Bernanke Meets His Inept Match In Bill Dudley

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Back in the late ‘90s at Goldman Sachs, it was a running joke in the equities division that so inept were the firm's economists, that the best way to put one's clients into profitable trades was to bet against their projections. Though a buy-and-hold firm by nature, Goldman had clients eager to trade, and the GS economists served as the proverbial muse for clients seeking profitable action.

What's notable about this is that Bill Dudley was Goldman's chief economist during the time in question, and presumably the brains behind all those faulty, but paradoxically profitable forecasts. Of course Dudley's reward for regularly being wrong was quintessential Washington. Hired away from Goldman to run the New York Fed's markets desk, Dudley became a soulmate of sorts with the walking, talking definition of economic fallacy in the form of Fed Chairman Ben Bernanke, and having worked well with the latter in crafting the bank bailouts that continue to bring our economy harm, Dudley was eventually promoted to the top job at the New York Fed.

Failing upward is something Bernanke (see: bank bailouts, and the subsequent "financial crisis") and Dudley both know well, and now seemingly joined at the hip, there's no telling the economic damage the two can achieve working together. Sure enough it was Dudley who, according to the Wall Street Journal, "was a key ally in Mr. Bernanke's push last November to launch the Fed's $600 billion in purchases of U.S. Treasurys" to allegedly "stimulate the economy."

All of which brings us to a recent speech Dudley gave to the Queens (NY) Chamber of Commerce. According to a report in the New York Post, Dudley's talk didn't fool many of the attendees, but given his Bernanke-like understanding of economic growth and inflation, no one should be surprised.

Apparently eager to make the case for the absurd, Dudley remarkably told the audience that inflation was under control. But with many in attendance not taking the bait, Dudley noted that "Today you can buy an iPad2 that costs the same as an iPad1. That's twice as powerful."

Nice try, but were Dudley more in touch with the history of consumer prices, he would know well that from flat-screen televisions to cellphones (the original Motorola brick phone in the early ‘80s retailed for $3,995) to long distance calling, prices fall by definition, and it's often a function of increased productivity rather than something driven by a well managed dollar.

What Dudley seemingly doesn't understand is that falling prices on their own are not deflationary, let alone signals of a lack of inflation. Indeed, assuming cheaper or near costless long distance, that merely expands the range of goods individuals can buy on the way of driving up the prices of other products and services.

Furthermore, it was the Bernanke Fed - and by extension the Dudley Fed - which stated with urgency last year that the declining prices which characterize all advanced economies were something to avoid at all costs. One misbegotten reason for the failed experiment that was and is QEII was that if prices began to fall, consumers might (gasp) turn into the very savers whose savings confer jobs on the unemployed. Our hopeless Fed said that reduced consumer prices just couldn't happen, so it's passing strange now that Dudley, depending on the audience, at least situationally sees at least some of the undeniable good that results from falling prices.

Happily for those of us who know that which eludes Fed officials, specifically that commodity-price swings upward are the best signal of monetary error, an attendee mentioned grocery-price spikes that are frequently useful symptoms of devaluationist monetary policy. The attendee noted that "we see prices going up or smaller products at the same price." Skippy peanut butter comes to mind for this writer among many products the price of which hasn't changed amid a reduction in content.

Essentially caught, Dudley did as government officials tend to do, and changed the subject, talking up an "economic outlook that has improved considerably over the last six months." No doubt the audience was a bit taken by this non-sequitur, but then what could Dudley say?

Further on, he sought to defend the Fed's imposition of the indefensible QEII, and his reasoning was straight out of the Phillips Curve playbook. In short, weak economies are anti-inflationary, the Fed for reasons that don't pass the most basic of tests likes a little bit of inflation, so QEII is necessary in the eyes of Dudley because in today's economy, "there are still several areas of vulnerability and weakness."

What Dudley and Bernanke still don't get is that their definition of inflation isn't credible empirically or anecdotally. To them inflation results from labor and capacity shortages, but as U.S. producers operate in what is a global economy, and with unused labor and capacity plentiful around the world, what they presume to be inflation's causes never could be. To use a U.S. example of what occurs globally, the economy in North Dakota is booming, it suffers a labor shortage, but rather than an inflationary event, underutilized or unemployed workers from outside North Dakota have migrated there on the way to a 5% population increase that has mitigated any falsely supposed notions that too much growth drives up the price level.

And that's of course where Dudley outdoes the master of the absurd, Ben Bernanke, when it comes to obtuse economic pronouncements. Indeed, while both share a false, output-gap driven misunderstanding of inflation, Bernanke at least acknowledges a monetary component to inflation through his oft-quoted assertion that a simple deflation cure would be to drop dollars from helicopters. In Dudley's case, during the Queens talk he remarkably asserted that inflation could "never happen today" thanks to the Fed's ability to adjust interest rates on reserves.

So despite a tripling of the dollar price of gold on Bernanke's watch (it could be credibly argued that the U.S. Treasury played the major role since 2001 in the dollar's devaluation), there's apparently no inflation, and according to Dudley, it could never happen. Even Bernanke would never suggest such an untruth, so for proclaiming a lack of inflation during an era in which the dollar is severely depressed, Dudley, if this is possible, reveals a weaker understanding of money and inflation than his boss.

What this means for the economy is quite basic, and unfortunate. Personnel, as they say in Washington, is policy. In this case we have a hapless Fed Chairman running the world's foremost bank, and one of his top lieutenants is running the world's foremost central bank branch. Bad policy means sagging economic growth, so when Americans wonder at a limping recovery with no endpoint, it can only be hoped that they begin agitating for necessary personnel changes at our Federal Reserve.


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). 

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