Dear Chairman Bernanke,
I've been in business for more than 25 years and if there's one thing I have learned it's that every real business leader worth a damn has a number.
That's the figure where they throw in the towel and admit defeat. It's the precise instant they acknowledge that they will no longer throw more money at a bad idea. It's the point in time where they seek fresh counsel and new ideas because the pain of staying the course becomes too great.
Chairman Bernanke, what exactly is your number?
You've just announced Operation Twist (again). You're preparing to spend another $267 billion buying long-term securities as part of a plan to keep rates low through 2014.
You position this as a means of stimulating hiring and supporting a flagging economy that needs more support. You counsel that it will spur borrowing and spending.
We all submit that your plan is not working.
Four years and trillions of dollars into this mess, your Fed has taken a buzzsaw to growth estimates, most recently cutting them to 1.9% from 2.4% for this year. If the government multiplier everybody always cites actually worked, our economy should be screaming along at 8% a year or more.
Yet over 6 million people have left the workforce, which makes the most recent 8.2% unemployment mark extremely suspect. Hiring is slowing again. Factory output is dropping and consumer confidence is faltering.
You've said repeatedly that you can create more "accommodative" financial conditions. When announcing the most recent continuation of Operation Twist, you noted using "non-standard" tools.
Like what...exactly and specifically? Our financial sector is still appallingly overleveraged and undercapitalized. Jamie Dimon's traders used "non-standard" tools to supposedly hedge JPMorgan's risks and suffered at least a $2.1 billion loss. The word "non-standard" scares the hell out of me, Mr. Chairman.
I can only wonder if you're waiting for things to get worse before you act as some people suggest. A simple yes or no would go a long way towards calming things down especially in the financial markets.
You've already spent $2.3 trillion buying bonds and mortgage-backed securities. Spending another $267 billion strikes me a little like giving yourself a transfusion - only you're taking blood from your left arm and putting it back into your right arm.
The labor participation rate is at a 30-year low and I am sure most Americans who are either seeking employment or working now would like to know why. So would those who have given up. Many I've talked to would actually like to come back as productive members of society again.
At what point are you willing to admit that what you're doing isn't working?
Is it $10 trillion? $25 trillion, even $100 trillion - please just commit to a figure so that we will know when this madness will end. And how to live our lives in the meantime.
Since we moved away from the gold standard in 1971, the Fed has effectively printed money every time the stuff has hit the fan. Most recently:
1998 when Russia defaulted and LTCM crashed
2000 after the dot-com bomb exploded
2001 following the horrific events of 9/11
through 2005 to balance out the housing bubble caused by too much cheap money in the first place
Minus the growth of the 1950s and early 1960s, it seems to me that printing money has been the Fed's mantra since the Great Depression 80 years ago.
I don't see how our leaders and, by implication, you, can possibly make the argument that we need more time to give everything a chance to play out and for growth to ignite and expect Americans to buy it any longer.
What I am suggesting is hardly new. In fact a New York senator named Elihu Root warned about the dangers of easy money in 1913, which I am sure you know, is the year in which the Federal Reserve was created.
At the time, Root noted that the "expansive" policies of the day would "enlarge business with easy money" but ultimately would lead to a crash when "credit exceeds the legitimate demands of the country."
His warnings should sound hauntingly familiar, as should his observation that the boom and bust cycle leading up to the Fed's creation did not happen in isolation. Root suggested that this would be self-evident to serious economists of the day if only they would look at the panics of 1837, 1857, 1873, 1893 and 1907.
At some point, Chairman Bernanke, you're going to have to acknowledge reality. Printing money has never worked. The Fed's policies not only inflamed the financial crisis that set off the Great Depression in 1929, but directly contributed to the size of the financial bubble that has now burst and the deleveraging that's under way at the moment.
Even the biggest theories fall once proven beyond a shadow of a doubt they don't work or aren't true.
Most flat-earthers gave in around the 3rd century BC. Geocentrics were relegated to the sidelines by Galileo and Copernicus in the 16th century.
The lack of objective evidence in support of additional monetary stimulus or accommodative policy is mounting by the day. Myths remain only because people use them to interpret reality until they know better. The fact that millions of people believe something is true does not make it so.
You tread a very fine line in that sense if for no other reason than myths are also frequently spread and reinforced by those in charge who are believed to be credible.
The reality of the situation today is that cheap money and low rates coupled with an out-of-control banking system, government guarantees and credit insurance actually encouraged riskier behavior leading up to this crisis and continue to do so today.
So again, I ask respectfully Chairman Bernanke, what's your number?
Regards,
Keith Fitz-Gerald
for The Daily Reckoning Australia
Ed Note: This article originally appeared in Money Morning USA.
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Comment by watcher7 on 25 June 2012:
Dear Mr Fitz-Gerald,
Thank-you for your letter.
The number, in answer to your question, is the one that breaks the bank.
What I am doing here is playing my part in laying the foundation for the next upwave.
To force the restructuring, so as to enter the information age proper, I need to play my part in loading up the global economy with as much debt as possible so that when the ‘bubble’ burst the hard decisions will be made that would not otherwise be made.
So If your business goes bankrupt during the Great Depression then it was not meant to be a part of the next upwave.
Regards Ben, who doesn’t believe in YHWH financial architecture of Leviticus 25, Bernanke - we humans love doing to it the hard way.
The rhymes:
Delayed Recovery - Structural change
1930s
"The low-cost Model-T, with its internal combustion engine powered by cheap gasoline, was the big-bang opening the world of the automobile and of mass production and mass consumption" (Carlota Perez, Technological Revolutions and Financial Capital, (Cheltenham: Edward Elgar, 2002), p.3).
By 1929 there was one car for every five people.
"When they weren't driving, they were talking... by 1927 40 percent of the homes had telephones. By 1927 every third home had a radio, two-thirds had electricity. Scheduled air services had started. There was nothing like it anywhere else in the world" (Evans, p.182).
"I want to suggest in this study that the difficulty experienced by the American economy in the 1930s was an outgrowth of secular trends in development. By the 1920s, the economy had entered an era characterized by the emergence of dramatically new demand patterns and investment opportunities foreshadowed and indeed encouraged a shift in the composition of national output. But such a qualitative transformation created impediments to the recovery process in the thirties. These impediments derived from the difficulty of altering technology and labour skills to meet demands for new investment and consumer goods at a time of severe financial instability. In this sense, long-term growth mechanisms played a major role in the cyclical problems of the interwar period" (Bernstein, p.20).
"The fact that certain industries actually prosperred and recovered quickly after the trough of 1932 does not mean that demand could be quickly or easily restored. The lower firm incomes and sales that resulted from the crisis of 1929-32 made the dynamic industries incapable of growing quickly enough to absorb the unemployed from the mature and declining industries A generally low level level of G.N.P. thus limited the impact that the more vibrant sectors could have on aggregate investment and employment. Hence recovery was delayed" (Bernstein, p.144).
1930s and 1970s
"On a day like any other in November 1971, a small event in Santa Clara California was about to change the history of the world. Bob Noyce and Gordon Moore launched Intel's first microprocessor, the precursor of the computer on a chip. It was the big-bang of a new universe, that of all-pervasive computing and digital telecommunications. Chips were powerful, they were cheap and the opened innumerable technological and business possibilites" (Carlota Perez, Technological Revolutions and Financial Capital, (Cheltenham, Edward Elgar, 2002), p.3).
"... in the 1970s, the performance of the American economy was somewhat similar to that of the 1930s. In both decades, the growth of the gross domestic profit ... fell after years of robust expansion. Unemployment reached disquieting levels, and the attendant downturns were persistent rather than transitory...
"The development and growth of new industries and products were too slow because of a combination of demand-side problems, supplyside shocks, and policy difficulties...
"It would be foolish to suggest that in absolue terms the performance of the American economy in these two decades were similar... The thirties and seventies were decades that marked major disruptions in the process of growth in the American economy...
"The difficulty experienced by the American economy in both decades grew out of secular trends in the economy's development. Preceding both crises, the economic system encountered new demand patterns and investment and employment opportunites. These patterns and opportunities were linked with a shift in the composition of national output. But such reorientation wealkened the recovery process in decades. A sluggish recoupment was the result of altering technology and labor skills to meet the new demand for investment and consumption goods at a time of severe financial restriction occasioned by the stock market and O.P.E.C. shocks..." (Bernstein, pp.207, 209, 210-211).
Industry, Workforce and Society in the future
Industry
"We are in the early stages of the creation of a new industry, reminiscent of computing in the early 1970s when companies began to adopt it in earnest. There was plenty of resistance. The systems were difficult to operate and seemed to be set up for nerds. The economic benefits were questioned. There were privacy and regulatory worries. Yet in time the rough edges were smoothed and everybody benefited" (The Economist, Telecoms - The hidden revolution, economist.com, April 26, 2007).
"It is hard for anyone - politicians most of all - to picture how wireless will be used, just as it was with electric motors and microprocessors, two earlier stand-alone technologies that have been built into a plethora of devices. Wireless technology will become a part of objects in the next 50 years rather as electric motors appeared in everything from eggbeaters to elevators in the first half of the 20th century and computers colonised all kinds of machinery from cars to coffee machines in the second half. Occasionally, the results will be frightening; more often, they will be amazingly useful" (The Economist, When everything connects, economist.com, April 26, 2007).
The Economist in Telecoms - A world of connections states that the 'structural change' ahead "will be tricky" and "it will not be easy".
Workforce
"The next society will be a knowledge society. Knowledge will be its key resource, and knowledge workers will be the dominant group in its workforce..." (Peter Drucker, A survey of the near-future - The Next Society, economist.com, November 1, 2001).
"They are ... people who do much of their work with their hands (and to that extent are the successors to skilled workers), but whose pay is determined by the knowledge between their ears, acquired in formal education rather than through apprenticeship. They include X-ray technicians, physiotherapists, ultrasound specialists, psychiatric case workers, dental technicians and scores of others...
"Within two or three decades, knowledge technologists will become the dominant group in the workforce in all developed countries, occupying the same position that unionised factory workers held at the peak of their power in the 1950s and 60s" (Drucker, ibid.,).
Society
"... [the suggestion is that] the greatest changes are almost certainly still ahead of us. We can also be sure that the society of 2030 will be very different from that of today, and that it will bear little resemblance to that predicted by today's best-selling futurists. It will not be dominated or even shaped by information technology. IT will, of course, be important, but it will be only one of several important new technologies. The central feature of the next society, as of its predecessors, will be new institutions and new theories, ideologies and problems" (Drucker, ibid.,).
For America this post-Cold War boom has been a major 'turning point' in its hegemonic cycle. America entering the 'mature' phase of its cycle now faces its greatest challenges since becoming a nation.
Thomas Au commented above that:
"Like the peers of Moses, who saw the Promised Land but never got to enter it, Americans will wander the desert for two generations until their children are ready to take the big step. (And yes, I believe that those children will fight the modern "battle of Jericho" to get there.) But getting from here to there will not be a pleasant experience".
Comment by Ross on 26 June 2012:
The numbers that bear watching right now are the soft commodity prices. Wheat at +USD7.50/bushel. If they can't wash USDs with ore prices due to lack of demand what is the next step? Unlike hard to govern demand they can play dirty with supply on soft commodities.
Comment by Ed_B on 26 June 2012:
The sad reality here is that Mr. Bernanke hasn't worked a day in his life in a real business and therefore does not "have a number". To even consider having a number would be a tacit admission of the possibility of failure and that is intolerable.
He is still flailing through the idiocy of Keynesian economic theory that claims what he is doing is correct and will work. Unfortunately for this school of thought, it is failing and miserably at that.
The unintended consequences of Keynesian economics is exactly what we see happening today. Practically all of the western nations are suffering from a massive over-dose of government. Governments are literally consuming the nations that created them. The private sector is being starved of the oxygen it needs to survive, let alone thrive. All government needs to be reduced by approximately 50%... if not more. Doing that would create an explosion of productivity such as the world has never before seen.
Unfortunately, it is likely that we will have to have a horrendous stock / bond / currency crash before those in power are absolutely forced to recognize the obvious. Suffering will be on sale like never before and there will be plenty of it to go around... for the little people, of course.
Comment by Lachlan on 27 June 2012:
I think Benny is doing just fine....depending on what you think his real objective is. Trying to save the American economy? Give me a break.