Ben Bernanke's 'Courage' Confirms His Failure

Story Stream
recent articles

Inflation in the purest sense has very little to do with consumer prices, except that they may be indicative of the greater change. In a word, inflation is redefinition, which used to be quite obvious by the actual presence of true money. For whatever reason, a national system would devalue its currency forcing an economic adjustment often, but not always, through consumer and producer prices. Thus, the price changes followed from the redefinition of the currency. The US has done this before, once in 1933 but that was not the last.

In maneuvering himself toward living up to his mainstream "heroic" reputation, now with so much time past, Ben Bernanke recently wrote instead his own damnation. While trying to suggest how his "courage" led in the correct direction, the former Federal Reserve Chairman unleashed the confirmation of that inflation. Trying to come up with solid evidence that QE worked in even a small part as intended, a great challenge, what is left is so small and rancid which is why it is never given but deflated context.

Writing several weeks ago, on October 4, in the Wall Street Journal under the headline (likely an editor's choice) How the Fed Saved the Economy, Bernanke pulled apart Europe in order to bolster his case.

"Europe's failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its precrisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak-an enormous difference in performance."

Not only is his correlation misleading, and thus the entire characterization of success and courage, as you will see below, it isn't even much of a distinction. With the advance estimate for Q3 GDP out yesterday, we can update all the ways in which QE has utterly failed; and thus how the US is almost exactly like the European monstrosity that even Bernanke defines as miscarriage.

What follows is a catalog of statistics and figures, so I beg patience with the bevy of numbers and the unevenness of the descriptions that accompany them. In the first place, Bernanke is correct to measure economic performance from the prior "cycle" peak rather than the lazy and duplicitous tendency of monetarists of late to suggest interpretations only from the trough (cough Yellen cough). Since Q3 GDP turned out positive, if not enthusiastically so, the distance above the last peak has increased to 9.4% in real terms; 22.8% nominally. It only sounds somewhat positive until you note, where Bernanke does not, the 31 quarters it took to "achieve" such a gain.

While better than Europe, the distance between the US in this "recovery" and Europe is actually much, much smaller than the divergence from the historical record. Following the dot-com recession, with a cycle peak at Q4 2000, real GDP gained 17.4% over the next 31 quarters; 41.7% in nominal terms. And that double performance was recorded even though the end of that comparable lookback landed within the Great Recession (Q3 2008), being then somewhat charitable toward the monetarist.

That ends the favorability, however, as cycles prior again demonstrate that Bernanke's attempted distinction against Europe is none at all. From the 1990 peak, 31 quarters forward saw real GDP gain 26.0% while nominal GDP advanced almost 50%; from the peak in 1980 (which, again, is a highly advantageous starting point to Bernanke's display since I have reflected through both of the double dip as the cycle peak) real GDP gained 27.1% with nominal GDP riding the remnants of the Great Inflation to 79.6%; from the 1973 peak, real GDP rose 22.0% while nominal GDP flew apart at 120.5%.

Not only was GDP remarkably consistent in those cycles, at about triple Bernanke's "success" rate in real GDP terms, the same is true for labor gains. Measuring peak to peak economic performance via the Establishment Survey only adds to the relative misery. Since the March 2008 prior peak, payrolls are just 2.9% above that level as of September 2015; a chronological distance of 92 months (or 7 and two-thirds years, almost exactly the same void as 31 quarters). From the cycle peak in February 2001, the Establishment Survey registers 2.6%, but again that includes about half of the Great Recession; from peak to peak, the increase was a sluggish but significantly better 4.2%. Prior cycles followed, however, the GDP disparity; from the 1990 peak, payrolls were up 13.8% over the next 92 months to early 1998; from the 1980 peak, the increase was 13.6%; from 1974, all the way through the double dip into 1982, the Establishment Survey registered +15% (+15.7% peak to peak).

That means by count of real GDP and the Establishment Survey's measure of labor utilization, both mainline statistics that are constructed most auspiciously toward a positive economic outlook, the current age is significantly and seriously worse than the Great Inflation - and it isn't even close. That comparison should not only be striking in its indictment but terrifying to anyone suggesting monetarism holds at least some answer. From 15% in payrolls to not even 3%? From 22% in real GDP during one of the most universally reviled economic periods in history (anyone recall Gerald Ford resorting to WIN; Whip Inflation Now?), featuring oil, dollar and political crisis almost everywhere, to not even 10%?

There is something very illustrative about that comparison since in the latter half of the 1970's the Federal Reserve wasn't trying for consumer price inflation but finding its incessant and staining presence everywhere while in the current age the FOMC is doing everything they possibly can, from almost a decade of ZIRP and four QE's, to engineer some and getting none. The Fed last achieved its line-in-the-sand 2% target for the PCE deflator in the early months of 2012, more than three years ago. For the record, the year-over-year change in the PCE deflator in the three quarters of 2015 so far has been just 0.26% or less in each.

As offered at the outset, the relevant context renders Bernanke's QE/ZIRP/courage judgment beyond suspect to the point of disqualification; there is almost no difference between the US and Europe in this "cycle", whereas that all curiously amounts to huge disparities with the rest of our own record. To come in so far underneath the Great Inflation, and the worst of it, renders Bernanke's attempted duplicity contemptible.

And thus, with each quarterly GDP report, economists and the media are splitting hairs about not a recovery or its potential but rather the degree to which monetarism has utterly and totally failed. That observation is obscured by the intentionally narrow focus of quarterly variation, as if, at this point, 1.5% in Q3 is all that different from the tortured 3.9% in Q2; the more pressing issue is not purely that instability but rather how it works out in lost time. Had QE worked as Bernanke hinted and carefully nurtured by weaseling his phrasing in that infamous November 2010 Washington Post op-ed, there would be no debate or global turmoil - economic, financial or political. A 22% gain in real GDP from the $14.99 trillion (SAAR) of Q4 2007 would yield real GDP of $18.3 trillion for Q3 2015; the BEA just placed it instead at $16.4 trillion, for an unforgivable distance of $1.895 trillion! It is that statistical comparison that proves the unrest; the economy economists keep pretending about is nothing like the one "Main Street" is moved toward the political ends to do something about it. How many actual and fruitful jobs would accompany almost $2 trillion more in real GDP had the Fed been at least as incompetent as it was in the Great Inflation? To ask that question is to answer it.

Economists will take issue, however, as if the size of the Great Recession itself was somehow a factor. In other words, because the hole ended so large (far more than "expected", which was exactly zero as late as the middle of 2008 in all the models, and then only increased after-the-fact once the "unexpected" calamity revealed again the fruitlessness of not just mainstream prediction but how that related to the soft central planning to begin with) somehow the Fed is supposed to be graded on a generous curve. The very idea is actually quite against, however, both mainstream and orthodox theories on the business cycle itself.

In most cases, orthodox economists (Bernanke included) follow the natural rate hypothesis. Here, it is assumed generic "output" follows an equilibrium or natural level that is consistent with benign consumer inflation. If output is believed to be too deficient for too long, as in the current case of so much "slack", then the IS-LM framework demands the central bank or monetary authority reduce its interest rate mechanics, across-the-board if need be, below the assumed natural rate in order to push output back toward the natural equilibrium. That these same economists are forced now to suggest a negative natural interest rate for the recovery's acute absence would lead common sense to look instead inward.

For the business cycle, however, the size of the "boom" is directly related to the size of the "bust." Yet, as noted above in the forest of GDP and labor statistics, the size of the "boom" that preceded the Great Recession was by all counts lackluster at best. There cannot be a consistency here with regard to this miserably cyclical behavior of the US economy that so clearly violates that theoretical framework on all counts. Not only was the recession, by far, asymmetric the "recovery" has followed in the same manner despite Keynesian doctrine that asserts the rate dynamic that Bernanke actually tried to deliver in the form of his "courageous" monetarisms of extended ZIRP and QE.

The other cycle theory was developed by Milton Friedman in a paper he wrote in 1964 but, admirably, waited to publish until 1993 once that recession cycle added to his data evidence. Called the "plucking model", the economy here supposedly moves along an upper bound trend determined by "supply" factors while temporarily deviating by "demand shocks." A business cycle, then, is one in which the economy might stumble but quickly find itself back toward that trend upper bound in short and easy order. Friedman believed, after the 1990-91 cycle, that US history proved his early 60's supposition largely correct even though he had no way, theoretical or otherwise, to suggest how or why - the mechanisms and pathology that might make it so.

In the plucking view (named so as Friedman imagined a guitar string set along an inclined board that would be plucked like a guitar into recession and recovery), symmetry is preserved by both sides of cyclicality; the recovery would be as strong as the bust. Notably, then, the recession is unrelated to the prior "boom" period which was his conjecture toward the 1920's Golden Age of the Fed (as he called it in his seminal 1963 monetarism bible, A Monetary History) as if it were somehow totally unconnected to the Great Depression (and thus his emphasis almost exclusively on "tight" monetary policy starting in 1930 to the complete disavowal of all that happened quite bubbly of the 1920's, including and especially call money). Despite all that, the plucking model found difficulty in the dot-com recovery and has been, obviously, completely violated by the Great Recession and Bernanke's subsequent subprime record that was derived in great part from Friedman's relatedly narrowed attention.

While it isn't much publicized, economists find themselves again totally stumped. They could not fathom what had developed by late 2008 and now cannot figure out why the economy won't act and react to any theoretical designs. To at least acknowledge reality, various government and orthodox agencies and efforts have quietly redrawn and downgraded their view of economic "potential" (by more than a little) and that trend/equilibrium even though they cannot pin a mechanism or explanation to it. Some have called it "secular stagnation", notably Larry Summers, which simply assumes there is something exogenous about the asymmetry and leaves it at that.

So it is quite remarkable, yet again, that the FOMC would use "slack" as really the only justification for raising rates off ZIRP in 2015. The peak-to-peak payroll gain is, again, less than 3% for the Establishment Survey (which itself isn't even confirmed by anything else, especially the continually shrinking labor force) compared to the consistent 14% or better from the pre-2000 cycles, yet Yellen and the FOMC are claiming that such minimal and paltry gains are becoming enough to erase the Great Recession's asymmetrical hole? Of course it makes little sense, as does secular stagnation, but that is what orthodox monetarism has left for itself in a century where its presence is greatest. The logical inconsistency easily provides the emphasis for the Fed's inability to actually do it; the longer they wait the more they confirm not just the senseless nature of their "slack" projections and the terrible writedowns it took to get there, but the whole economic theory from the basic cycle function on up.

Somehow, nobody is supposed to notice that gigantic relationship. The Fed's attempted economic control has only increased as has the asset bubbles that accompanied all that. That process occurred at the exact same moment the US economy suddenly stops acting in the consistent manner that had convinced Milton Friedman at its outset of the validity of his plucking model? If economists were actually confident that wasn't the case they would do far more to directly address such complete blatancy, rather than hide from it. That would include the very reasonable supposition that asset bubbles and overly emphasized financialism and debt might actually be harmful to the long run trajectory of the economy; thus explaining "secular" stagnation as not secular at all but monetary.

The mechanisms for that aren't even that difficult to identify once you step outside the mainstream monetary bubble. As the BIS noted in October 2009, the stock of foreign bank claims on foreign assets (thus mostly European banks debt purveyance toward domestic, American borrowers and obligors) grew from $10 trillion to $34 trillion in the seven years to 2007. Total domestic gross notionals of credit derivatives reported to OCC by only domestic banks exploded from practically nothing at the turn of the millennium to $16.4 trillion just before Bear Stearns "unexpectedly" imploded; interest rate swaps' gross notionals were less than $30 trillion at the start of the 2000's but were $175 trillion by the time the eurodollar system completely panicked.

The eurodollar portion of M3 had jumped to 10% by the end of 1979, which helps to understand the transformation and distress of the latter Great Inflation. By 2005, eurodollars (and repos) were far too much for the Fed to even bother attempting to estimate, leading to the total abandonment of M3 altogether, yet that isn't supposed to matter to either monetary policy or even the asymmetry of the economic outcomes that have followed?

While all that was taking place, M2 and the traditional monetary estimates were behaving so very favorably and mildly. The world was filling up with immense piles of debt and credit, building, as it was, the Chinese economy (and EM's behind it) from almost nothing, but the most economists could muster was Greenspan's "global savings glut." The quaintness of that self-guiding ignorance is rather offensive given what Bernanke, a "glut" disciple himself, is trying now to pull off for his reputation. That is the great problem here, namely that if he is "allowed" success at doing so the economy will continue its depression. To prohibit Bernanke's dishonesty is to start the healing process through recognition.

The disparity between eurodollar and global debt levels and domestic dollar deposits and basic monetary liabilities is inflation in a truly modern sense. I won't get into the mechanics here (as I have over the years described bits and pieces of it in this forum) but suffice to say the wholesale banking system has essentially re-arranged the financial organization of "money." In traditional money multiplication, deposits are a form of currency based upon a fractional, derivative claim that performs monetary functions. Thus, deposits are a method of monetary "supply" related to both the claim and the fraction.

In the wholesale banking version, all that is rendered moot. There is no claim or rudimentary element of convertibility, only various components of supply acting as factors for determining bank balance sheets. The basis of the wholesale money "pyramid" is rather esoteric and often contradictory creations and extensions; the chained liabilities of interbank and eurodollar banking that, as described last week, hold no beginning or end. In this way, deposits are not the relevant description of money supply and advance but only the end of the wholesale process where eurodollars become usable currency. Eurodollars (and other wholesale elements like federal funds, to a lesser extent, and repo) divorce the fractioning, leaving traditional deposits as nothing more than a byproduct of wholesale expansion and really leakage into the real economy (the rest of that debt and "money supply" goes, obviously, toward the support or denial of asset prices; Greenspan's self-indulgent "glut").

The dollar has, slowly over time, been devalued wholesale; from the dollar to the "dollar." The Great Recession and the panic in 2008 were just revelations, belatedly, of the transformation. The real economy, both here and globally, had become highly financial and credit-driven due to the monetary conversion but can no longer perform in that manner. If the US "cycle" irregularities aren't enough demonstration, one need only look across the Pacific to see what has become of the economic system developed almost exclusively to serve all this. By every count of the Chinese economy "something" changed in 2009 (and again in 2012) and now, like the US, nothing the PBOC does makes the slightest dent on that downward incline.

To fill out this argument with yet more numbers, Chinese exports grew 10% total (not per year) between September 2012 and September 2015, where exports grew 94% in the three years up to September 2008 when dark leverage and eurodollars flowed far more freely and openly; industrial production averaged just 8.4% in the past three years, including just 6.66% since the "dollar's" turn in the middle of 2014, versus an average of 16.5% up to September 2008; fixed asset investment has seen an average growth of 17.2% September 2012 to September 2015, and just 13.4% since June 2014, while it was expanding an average of 27% at the height of the eurodollar deformation.

On common sense alone, that is a structural change here and globally, and disruption in economic "potential" which economists refuse to admit because all these money and monetary factors must be left "neutral" in order for nothing more than regressions and equations. In that sense, symmetry has been dutifully preserved. It is found not in the size, the scale or relative relation of either booms or busts in this century but rather in the function of the "dollar" transformation - its rise has been perfectly matched by its continued fall; the economy globally is just moving along those contours with minimal deviations from central banks that still think fractionally.

That is why they had no inkling about 2008 and remain steadfastly confused to the point of the final act of true inflation, reducing the standards by which they wish to be judged. Nine percent GDP growth after nearly a decade of constant manipulation is, and always will be, an abomination; to undershoot, vastly, the Great Inflation stamps that exclamation. Make no mistake, however, the monetary transformations that were required to reach such impotence were entirely due to orthodox self-indulgence in increasing intensity. In short, symmetry is as multi-dimensional as the "dollar", where booms and busts are totally related.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

Show commentsHide Comments

Related Articles