of another nation-state who conduct war.

For the U.S. government to even begin to lecture Iran’s on whether or not it should have the right to develop a nuclear weapon ignores the very fact that it remains the one and only government on the planet to ever used the atom bomb to exterminate millions.  American school children are often told that the use of the nuke was necessary to save the troops who were going to invade Japan during World War II even though such an explanation is dubious.  As John V. Denson points out, President Truman kept to a policy of no-surrender even while the Japanese government was willing to admit defeat as long as the emperor could remain in power.  The bombings of Hiroshima and Nagasaki were carried out as a demonstration of force to the Russians.  Many of his advisers, including General Eisenhower, had pressured him to not go ahead with the nuking but Truman would have none of it.  Establishing the United States government as a supreme world power was more important than the lives of innocent women and children.

It should also be noted that while it is widely believed that Iran’s President, Mahmoud Ahmadinejad, threatened to wipe the nation of Israel “off the map,” this was a mistranslation.  On October 25, 2005, Ahmadinejad reportedly gave a speech titled “The World Without Zionism” in which he supposedly uttered the infamous remark.  But as Arash Norouzi, co-founder of the Mossadegh Project, explains, the words “Israel,” “map,” and “wipe out” were never actually uttered.

So what did Ahmadinejad actually say? To quote his exact words in Farsi:

“Imam ghoft een rezhim-e ishghalgar-e qods bayad az safheh-ye ruzgar mahv shavad.”

That passage will mean nothing to most people, but one word might ring a bell: rezhim-e. It is the word “regime.” pronounced just like the English word with an extra “eh” sound at the end. Ahmadinejad did not refer to Israel the country or Israel the land mass, but the Israeli regime. This is a vastly significant distinction, as one cannot wipe a regime off the map. Ahmadinejad does not even refer to Israel by name, he instead uses the specific phrase ”rezhim-e ishghalgar-e qods” (regime occupying Jerusalem).

So this raises the question.. what exactly did he want “wiped from the map”? The answer is: nothing.

None of this is to say that Iran’s government is filled with respectable men trying to do what is best for Iranians.  It has its own history of brutal murders and political suppression.  This despicable behavior is not an excuse to distort facts however.  As history has shown, campaigns of misinformation are often orchestrated to make way for war.  And unfortunately for Americans and Iranians alike, war may very well be on the horizon.

The heightening tension between the United States government and Iran’s is based off of the fallacious notion that nuclear weapons have a legitimate purpose outside of killing enormous amounts of people.  Yet they have no other real purpose in the end.  Governments possess nuclear weaponry because there is little recourse for state-sanctioned murder.  The millions of innocent lives that stand to be vanquished off the face of the Earth have little meaning to the power-tripping political elite.  So while the Iranian government’s pursuance of nuclear weapons should be condemned, the United States government, the Israeli government, and others capable of waging nuclear war are in no place to criticize.

Visualizing The Political Importance And Truthiness Of The Payroll Report

With the current lackluster economic trends and job outlook, unemployment and salary figures are tossed around left and right; figures can make or break a politician’s career. The Non-Farm Payroll report supplies these numbers, and its monthly findings impact global economic performance expectations – but its reporting (as we have been vociferous about) on unemployment rates and job outlook are skewed to paint a falsely healthy picture of the economy. The followng info-graphic sheds more light how the ‘official’ unemployment figures are much lower than they really are.


Source: Bank of the Internet

The German Economy Tanks, The ECB Throws Gasoline On The Fire, And Eurozone Bailouts Enter Phantasy Land

Wolf Richter

Slovenia joined the Eurozone in 2007, went on a borrowing binge that blind bond buyers eagerly made possible, dousing some of its two million people with riches, creating a real estate bubble that has since burst, and driving up its external debt by 110%. And in October, it may go bankrupt, admitted Prime Minister Janez Jansa. Because borrowing binges can last only so long if you can’t print your own money. The sixth Eurozone country, of seventeen, to need a bailout. But it’s just a speck, compared to Spain, which will strain the bailout funds, and Italy, which is too large to get bailed out. The other option is the European Central Bank. Its printing press—the one it is not supposed to have—could easily bail out the once blind but now seeing bondholders. As in all bailouts, workers and taxpayers would get a haircut. And in Germany, the debate itself may tear up the Eurozone—just as its economy is tanking.

New car sales in Germany had been holding up well through June—a miracle in face of the fiasco playing out in the Eurozone’s auto industry. But they caved in July; and instead of miraculously recovering in August, they caved again: down 4.7% from August 2011 and down 8.6% from July. Ominously, sales of medium-heavy and heavy trucks, a thermometer of the business investment climate, fell off a cliff: -18.8% for trucks over 12 metric tons, -15.1% for trucks over 20 tons, and -9.4% for tractors (now down 5% for the year!).

Retail sales, which had been on a roll through May, stalled in June, and skidded in July. Early indications are even worse for August: retailers’ negative sentiment worsened for the fourth month in a row. They suffered from a nasty margin squeeze, given the dual pressures of wholesale price inflation that “increased sharply,” and heavy discounting, as Germans struggle to make ends meet [read…. The “Pauperization of Europe”].

And manufacturing, the vaunted engine of the German economy, after a rout in July, was hit by another “deterioration in business conditions” in August. It recorded the fifth month in a row of job losses. And export orders plummeted at the “steepest rate since April 2009.”

Alas, 2009 brings up horrid memories. In the first quarter that year, GDP plunged 3.8% from the fourth quarter of 2008, when it had already plunged 2.1% from the third quarter. Annualized, those two quarters added up to a double-digit collapse in GDP, the worst in the history of the Federal Republic. The German economy, which lives and dies by its exports, was saved not by hard-working Germans or smart managers or a superior system, but by the drunken stimulus frenzy in the US and China. German companies and their suppliers sucked with all their might on a wide variety of programs, from green-energy boondoggles to the cash-for-clunkers fiasco.

But now, without such foreign deus ex machina, Germany’s ability to bail out the Eurozone is more than ever in doubt. So, the ECB’s latest machinations hit fertile ground when they were leaked after ECB President Mario Draghi outlined them to the European Parliament late Monday: buy up Spanish and Italian debt with maturities of up to three years—up from the six to 12 months proposed at his last press conference. It worked. Italian and Spanish yields on two-year debt dropped below 2.8%, down from over 7.5% and 6.9% respectively this summer. Central-bank market manipulation at is best. Crisis solved. In phantasy land. Until reality sets in.

Namely a rift in Germany. Chancellor Angela Merkel and a slew of other politicians support it more or less tacitly. But the Bundesbank is having conniptions; printing money to fund government deficits violates EU treaties that limit the ECB to the single mandate of price stability. It just can’t find, not even between the lines, any traces of a hidden second mandate, such as funding government deficits. Bundesbank President Jens Weidmann—”I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” he’d said last November—has hardened his attacks on bond buying programs. With broad public support in Germany. And Merkel, who wants to hang on to her job more than anything else, will tread carefully. Yet, if Germany skids into a deep export-driven recession, all bets are off.

The world is becoming “less stable,” with a “bloated” financial sector, “bankrupt governments” looking for ever more revenues, and the possibility of a “gold mania,” said Doug Casey, chairman of Casey Research. For the highly insightful interview, read…. Doug Casey’s Predictions For The New World Market.

Is The Fed Responsible For The Great Financial Crisis?

“Recessions are a natural economic feature and their regular occurrence is healthy and indeed essential,” is how Deutsche’s Jim Reid introduces his investigation into post-Fed un-natural business cycles. Without them there is a serious danger of bubbles and the misallocation of resources as the further market participants detach themselves from the last downturn the more they tend to under-estimate risk. We,


Jim Reid, Deutsche Bank: The history of business cycles in the US

The chart below shows the duration of each economic expansion (i.e. between all US recessions) since the NBER started collating statistics from 1854. This highlights the fact that prior to the GFC the three preceding expansions were in the top five on record. We can also show that this cycle is now almost exactly average length through history.


If we re-order these cycles by duration we can show more clearly how this current US expansion compares to those through history.


We passed the median cycle length at the start of 2012 and we will be past the historical average point by the end of this month (September 2012). This expansion is now the 12th longest out of 34 since 1854.


There are those that suggest that the Fed’s inception back in 1913 has allowed for longer business cycles and for those interested we have colour coded those cycles (above) that occurred after this point, and also those post WWII when overall economy debt seemed to start a YoY increase that continues to this day. Countering the argument for longer post-1913 cycles would be the view that without the Fed helping to elongate several recent cycles, the GFC we’ve just been through might not have been anywhere near this deep and we are therefore now left in a unique situation at what is at the likely end of a multi-decade leverage binge consisting of several artificially long cycles. We are also now arguably in a liquidity trap where the Fed are less potent that they have been before in their near 100 year history.


The three ‘super-cycles’ between 1982 and 2007 were the exception rather than the norm, one where Central Banks and Governments had almost total flexibility over policy. The conditions that allowed for these long cycles perhaps started a decade earlier with the already much talked about collapse of the Gold Standard.


Unfortunately the 25-30 year build up of excess that this facilitated led to the GFC being the worst crisis since the 1930s and we have now likely moved to an era where policymakers no longer have the flexibility that defined the previous 25-30 years. Most Developed World (DW) Governments are up against their fiscal limits and are actually being forced into economically damaging austerity. We also have interest rates across the Western World that remain close to zero with little room to be lowered further. While we do have money printing, we are close enough to a liquidity trap that flooding the market with printed money doesn’t have the same immediate impact on the economy as a cut in interest rates did in the long leveraging stage of the super-cycle.


So not only are we battling with the huge structural problems that the post-credit crisis world brings, we are fighting it without much policy flexibility and are indeed being forced into a reversal of stimulus at arguably exactly the wrong time.


So it all adds up to a return to more normal length business cycles in our opinion. Indeed one could make an argument for shorter cycles than normal given the lack of policy flexibility relative to most of history.


We, like Jim, would argue that the reason the Great Financial Crisis was so deep was due to the authorities continued refusal to let the business cycle take its natural course.

Guest Post: Bernanke: "We Can't Really Prove It, But We Did The Right Thing Anyway"

Submitted by Pater Tenebrarum of Acting Man blog,

Bernanke and the Financial Markets

It is amazing how big an effect a rambling, sleep-inducing speech by a chief central planner can have on financial markets in the short term. Ben Bernanke’s Jackson Hole speech was of course widely expected to have such an effect, the main question was whether markets would be ‘disappointed’ or ‘happy’ with it.

In connection with the gold market we mentioned a week before the speech was delivered  that one should be mentally prepared for disappointment if the gold price were to rise in the days leading up to the speech. However, precious metals prices actually corrected ahead of the speech, which lowered the chance of a disappointment somewhat. Gold is an especially useful indicator with regards to expectations about monetary policy, as it tends to be the market that reacts most forcefully when a fresh inflationary impetus presents itself. Moreover, it tends to lead other markets (a pertinent recent example is 2008-2009; gold bottomed several months before equities did, evidently in expectation of additional monetary stimulus).


Given that the speech was fairly long (this does not mean it contained anything new – in fact, it didn’t. We have heard all of it before), it would take a human, even a speed-reader, some time to digest the relevant passages. These days there are computer algorithms that can analyze a speech very fast, looking for key terms and key phrases that are held to be important.

Apparently the algos initially tripped over Bernanke’s longish list of the ‘cost of non-traditional policies’ and at first decided to sell. Then they advanced to the ‘economic prospects’ section and the conclusion of the speech and bought back. Still, it is important to realize that the content of the speech – in spite of what various Kremlinologists have concluded afterward – cannot possibly have been the ‘reason’ for any of the market moves observed last Friday. As noted above, absolutely nothing new was revealed.



Gold on Friday in the wake of Bernanke’s Jackson Hole speech. Sell! No, buy! – click chart for better resolution.



Silver was similarly affected, but was subject to an even more pronounced price swing – click chart for better resolution.



We Can’t Really Prove It, But We Did the Right Thing Anyway

Nonetheless, the speech contained a few interesting passages which show us both how Bernanke thinks and that people to some extent often tend to hear whatever they want to hear.

Bernanke noted that although he cannot prove it, econometricians employed by the Fed have constructed a plethora of models that show that ‘LSAP’s (large scale asset purchases, which is to say ‘QE’ or more colloquially, money printing) have helped the economy. In other words, although no-one actually knows what would have happened in the absence of the inflationary policy since we can’t go back in time and try it out, the ‘models’ tell us it was the right thing to do.


Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS. The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.


“While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual – how the economy would have performed in the absence of the Federal Reserve’s actions – cannot be directly observed.

If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy.

Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy.

For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”


(emphasis added)

Of course such models are a prime example of ‘garbage in, garbage out’. The Fed’s own researchers can hardly be expected to provide proof that their bosses have not the foggiest idea what they are doing. Moreover, we need neither models nor ‘counterfactual observations’ to know that when a buyer with unlimited firepower shows up to buy securities, their prices will rise. So it is certainly true that the Fed can successfully manipulate interest rates for a while. Duh.

The question is really whether such a manipulation helps or hinders the economy. It is even believable that the ‘level of output’ has been higher in the short term than it would have been otherwise. This tells us absolutely nothing about the quality of said output and whether it has made us richer or poorer.


Falsifying Economic Calculation

Imagine Bernanke holding a similar speech in 2005 or 2006, looking back at the ultra-low interest rates the Fed imposed after the technology bubble had burst. He would have been equally correct to state that ‘the level of output’ was probably greater than it would have been otherwise.

In fact, he did perform a number of such back-patting speeches, beginning with his infamous ‘The Great Moderation‘ speech in 2004. What all these premature victory laps omitted was the fact that 90% of said ‘output gain’ was a complete waste of scarce resources which were employed in various bubble activities. This inevitably resulted in a major economic bust once the bubble burst in the wake of a number of baby step rate hikes.

In fact, the last ‘rescue’ of the economy performed by the busybodies at the Fed almost led to a complete collapse of the financial system (that is of course not how the Fed’s official history book has it; according to Bernanke it was the ‘lack of regulation’ in the most over-regulated sector of the economy that produced the bubble and subsequent crash. Manipulation of interest rates by the Fed can obviously only have ‘good effects’).

It should be clear to all but the most blinkered apologists of central planning that the long term effects of the post-2008 bust policies have yet to enter the scene. However, it appears already as though something is not quite going according to the interventionist playbook. After all we have thus far experienced what is widely held to be the ‘weakest post WW2 recovery’.

As to the effect of the inflationary policy on stock prices, stocks are titles to capital they are no doubt among the primary ‘beneficiaries’ of inflation at present. The large increase in their prices should however be seen as a warning rather than a sign of success. This may be counterintuitive, but the reaction of stock prices to the inflationary policy is one of the manifestations of the fact that relative prices in the economy have been altered. In other words, Bernanke hails the fact that he has managed to create falsified price signals as a success of his policy – but that raises the question of how falsified prices can possibly produce an economic benefit.

The reality is that they invariably lead to a falsification of economic calculation.  Economic calculation in turn is the main mental tool employed by entrepreneurs to estimate future conditions and arrange their production plans accordingly. We have just seen in the case of the housing bubble what a deleterious effect is has on the economy at large when economic calculation goes awry, resulting in large-scale capital misallocation.



Ben Bernanke: we can always print more…and maybe we will.

(Photo by Karen Bleier / AP)



Nothing Can Go Wrong

The portions of the speech that presumably led to the initial sell-off in precious metals as well as various ‘risk assets’ was probably the one in which Bernanke summed up the costs and benefits of ‘non-traditional’ monetary policies:


“In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies.”


(emphasis added)

At this point, the sell buttons were probably pressed. This mention of the ‘higher bar’ for ‘QE’ and similar policies was however immediately followed by an assertion that shows the hubris of the planners –  a hubris that is curiously quite persistent in spite of the evidence that their actions have set massive boom-bust cycles in motion:


“At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”


Don’t worry, it is all well in hand! We’ll pull just the right levers when the time comes, no problem at all. Listening to this one almost gets the impression that the crash must have been part of the plan, since obviously nothing can possibly go wrong!



The S&P 500 in 2008-2009. Nothing bad ever happens? The central planners have everything under control? – click chart for better resolution.



Economic Outlook and Conclusion

Then Bernanke turned to the economic outlook, and it was likely this portion of the speech that emboldened the buyers. First he patted himself on the back for having avoided both deflation and inflation (for some reason he failed to mention that the true broad money supply has increased by over 80% since early 2008, which seems to us is a lot of inflation indeed), while obviously the economic data have improved from the nadir of the recession.

Again, we don’t even want to contest the idea that the interventionist policy has produced a minor sugar high for the economy. Our point is that it is nothing but an inflationary illusion. Not an iota of wealth can possibly be created by increasing the money supply.

Then Bernanke noted that the recovery was not as good as has been hoped. Although he failed to supply an explanation for the phenomenon, this gloomy assessment was followed by an assertion that probably led all the Kremlinologists out there to conclude that more ‘QE’ is just around the corner:


“Some have taken the lack of progress as evidence that the financial crisis caused structural damage to the economy, rendering the current levels of unemployment impervious to additional monetary accommodation. The literature on this issue is extensive, and I cannot fully review it today.


However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years. Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds.”


(emphasis added)

If the economy’s sluggish performance is not due to ‘longer term structural factors‘, then it presumably follows that the Fed has good reason to intervene further.

Then Bernanke listed the ‘headwinds’, which in his opinion consist of the unusually sluggish housing market (err…there was a bubble in housing, remember, Ben? You and your buddies created it), various fiscal problems ranging from the fact that budgets are tight at the local and state level to the so-called ‘fiscal cliff’ situation, and finally the debt crisis in Europe. It seem the Fed cannot do much about any of these problems, which could be seen as a sign that Bernanke expects other policymakers to pull their levers before he is intervening again. However, his conclusion suggested otherwise.


“Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound.


I was reacting to common assertions at the time that monetary policymakers would be “out of ammunition” as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound.”


That was of course a reference to the famous ‘Helicopter Speech’ of 2002, in which he gave voice to his deflation-phobia (‘Deflation: Making Sure It Doesn’t Happen Here‘). Reminding us of this speech is probably a pretty strong hint (readers should look at the list of the Fed’s non-traditional ‘tools’ mentioned in that speech; it is enough to make one’s head spin).


“Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work.”


No, ‘we’ actually don’t ‘know’ any such thing. It’s only been four years and the negative effects will only become obvious in the long term – although we suspect that the sluggishness of the recovery is already a glaring effect of the policies enacted thus far. Not according to Bernanke:


“It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.”


The opposite is probably the case. It seems likely that the initial downturn would have been more pronounced, as the liquidation of malinvestments wouldn’t have been arrested and reversed so quickly – but in all likelihood a much stronger recovery would have followed. As we have pointed out many times, the recession of 1920-1921 was the last time both the administration and the Fed adopted a ‘laissez faire‘ stance in the face of a major economic bust. It was over so fast that no-one remembers it today, but the downturn was actually more severe than the initial downturn of the Great Depression. The current ‘never-ending slow-motion depression’ is typical for an economic bust that occurs after a series of credit expansions has depleted the pool of real funding and the economy has been subjected to major interventions designed to counter the bust. It is a method to avert short term pain to some extent, but it tends to condemn the economy to an endless malaise.


“As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.”


Another admonishment to the rest of the policy-making universe to do something. Although it is not specified what that something might be, the previously mentioned ‘fiscal cliff’ was a hint that Bernanke thinks more deficit spending is called for. In the end though, Bernanke gave us the boilerplate assurance that the ‘Fed is standing by to do more’, i.e., it will try to inflate us back to prosperity:


“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.


Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”


Bernanke is right to be concerned about the suffering and waste entailed by the weak labor market, but he has only himself and his colleagues to blame. After all, their policies created the mess in the first place. It is bizarre that he concludes from this that they should do more of the same, but there it is.



The SPX on Thursday and Friday (5 minute chart) – quite a bit of short term volatility surrounded Bernanke’s speech, but stocks ended the day in limbo – higher, but not by a lot – click chart for better resolution.



Jon Hilsenrath Chimes In

To briefly come back to what we wrote at the very beginning: nothing of what Bernanke said was actually new. It sure didn’t sound to us like he actually promised ‘imminent QE’. Rather, he concluded his speech with the same sentence that has been part of every FOMC statement since 2008: “The Federal Reserve will provide additional policy accommodation as needed.

Here is the sentence that concluded the August FOMC statement:


“The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”


This is the sentence that concluded the June FOMC statement:


“The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”


You get the drift – it goes on like that, ad nauseam, if one tracks back through the statements to the beginning of the crisis. The only differences are minor points of inflection, but the substance is always the same.

In this sense we say that people simply heard what they wanted to hear. All Bernanke did was to confirm the preexisting ‘easing bias’, but it is not at all clear to us from his words that the current situation is sufficiently dire to surmount the ‘higher bar’ that according to Bernanke stands in the way of the implementation of ‘non-traditional’ policies. The stock market is close to a multi-year high, commodity prices have firmed and the US economy is officially still in expansion mode, even if the expansion is widely acknowledged to be weak.

However, there is Jon Hilsenrath, the Fed’s favored media mouthpiece, who chimed in after the speech with the following:


“A defiant Ben Bernanke sought to shoot down criticism of the Federal Reserve’s easy-money policies and strengthen the case for new efforts by the central bank to bring down what he described as gravely high unemployment.


Markets have been on edge for months about whether the Fed will launch another large bond-buying program. Fed Chairman Bernanke, speaking Friday at the central bank’s annual retreat here, offered a vigorous defense of the Fed’s $2.3 trillion in bond purchases since 2008, estimating they helped lead to more than two million jobs—and signaled that he is strongly considering another installment.



“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery” Mr. Bernanke said.


Mr. Bernanke acknowledged some of the hurdles he faces, noting, “It is true that nontraditional policies are relatively more difficulty to apply,” he said.

But he left little doubt that he sees the benefits of trying. “Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation,” he said, “and it is important to achieve further progress, particularly in the labor market.”


(emphasis added)

This reminds us that a previous installment of Hilsenblather published just four days before the Jackson Hole speech weighed the ‘costs and benefits of non-traditional monetary policy’ in much the same way Bernanke did in his speech – and came to similar conclusions. Much of what Hilsenrath writes about the pros and cons as the various monetary bureaucrats see them can be deduced from their speeches and papers, but it is clear that he is the ‘go to’ man when they want to leak something. So when he interprets the speech as promising more money printing to come down the pike soon, one should probably take heed.

There is a considerable risk associated with going ‘whole hog’ when financial markets are already near their recent highs, as the concrete decision may still disappoint by dint of being seen as ‘too timid’. In short, there could be a ‘sell the news’ event in store once the actual policy announcement comes. What would they then do for an encore?

As to the steps that might be adopted, James Bullard recently argued that the Fed may follow the example of Denmark’s central bank and impose a negative interest rate penalty on excess reserves. This would be politically uncontroversial, but there could be a plethora of unintended consequences as the Fed’s own researchers admit.

John Williams of the San Francisco Fed (who similarly to Eric Rosengren recently argued for ‘QE without limit‘) wants to see ‘at least $600 billion in asset purchases‘. Contrary to his fellow über-doves Evans and Rosengren, Williams actually has a vote at the FOMC this year.




The ratio of durable goods manufacturing versus non-durable consumer goods production. This illustrates how during recessions, malinvested capital in the higher order goods production stages is liquidated, while production of non-durable consumer goods continues as before. The economy’s production structure is temporarily shortened to restore a proper balance between consumer and capital goods production and allow the pool of real funding to recover.

As can be seen, the ratio has shifted upward and become considerably more volatile with the advent of the credit bubble and the massive expansion of the money supply it has fostered. At present yet another extreme has been reached, even faster than in the preceding bubble phases. It is a good bet that the production structure therefore ties up more consumer goods than it releases, an inherently unsustainable condition. Additional expansion of money and credit will only serve to exacerbate the imbalance – click chart for better resolution.

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