Guest Post: Bizarre Updates From 'The New Normal' School Of Economics

Submitted by Pater Tenebrarum of Acting-Man blog,

Bernanke: Spreading Money Printing Bliss Globally, Whether or not Anyone Asked for it

Last week saw a full court press in defense of the current money printing exercise. It started with Bernanke telling us the Fed is making the whole world happy … even if the world hasn’t asked for it:

“The Federal Reserve’s bond-buying program is not a “beggar-thy-neighbor” policy designed to spark a devaluation of the dollar to spark the U.S. exports at the expense of other countries, said Fed Chairman Ben Bernanke on Monday. Rather, the Fed’s policy is an “enrich-thy-neighbor” action because strong growth in the U.S. would spillover to trading partners, Bernanke said in a speech to a conference at the London School of Economics. Some emerging market economies have complained about the Fed’s quantitative easing program, and some have called it the start of a “currency war.” But Bernanke said a return to solid growth in the U.S., Europe and Japan would ultimately benefit smaller countries.”

(emphasis added)

One should not let this man loose in front of innocent students. It is certainly true that the dollars Bernanke prints are spilling over into the world at large – where they distort price signals everywhere. In most foreign nations mercantilist thinking predominates, and some even have currency pegs or quasi currency pegs. In any case, they all feel they must inflate right along with the Fed, so as to avoid that their currencies appreciate too much against the dollar. As an example, Brazil’s minister of finance has been complaining for years about ‘QE’, and the central bank of Brazil has begun to run a very risky and far too loose policy, which has in the meantime led to a noticeable increase in money prices. The one thing money printing can definitely not achieve is ‘solid growth’, even though it may temporarily appear so on paper on a purely quantitative basis. Misdirecting scarce resources into bubble activities may well look like ‘growth’ to Bernanke, but in reality it can only weaken the economy structurally.



Ben Bernanke: spreading happiness far and wide.

(Photo via


Rosengren’s Cost-Benefit Analysis of Money Printing

Next up to bat was Eric Rosengren of the Boston Fed, who similar to most of his colleagues is of the ‘John Law School of Economics’ (i.e., what the economy needs to ‘get better’ is ‘more of the circulating medium’). Rosengren is a proponent of Anglo-Saxon central banking socialism at its finest and always likes to decorate his speeches with reams of statistics to buttress his case, but unfortunately one cannot prove or disprove points of economic theory by means of statistical data.

Here is an excerpt from his assessment of what the money printing exercise achieves that is fairly typical for Rosengren’s explications:

“The Fed’s purchases of long-term securities are intended to lower longer-term interest rates, like rates on home mortgages and auto loans, in order to promote faster economic growth. These purchases also encourage households and businesses to shift somewhat from riskless low-yielding short-term government securities to investments that bear a sensible degree of risk and have a stronger economic effect, like corporate bonds and stocks.


Federal Reserve Bank of Boston staff use two different models to estimate the impact of asset purchases on the economy. One explicitly articulates household and business behaviors and the other is a purely statistical model.  Reassuringly, both models give similar results. Our best estimate implies roughly a one-quarter-point decrease in the unemployment rate for a $500 billion asset-purchase program.”

(emphasis added)

In so many words, nothing can go wrong because our ‘models’ say so. One may well feel compelled to ask Mr. Rosengren what the economic models of his staff were saying about the economy in 2006 and 2007, but as far as we are aware nobody present at the delivery of his speech actually asked that. That would no doubt be considered impolite.

However, we know what the Fed heads were talking about in their meetings at the time, and that they were laughing a lot in 2006 (the details of the 2007  meetings are due to be released this year – there is an inexplicable five year delay associated with these releases). In other words, their ‘models’ evidently told them that everything was just going swimmingly. By contrast, anyone with even an ounce of common sense could see that the economy was cruising toward a disaster. Now the same people who didn’t see this coming are laying the foundations for the next disaster by doing the same things all over again, only at an even grander scale. Meanwhile they are defending their actions with the same means that they undoubtedly used to justify their previous catastrophic policy decisions. And the whole world is seemingly pretending that all of this is completely normal!


Bubble trouble

The tinder for renewed bubble activities: assorted interest rates (from Rosengren’s presentation) – click for better resolution.



Eric Rosengren – guided by models that tell him nothing can possibly go wrong.

(Photo via


Former “Hawk” Wheeled out in Trial Balloon

A few years ago Minneapolis Fed chief Narayana Kocherlakota was among the handful of dissenters on the FOMC board, refusing to go along with the ultra-easy monetary policy proposed by Bernanke and others. At the time he provided a qualitative assessment of the labor market which we actually greeted with a few approving words in these pages.

Here is what he said back in 2010:

“The job openings rate has risen by about 20 percent between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period. What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.


There are many possible sources of mismatch — geography, skills, demography — and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.”

(emphasis added)

Got it in one. As an example, companies in the US are looking for experienced welders and cannot find enough of them. For reasons unknown, Kocherlakota has completely abandoned this largely qualitative approach to analyzing the labor market. Now he is attempting to out-dove the doves.

As we have pointed out here many times, we do not believe for one second that there is anything to the frequent ‘exit’ talk.  Here is Kocherlakota’s latest, where he notifies us that he now believes that $85 billion in additional money printing per month while keeping the overnight interest rate at a big fat zero is still not enough – and more importantly, he wants to see the threshold at which the policy is ended lowered even further.

“As I described earlier, the FOMC has a second mandate: to promote maximum employment. In March, most of the 19 FOMC participants believed that the unemployment rate will converge to a level between 5.2 percent and 6 percent within five to six years. But, under the current formulation of monetary policy, I see the rate of convergence to this long-run rate as likely to be slow. In particular, I expect that the unemployment rate will still be close to 7 percent by the end of 2014. The FOMC could facilitate a faster return of the unemployment rate to its lower long-run level by adopting a more accommodative monetary policy that puts more upward pressure on employment. Thus, I would say that my outlook for unemployment and my outlook for inflation both point to a need for more accommodation than is currently being provided by the FOMC.


Based on my outlook for the next two years, I’ve concluded that the FOMC would better fulfill both of its congressional mandates by adding more monetary policy accommodation. How could it do so? I think that there are several possible approaches available to the Committee. For example, the FOMC could reduce the public’s level of policy uncertainty by clarifying the nature of the economic conditions that would lead the Committee to reduce or stop its current asset purchases. Alternatively, the Committee could communicate to the public that, once the removal of monetary accommodation eventually commences, the rate of withdrawal will be slower than is currently anticipated.


Both of these kinds of changes in communication could potentially provide needed monetary accommodation. However, they would require the FOMC to make relatively complex changes to the language of its current communications. My own preferred approach is considerably simpler. In its current forward guidance, the FOMC has stated that it expects the fed funds rate to remain extraordinarily low at least until the unemployment rate falls below 6.5 percent. The FOMC could provide additional needed stimulus by lowering the threshold unemployment rate from 6.5 percent to 5.5 percent—that is, by changing one number in the existing statement.”

(emphasis added)

In other words, not only has the skills mismatch magically disappeared from his deliberations, and the Fed is suddenly able to ‘create employment’ by printing money, but he also offers the first public trial balloon in favor of extending the money printing exercise way past its current official sell-by date. You couldn’t make this up.



Narayana Kocherlakota: from now on, 2 + 2 shall be 5.

(Photo via


Pseudo-Scientific Justifications

To round things out so to speak, the NY Fed’s economics staff is now putting out something that is resembling long discredited Philips Curve nonsense to justify higher inflation (note that some seven Nobel Prizes in Economics have been awarded for papers debunking the nonsense Samuelson et al. had cooked up in the context of the Philips curve. This happened not long after Henry Hazlitt showed in an analysis of the 1947 to 1976 period that the probability that the alleged connection between inflation and employment existed was no higher than simply flipping a coin). Admittedly Nobel Prizes in Economics don’t prove much and are often even a contrary indicator (see Krugman), but in this particular case they seem to have been on the mark.

It should be noted that while there can be short-run effects on employment if prices rise faster than wages, such seeming gains are perforce ephemeral, as they A) assume that workers will forever be accepting lower and lower real incomes without demur and B) lead invariably to a misallocation of capital that ultimately weakens the economy’s ability to generate real wealth. In other words, to recommend higher inflation in order to lower unemployment ranks among the worst economic policy ideas ever. That the Fed’s board members are all such big fans of it is quite ominous. Now their staff is evidently providing the pseudo-scientific ammunition to justify it. Note here that when these people speak of ‘inflation’ they are not referring to the massive growth in the money supply, they are referring to one of its eventual effects, namely rising prices on a broad front.

“In times like these, a rise in inflation expectations could do the economy some good, argues research published by the Federal Reserve Bank of New York.


The paper argues that when traditional forms of monetary policy, such as cutting short-term interest rates, can go no further, central bankers can goose economic activity higher if they can convince the public the future pace of inflation is likely to rise.”

In short, the Fed should actively seek to lower the demand for money, a task it is undoubtedly capable of fulfilling. Unfortunately such ‘goosing of economic activity’ by means of inflation is precisely what John Law’s playbook recommended and was later tried again by the revolutionary assembly of France and many others. In all cases it appeared to ‘work’ for a while, and every time when the juice was switched off, the depression immediately returned. This then caused the monetary authorities to opt for dispensing the next ‘coup de whiskey’. Often this went on until the ultimate catastrophic demise of the entire underlying monetary system. That is in fact the only choice there is: one either allows the economic adjustment (a.k.a. bust) to occur early and fast, or one postpones it by printing money and thereby ensures an even bigger catastrophe down the road. That is the only long-run outcome that can be expected from this type of policy.



As we have frequently pointed out, modern-day economic policy is evidently in the hands of utter quacks. It matters little to them that their prescriptions have failed time and again for hundreds of years – they do the same thing over and over again, as though they were escapees from an insane asylum.

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