'Its Dishonour, Sir!'

By: Sean Corrigan | Sun, Aug 3, 2003
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In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said:"If you dont work you die."

Rudyard Kipling, 1919

The hardest thing about analyzing one of Cranky-Bernankes headline-grabbing (and increasingly Greenspan-upstaging) speeches, is knowing where to start when dissecting out the tangled web of ill-formed logic and how many of his groundless suppositions and how much of of his erroneous theorizing to refute, without either taxing the readers patience or losing the will to live oneself.

Lets just cut to the chase and say that in his latest offering [see: http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/default.htm ], the man has managed to repackage most of his boss's blithe acceptance of such dubious propositions as the productivity revolution, the blind belief that CPI is somehow perennially overstated (rather than being redefined, hedonised and smoothed out of existence by the highly-politicized BLS), the peddling of the risible claims about how well the credit junkies of the West have done by giving banks a claim on a bigger piece of their only substantial asset - their homes - (and how riskless has been this deal for their lenders), and the expressed near-certainty of a swift return to 3%-ish levels of GDP growth.

He has then has then wrapped them up in just about every one of the pseudo-academic, muddle-headed, neo-Keynesian bits of macro-economic hogwash he probably uses for the chapter headings of one of his interminable textbooks.

The Phillips curve, Okun's Law, exogenous shocks, output gaps, NAIRU rates, the desirability of 'price stability' (actually an uninterrupted, if slow, erosion of the value of money), effective demand shortfalls, cost-push inflation, the primacy of 'expectations', the role of econometric modelling, the long-run neutrality of money, the need for positive inflation and the anathematizing of lower prices, the unquestioned benefits of fiscal stimulus, currency devaluation, artificially cheap money and a total suppression of market forces in the setting of key asset prices as part of the push for the Utopia of 'full employment' - all these discredited old concepts had an airing.

Allow us to run quickly run through a list of some of the basic reasons Bernanke and his kind are given to commit such grievous errors of diagnosis and prescription.

Firstly, Man does not conduct his life on a Philips curve - or, indeed, according to any other such ceteris paribus, static, aggregate construct, Rather, he acts as best he can to ease his personal material or spiritual discomfort and this he does as an Individual (with a capital 'I'), not as an atom, or even an ant. Therefore, he cannot be made subject to false analogies with the laws of Boltzmann or Boyle.

Secondly, economic well-being is not predicated upon effective demand, but upon efficient supply - to argue otherwise is to say a village full of insatiable and idle gluttons is more prosperous than one populated by frugal and hard-working farmers.

Indeed, to elevate naked consumption in this manner above all other economic activities is a doctrine of self-defeating nihilism. Locusts do not alleviate starvation: Honey Bees do.

Thirdly, to promote as a primary goal growth in a statistical artefact like GDP without asking how this growth has been achieved, or whether it is sustainable - or even whether it is cancerous - is to suggest we should not wonder if we are warming up a hypothermia victim by burning his clothing, or worse, by setting his garb ablaze while he is still wearing it.

Fourthly and worse, to suggest, as Bernanke explicitly does, that this 'growth' should be promoted, if necessary, by fostering money illusion through coin-clipping, thus cheating savers and creditors at home and abroad, or by encouraging an already rapacious government to commandeer more of our property for its self-serving, minimal-return ends (usually those related solely to the consolidation and extension of its powers) is to say that we can only hope to thrive through fraud or extortion.

Fifthly, however Bernanke dresses this up in the language of the need for the Fed to make 'clear and credible commitments', what he is prescribing as his main policy directive is the need to reassure a key group of players - those in the bond market - that they will receive plenty of notice before their traditional ploy, that of borrowing short at rates directly subsidized by the Fed and lending long to the Strate and its pals, starts to incur extra risks, rather than active support, from the Fed itself (something which, it seems to have escaped him, might already be a touch belated!)

Once again, we are back to a doctrine of wholesale market frustration, helping to set long and short term rates - and by implication most asset prices - at odds with those which would have arisen as a proper reflection of people's valuations upon the unhampered free market and which is thus an inherently malign act.

But then, that is what central banks do, isn't it? To show this is their unabashed aim, let us leave Bernanke and his printing press for the moment and look east across the Atlantic.

In the midst of an encomium to Keynes and Sraffa, delivered in London in February - what we must describe as the Catholic Socialist head of the Banca d'Italia, Antonio Fazio, had the following remarks to make - remarks which make our case as well as giving the gold suppression conspiracy theorists everywhere a renewed sense of vindication.

It also reinforces our previous characterisation of George and Greenspan as today's Montagu Norman and Ben Strong, continually acting to rig markets in the struggle to maintain an otherwise challenged national standing and to subvert economic freedom, wreaking havoc everywhere as a result.

As Fazio wrote:

'In a system that rests basically on fiduciary money, the principles of free trade and comparative advantage typical of trade in manufactures have sometimes been extended unquestioningly to movements of financial capital. Past errors in fixing exchange rates and instituting specific monetary regimes have been repeated in new ways.'

To what can the emphasised text refer, but gold?

'Reflection on the mistakes made and the need to limit and rectify the adverse effects on the stability of intermediaries, to protect savings and to restore conditions for a recovery in output have prompted the monetary authorities of the industrial countries to establish more extensive and closer cooperation among themselves and with the developing countries.'

A particularly bold assertion of the truth, you will perforce agree

'The Governor of the Bank of England, Sir Edward George, plays a leading role in this new phase of international monetary cooperation that we could say began with the meeting of the Group of Seven leading industrial countries in Toronto in February 1995, shortly after the Mexican crisis erupted.'

Sir Edward the Unrede was, of course, head of the Bank for International Settlements 'Group of 10' for most of this period, and so had the chair when it came to central bank 'co-ordination'.

Thus, we are told, the age-old collusion of the Anglo-American moneyed interests was reinvigorated exactly when the so-called 'strong dollar' policy became an engine of global reflation, helping instigate the Bubble and sending Gold - intentionally or not - into its long decline as a consequence

[See: http://www.bancaditalia.it/interventi_comunicati/integov/icci_uk/en_fazio_25_02_03.pdf ]

To conclude, let us offer a word or two about the baleful influence of Irving Fisher - cited by Bernanke for his 'debt deflation' theory, as well as being implicitly paid deference in the wholesale avocation of the need for something called 'price stability' - a long held dictum of Fisher and his contemporary Cassel.

Ironically, aside from the fact that the only 'stability' to be achieved in either a living organism or a dynamic universe is that of the grave for the first and of absolute zero for the second, when Bernanke pronounces on this subject, he is well behind the present trend of thinking at central banks far beyond the petty inflationism of the Fed.

As we have pointed out, the BIS itself has pondered much of late on the topic of how price stability may be a necessary, but is very far from a sufficient, condition for a well-behaved economy, by reason of the fact that the misconstruing of some of the symptoms of an inflation - generally higher prices - for its essence - an undesired increase in money and its substitutes - can lead to a false complacency in the face of vast distortions of the economic structure, as witnessed in the 1920s, as well as the 1990s.

For his part, Fisher, is of course, well known for his hubristic 1929 assertion that stock prices were on a 'permanently high plateau.'

What is less well known is that this academic swellhead ran through much of his heiress wife's fortune in the ensuing Crash and the best part of her sister's, too, in fruitless attempts at bottom picking in its aftermath.

Running from his creditors thereafter, Fisher, like any latter day Neo-Con, sought to conflate his personal plight with his patriotic duty and so founded the high-sounding 'Committee for the Nation to Rebuild Prices and Purchasing Power' in January 1933.

This pressure group - within whose ranks Governor Bernanke would evidently feel at home - was among the more vocal advocates of the abandonment of the gold standard, a policy of default which Roosevelt duly delivered in April of that year.

In a letter to his long-suffering spouse, Fisher wrote:

'Now I am sure - as far as we can be sure of anything - that we are going to snap out of this Depression fast. I am now one of the happiest men in the world!'

As Murray Rothbard noted, in his magisterial 'History of Money and Banking in the United States', Fisher went on in a less lofty vein:

'My next big job is to raise money for ourselves.... I have defaulted payments the last few weeks because I did not think it was fair to ask [your] Sister for money when there was a real chance I could never pay it back. I mean, if FDR had followed [Senator Carter] Glass...' (a hard money man) '... we would have been pretty surely ruined. Now I can go to Sister with a clear conscience [sic]!'

Senator Glass - himself one of the original sponsors of the 1913 bill which set up that fateful institution, the Fed - when asked by Roosevelt for his opinion of the devaluation, replied hotly:

'It's dishonour, sir!'

In the last seventy years, alas, such has been our unremitting dishonour that our motto could well be, 'Semper Infideles'


Sean Corrigan

Author: Sean Corrigan

Sean Corrigan
Capital Insight

Sean Corrigan is a principal of www.capital-insight.com, and a co-manager of  the Bermuda-based Edelweiss Fund.

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