09 Jul 2010

Is Bernanke Trapped By Monetary Models?

Federal Reserve 7 Comments

I was reading this John H. Makin piece warning of deflation (HT2 my favorite blogger) with rising skepticism. (Incidentally, I have been commissioned by a currency trader (who loves Austrian economics) to do a report on the Japanese Lost Decade. So I’m not going to shoot my mouth off about the US’s current situation until I understand what the heck happened in Japan.)

Anyway, I was getting more and more skeptical, but I finally lost it at this line:

The Fed is, and has been, forced to print money by purchasing Treasury securities and mortgage-backed securities in order to satisfy the deflationary rise in money demand.

No Mr. Makin, even if you think the Fed was “forced” to purchase things, it certainly wasn’t forced to buy Treasury securities and mortage-backed securities. The Fed could have boosted the monetary base by buying bonds issued by microlending operations in Africa, or it could have bought the rights to my next novel. But no, the Fed decided to give a trillion dollars to the most powerful people on the planet. What a coincidence.

(Note: I am not trying to pick on Makin, but we economists really need to wake up. If you want to say avoiding a “secondary depression” is paramount, and cite the waffler Hayek on me, fair enough. But let’s not kid ourselves that Bernanke stays up at night worrying about the output gap.)

7 Responses to “Is Bernanke Trapped By Monetary Models?”

  1. Random says:

    How about tackling the deflation vs. inflation issue as well? You have for a long time warned against massive inflation, or at least inflation. This AIE article makes the case for deflation, and the data seems to be telling us that deflation is on the horizon. How do you reconcile this with your views? Maybe you believe there will first be deflation and then hyperinflation?

    Personally I believe you can’t abuse the money supply like they have done without eventually causing hyperinflation, but who knows? Maybe they are smart and maybe they do indeed have an exit strategy.

    • bobmurphy says:

      Well that’s what I meant. Since in the next few weeks I’m going to be studying Japan fairly extensively, I will hold off until I’m done, before commenting on the prospects of inflation/deflation here.

      I have to amend my original views because obviously gas and milk prices have not risen as much as I thought they would.

      It’s true, I think this “oh my gosh if you take out food and energy, prices are only rising slowly, we’re all doomed” is silly, but I need to rethink my own views because my predictions haven’t panned out regarding CPI.

      • Bob Roddis says:

        Speaking of milk prices, Detroit area Kroger’s supermarkets have been selling milk in gallons for $1.77 for several months. Prior to the crisis, it was about $2.99 a gallon. Milk always seems to be one product whose price changes considerably from state to state. Also, $130,000 houses won’t sell for $50,000.

        The one place I see lots of price inflation is on junk food at gas stations. I have no idea if that means anything at all.

        Government Motors and Chrysler are supposed to fork over $12.3 and $3.4 billion repectively to correct pension underfunding in the next five years. Good luck with that.

  2. von Pepe says:

    Would there be inflation if you included asset prices?

    As we have been taught, inflation can occur in some places whilst deflation (or real price adjustments) occur in other places.

    • Random says:

      Marc Faber had some interesting discussion on this (deflation in assets and inflation in goods or vica versa) in one of this Gloom, Boom & Doom reports (January 2002). It’s one of the free sample issues if you sign up to get sample reports.

  3. Christopher Carr says:

    Here’s what happened as a result of repeated, worthless Bank of Japan stimulus throughout the Lost Decade: http://www.theinductive.com/christopher-carr/2009/11/5/lets-not-go-down-this-path.html

  4. Slim934 says:


    Didn’t Ben Weingarten write a Mises Institute working paper on the Japanese lost decade?

    I recall reading it before and finding it fairly informative.