Bernanke Ignores Basic Laws of Economics

Story Stream
recent articles

Much ink is presently being spilled by the economic commentariat concerning soft demand in the economy, and ways to increase it. Lost on the deep thinkers that presume to know what makes us prosperous is the greater truth that demand is the last thing governments would ever need to stimulate.

As humans, our demand for what we lack is unceasing, by definition. That's why we work. If this is doubted, one need only camp out an Apple store the next time our leading technology innovator releases its next must-have product.

But what the average consumer knows that the fine tuners in Washington apparently don't is that in order to buy an iPad, consumers must produce something of similar value first, exchange it for dollars, then purchase the Apple product. And if they've not created value that is exchangeable for the iPad, they must find someone who has produced the iPad's cost in dollars, and who is willing to delay near-term consumption on the way to transferring their consumptive abilities to the eager buyer.

To make what's simple even simpler, all demand is the result of production first, and this has been the case for as long as man has roamed the earth. We produce so that we can consume.

Of course economists will continue to try to put the cart of demand before the production horse, and unsurprisingly the never disappointing Ben Bernanke - the walking definition of an economic fallacy - will carry the load for them from the Fed. Bernanke did just that in an opinion piece last week for the Washington Post.

Eager to justify his latest dose of "quantitative easing" (QE) amid increasing skepticism even in Washington where the false concept of getting something for nothing is religion, Bernanke proclaimed that lower interest rates wrought by QE will increase stock prices on the way to more consumer wealth and confidence. According to our Fed Chairman, this might boost spending, and "Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." One can't make this up.

But if the sentient among us could climb inside Bernanke's dopey dreams for a moment a la the film Inception, we might insert the part about production preceding demand so as to make his Utopian visions in the middle of the night whole. In Bernanke's case, it's apparent that he always wakes up before the production aspect enters his incomplete picture.

Absent it, the increased demand that Bernanke presumes is no such thing. That's the case because the wealth effect that he naively believes to exist is non-existent.

If shareholders exchange shares of increasing value for dollars in order to consume, the seller's dollar bonanza is naturally matched by the buyer's reduced cash position. These things even out, with no increase in consumption. And the same applies to housing. If Bernanke's rate machinations enable mortgage refinancing for certain individuals, suddenly flush mortgage holders will be matched by savers whose savings will enable the financial transaction.

Of course underlying Bernanke's vision is lower interest rates across the board driven by the Fed's interventions. But here too he gets things backwards.

Indeed, tight credit during uncertain economic periods is usually a positive signal that failed economic concepts are being starved of capital so that they're no longer able to destroy it. High rates of interest aren't scary as much they're a symptom of previous mistakes, and they're essential for drawing savers back into the marketplace to fund productive ideas quite unlike the ones that caused the financial panic to begin with.

More important, high prices of anything by definition beget lower prices in the future. No economist - including even Mr. Bernanke - would suggest that if actual demand drove gasoline to $5/gallon that price controls should be put in place. They wouldn't because the $5/gallon would signal to producers what the market desires, and that they will be compensated handsomely for delivering what consumers want.

What's never been explained is why central bank attempts to control the cost of credit are any different. In the gasoline example government intervention would distort precious price signals on the way to shortages, but just as Bernanke ignores Say's Law, his vain efforts to make credit plentiful reveal that he ignores too the crippling effects of price controls as they apply to him.

Bernanke continues to promote the view that we don't have an inflation problem, and to support his claim he points to a "considerable" amount of "spare capacity" in the U.S. The problem there, if we first ignore that U.S. producers operate in a global economy with lots of spare capacity, is that Zimbabwe, Mexico and Argentina have long had a great deal of spare capacity, and this has never spared them from the cruel monetary phenomenon that is inflation.

Indeed, outside of central banks and academic circles inflation remains what it's always been, and that's a decline in the value of money. And with the dollar continuing to test new lows against gold and every major foreign currency, it's apparent that Bernanke is additionally ignoring the price signals that are presently screaming inflation.

Perhaps to give us a laugh, Bernanke notes that the Fed labors under a dual mandate imposed by Congress "to promote a high level of employment and low, stable inflation." Funnily enough, on Bernanke's watch the rate of unemployment has doubled, and while he would correctly point out that the dollar's exchange value is a Treasury thing, gold has nearly tripled versus the dollar during his tenure. It's as though he's begging to be relieved of his duties by noting his failures, but his peers and overseers in Washington are as clueless as he is.

As a result, Americans and the world will continue to suffer a Fed head that, with every utterance shows how very unequal he is to his job. A self-proclaimed expert on the 1930s, Bernanke continues to intervene in the economy despite clear lessons from that decade showing that government intervention then turned what should have been a brief downturn into a Great Depression.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

Show commentsHide Comments

Related Articles