Bernanke’s Balderdash

The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.

The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.

The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.

And even that ratio is an understatement. That’s because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony “growth” which under the laws of economics will be liquidated in due course.

Its due to the fact that London has good property laws; speaks English, has a large international airport; is a historical center of world trade and finance; adheres strictly to the rule of “don’t ask, don’t tell” when it comes to the immense international thievery which flows its way; and has a tolerable gulfstream climate, rich culture and improving food.

Stated differently, there is no such thing as monetary policy in one country.Bernanke’s drivel comes straight out of a Keynesian time warp. Indeed, its evident in his opening claim for what he believes the Fed was doing under his watch:

“….. by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce.”

Yes, and what was it that precipitated the Great Recession on a worldwide basis if it was not the mad-cap money printing policies and resulting $185 trillion global credit expansion shown above?

Bernanke didn’t explain, but his argument amounts to saying that first central banks cause bubbles, then crashes, then recessions.  After that they rinse and repeat, denying that they had any accountability whatsoever for the economic slump at hand.

Yesterday’s trade report for August contained figures which crystalize Bernanke’s bubble blindness and Keynesian time warp in spades. Namely, that US exports of nearly all categories of goods and services are falling sharply after the temporary post-crisis surge that was caused by the world concert of money printing central bankers.

As the global deflation gathered force, the commodity sector was the first to manifest the reversal—— with prices down by 50% on average. Not surprisingly, US exports of industrial supplies and materials have dropped from their 2014 monthly peak by 20% thru August.

Likewise, overall goods exports were down 10% from the 2014 peak, and even export of travel services was down by 10%. That is, activity in domestic lodging and resorts was goosed by the global boom, and will soon be cooling owing to the global bust.

Needless to say, even as Bernanke was boasting about how he filled the domestic bathtub of GDP with that invisible ether called “aggregate demand” and thereby restored the nation’s economy to something “close to full employment”, he did let one absurdity slip that is surely dispositive.

Said the Bernank in behalf of the Fed’s long spell of zero interest rates,

Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world…….by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future.

Right. But don’t mention that to the tens of millions of main street savers and retirees who have been literally expropriated by the Fed.

And especially don’t mention that to the casino gamblers who are once again being led to the slaughter by the Fed’s adherence to Bernanke’s Keynesian gospel.

Alas, this is the third time this century. By now the gamblers are fully deserving of the just deserts which lie directly ahead.

Reprinted with permission from David Stockman’s Contra Corner.