Dumb statement of the week

Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” (Jim) Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday

From here.

Look, the guy can disagree with Federal Reserve policy – it would be nice if he actually explained why – but even if he doesn’t he can.  But saying that one of the worlds top economists doesn’t understand economics really just shows that he doesn’t understand the discipline of economics.

Hey, he can disagree with the discipline of economics – but without understanding it how can he say that someone else doesn’t?

And when he says “debasing your currency” he shows his true colours – he doesn’t understand monetary policy or inflation targeting.  There is no “magic” value for money, it isn’t some god given level of what it should be.  The whole point of “printing money” at the moment is because inflation is below their target, their mandate is to hit a certain level of inflation, and by default they need to increase how stimulatory policy is to do that – if QE2 appears to be the wrong way of doing this, or will lead to unintended consequences, then criticise it on those grounds FFS.

As an investor I’m sure he understands investing – but this sort of attack on Bernanke indicates that he might not have the same level of mastery in economics.  Ben Bernanke might not be as good at investing – but he is one guy I’d sure listen to when it comes to economics.

  • Tribeless

    I almost see what you’re getting at, but then I don’t either. Yes, in the absence of a gold standard, etc, ‘money has no magic value’, but that doesn’t change the fact printing money debases the currency in existence beforehand, surely?

    If there is $1 in the economy and one widget, then if the government ‘create’s another $1 and puts that into the economy tomorrow – lets say they give it to a DPB mum – another widget cannot simply be ‘created’ overnight, it has to be manufactured, or some such process, so the widget will now probably be valued at $2, but the holder of the original $1 who could afford to buy the widget yesterday, can no longer afford to buy it, because although she still has her $1, its value has been ‘debased’, by being only half ‘the value represented by the widget’ previous to the new $1 being whipped up from nothing. Indeed, to buy that widget she’s now going to have to get herself into debt by borrowing the dollar from DPB mum. And that’s the current crisis summed up?

    Indeed, that is inflation isn’t it? An increase in the monetary base, that has the effect of debasing all currency before the increase?

    Which is the harm that inflation does. It ‘debases’ the value of existing savings which now cannot buy so much ‘stuff’.

    What am I missing?

    (Or is this simply some sort of economist semantic pettines you’re getting at?)

  • @Tribeless

    My critique is not against the idea that inflation in itself doesn’t distort prices – it is in the fact that actions by the central bank to ensure that the inflation rate stays low and stable is “debasing”.

    The central bank is supposed to target a low level of inflation which people know about – so people can set prices and the such with this knowledge in mind. That way as the economy changes, people can tell when it is the “relative” value of something changing or just a change in the general price level (inflation).

    Letting inflation fall below their target is just as dangerous as letting it ride above their target – and saying that Bernanke is “debasing the dollar” and “doesn’t understand economics” when he is doing this is poor form – and betrays a slight lack of understanding on his part as well.

    Hopefully that cleared my rant up a bit 😉

  • Miguel Sanchez

    I would venture that Bernanke knows more than Jim Rogers not only about economics, but about realpolitik as well.

  • Tribeless

    Oh, semantic pettiness then 😉

    When you say Letting inflation fall below their target is just as dangerous as letting it ride above their target … are you simply stating what Mr Central Bank thinks, or was that you stating an opinion?

  • @Miguel Sanchez

    Bernanke does seem like a pretty clued on fellow – I’m looking forward to the minutes of the current meeting as well.

    @Tribeless

    No no, its more than semantic – it is the very essence of what the Fed does 😉

    “When you say Letting inflation fall below their target is just as dangerous as letting it ride above their target … are you simply stating what Mr Central Bank thinks, or was that you stating an opinion?”

    I am stating what orthodox theory suggests. If people are making decisions into the future based on expectations of the price level – then variations from that create uncertainty with regards to the true relative value of goods. At most Jim Rogers is only showing a one sided understanding of this – which is why his attack on Bernanke appears ill informed.

    So all of the above 😉

  • Tribeless

    ‘Orthodox’ is a funny word to use in this context. What constitutes ‘orthodoxy’ in terms of theory here?

    Do you think central banks have brought about price stability?

  • @Tribeless

    In terms of variability in the path of general prices central banks have undeniably brought about stability by reducing the size of deviations from a given path of price levels through time.

    It isn’t about having the price level unchanged – it is about having the price level grow at a known rate that provides certainty. The asymmetry associated with price adjustment, and the measurement issues with improvements in quality, imply that having a small positive rate of increase in prices (low and stable inflation) is the best target in practical terms.

    Central banks with credibility have done this, ex-post it is easy to say “they could have done X better” but in ex-ante terms it is hard to say that central banks have done anything wrong per see.

  • Tribeless

    Then where in your opinion did the asset bubbles come from, specifically those that started popping from August 2008?

    And you didn’t explain ‘orthodoxy’ in the context you originally used it.

  • @Tribeless

    It came from people acting on expectations that were unstable. Bubbles happen – they are part of society.

  • Tribeless

    You don’t think central banks using artificially low/centrally planned interest rates to ‘stiumulate’ the economy had anything to do with the bubbles.

    I agree, bubbles happen, but true laissez faire gives the most efficient route to liquidating and correcting the underlying malinvestments. Why we are in such a crisis now, however, is that central bank policy itself allowed the asset bubbles to grow to heights, depths and widths that would not have been possible under laissez faire (ie, with no central banking central planning). Surely the size of the bubbles and resultant mess had far the greater part to do with unintended consquences of the central banking system – and in NZ, tax legislation – than people acting on expectations that were unstable’?

    I have to say, though, I have no idea, either, what you mean my ‘unstable’ in the context of your above post.

    That’s ‘orthodoxy’ and ‘unstable’ unresolved now. Though I’m trying not to get too petty over it 😉

  • @Tribeless

    Artificially low? But inflation was tracking below the target band for a long period of time – so in order to match the real rate of return nominal rates had to be at “lower” levels. If rates had been “too high” inflation would have accelerated above their target.

    Even if nominal rates were too low, I would be surprised if that was a major cause of a bubble – I didn’t think that investors would be so incredibly myopic that they would invest in large projects just because current rates are a tiny bit low. IMO the more important factor was expectations – people didn’t expect prices to be elevated forever, but they did think they could “beat the market” and sell out near the peak.

    This is why central banks try to just ignore bubbles as much as possible in the first place – the issue is one of financial stability (so involves making risks apparent and discussing them with retail banks) not monetary policy per see.

    By “unstable” I mean that they expected prices to keep rising when they were rising – but then when they feel their expectations turned. Expectations were formed on the basis of where the price was moving – not on the fundamental value. This sometimes happens with things.

    “Orthodoxy” is simply the central view of economists and analysts about how these things work.

  • Tribeless

    You’re typing much quicker than you used to: have you done a course?

    I’m thinking about the first parts of your above post, though I’m predisposed not to agree: for example, adding central bank control of interest rates on the scale of Fannie Mae and Freddie Mac, allied with the ability to pump the money supply, meaning a lot of money in circulation looking for a home leading to the creation of financial instruments that nobody really understood, including the makers, seems a far better fit for the bubbles we had. Your explanation seems bound on some type of mass societal insanity: if people could plan on a stable level of inflation, via the central bank system, then why would so many have thought they ‘could beat the market’? That doesn’t make sense (although, again, in NZ, when you bring in tax legislation and the distortions and unintended consequences of that, this does partly give better weight to your argument (but also to mine, vis a vis, the root cause of ill here is government involvement and no laissez faire).

    But I’m still thinking.

    Returning to your comment on orthodoxy though, being the central view of economists and analysts about how these things work, besides that giving the image in my mind of my sister, the kindy teacher, talking to me, who decides what is ‘central’ to how these things work? How can you possibly have an orthodoxy, for example, between an economist of the Austrian School, and a Keynesian? They have quite different ideas on ‘how these things work’. You’re surprisingly close to having an opinion here Matt!

  • @Tribeless

    No, I’ve always been able to type quickly – I just currently have a greater opportunity to check my email at this moment 😀

    I wouldn’t call bubble social insanity per see, it just requires an individual belief that you can sell before others do – and some people would have. In many ways buying a house became a “game” for some people where they believe in other peoples irrationality – so it wasn’t irrational for them to buy the house ex-ante. However, eventually houses were pushed towards their fair value (given the massive oversupply of building over there it was inevitable the movement would be relatively swift).

    I think the idea that temporarily low interest rates could lead to the “social insanity” of loading up on debt and buying expensive houses engenders a higher degree of irrationality then the view that people were acting on a belief that some other bugger would pay a higher price – a belief that was being backed by the “evidence” that prices had been rising.

    Now I didn’t buy a house, so I’m not saying I agreed with their logic – but that did seem to be the logic many people were working on, and it is internally consistent and rational.

    On orthodoxy, my main claim is that what Bernanke is doing is consistent with the central view of economists and policy analysts – he understands this view, and he is doing what he is doing. It is fine to disagree with the central view, but a blanket statement saying he doesn’t understand it seems unfair.

    The orthodoxy would be the current “synthesis”. If you add value judgments to the synthesis you can get conclusions similar to those an Austrian or a Keynesian would come up with – and then the question is “are these value judgments fair”.

    However, as long as we accept that inflation has been under control (a claim some would dispute, but one I have seen much evidence for) every school would accept the idea that moving towards the inflation target makes sense.

    BUT, even if all schools accepted that inflation was below its “stable” level this doesn’t mean every school would agree with printing more money, or QE2, per see. For example, if we believed many of the problems lay on the supply side the Fed might not have to do much to get inflation back to target – but the US economy might still be f’ed. So when trying to decide on the magnitude of what policy is appropriate these differences in description are still essential.

  • Also regarding the housing bubble, inflation, and interest rates this graph is useful:

    http://macroblog.typepad.com/.a/6a00d8341c834f53ef0133f5388652970b-popup

    Between 1998 and 2006 prices were below what a price level target would have indicated – if anything people could claim that interest rates should have been lower. It wasn’t until the housing bubble had already started popping (circa 2005/06) that inflation indicators were telling the Fed to lift rates – which it did.

    That same graph indicates that there is little stimulus can do now given that we are on the price line – however, my suspicion is that this line includes the sharp relative price increase in petrol. If we adjusted for that (and adjusted downwards earlier in the piece for record low petrol prices), Fed policy would probably look a bit better in the past – and would look like it needs to be a little more stimulatory now. However, in order to determine that we would really need to look at expectations, not the level – so this is very much just “indicative” I’m not trying to draw definitive conclusions from it.

    I remember people talking about the fact the Fed might hit the lower bound through the early parts of last decade. I remember people telling the RBNZ to cut rates in 2006, and then to lift rates more sharply in 2007/08. Its a tough job – and I think the best way to improve things is to improve information, statistics, and communication, not the mandate itself.

  • Tribeless

    I think the idea that temporarily low interest rates could lead to the “social insanity” of loading up on debt and buying expensive houses engenders a higher degree of irrationality then the view that people were acting on a belief that some other bugger would pay a higher price – a belief that was being backed by the “evidence” that prices had been rising.

    But ‘temporarily’ was in some cases over a decade: you’re underestimating, surely, the scale of the central banks distortion of the market. And not only on time frame, but the credit crunch came out of the US, and namely housing/mortgages, and that centred on Fannie Mae and Freddie Mac, by far the biggest single providers of mortgages, and under successive goverment edicts to give credit to those who should have been found wanting in terms of their ability to repay when rates rose, or principal had to be paid. Because central planning is used to control whole societies, even small distortions lead to major unintended consequences, such that could not happen under laissez faire – similar to a cloning v. biodiversity argument fr survival of a species.

    On orthodoxy, my main claim is that what Bernanke is doing is consistent with the central view of economists and policy analysts – he understands this view, and he is doing what he is doing.

    I think this ‘central view’ adds up to myth making: there simply is not that sort of consensus, especially when you factor in that crucial element you are missing: philosophy. The chief difference between an Austrian and a Keynesian is a philosophic one. Namely, Austrians are philosophical bound to the concept of laissez faire because it is the only economic system that both allows for the stable running of complex societal interactions amongst individuals, that is, a functioning econmy, while allowing those individuals their freedom, whereas Keynesians are drones seemingly bereft of the ability to understand the philosophical impact of their simplification of ‘the human’: that is, their theories end in centrally planned societies, and as shown latterly, the risk of bringing free societies to economic breakdown in its entirety.

    Or to slant this another way, if we hold that Bernanke represents the current “synthesis” – and I disagree with that notion absolutely, synthesis in a nonsense notion at the philosophic level – then if this ‘central’ view has it ‘all wrong’, then surely economies do risk the opposite of price stability, but rather, complete breakdown, which, lo, has very nearly happened.

  • @Tribeless

    Hello, I will be off for some beers soon – so future responses may be a bit delayed 😉

    Here I go on this though, it is nice to be commenting again (I have been very much under the screw with things lately).

    “But ‘temporarily’ was in some cases over a decade: you’re underestimating, surely, the scale of the central banks distortion of the market.”

    But, looking at the inflation statistics we can see that interest rates were consistent – the relative price of housing rose because people, believing it would keep rising, kept buying housing off each other.

    “such that could not happen under laissez faire”

    Yes it most definitely could happen – I don’t agree with central planning either, but pure free markets also have their distortions. Complete markets, information, property and legal rights, and corrections for external impacts are the set of things we would like in a society to ensure that the allocation is “best” – but even then we would have bubbles, booms, and busts.

    “The chief difference between an Austrian and a Keynesian is a philosophic one”

    The chief difference of an economist from any school should be a value judgment (or a set there of) – as you say that is philosophical. But they should all agree on a set of guiding principals that they add these judgments to to create policy – a set of facts about how the world works.

    With inflation below target over the period of the housing bubble it is hard to make a case that real interest rates were being depressed by the Fed – and so it seems difficult to lay much of the “blame” for a bubble on their shoulders.

    I am not defending the governmental actions here – I am solely talking about the monetary policy part.

    “Or to slant this another way, if we hold that Bernanke represents the current “synthesis” – and I disagree with that notion absolutely, synthesis in a nonsense notion at the philosophic level”

    The philosophical value judgments are the part that is not, and never will be, part of the synthesis though – the synthesis is the set of points and definitions that economists agree upon. As I mentioned earlier in la comment.

  • Tribeless

    The philosophical value judgments are the part that is not, and never will be, part of the synthesis though – the synthesis is the set of points and definitions that economists agree upon.

    Then if economists believe they work in this sort of philosophical vacuum, that explains why, as Hayek prescribed, modern life has been one long march to the planned society (with a few nasty Gulags on the way), whether that was the desired end point or not.

    And yes, of course pure free markets have distortions also, but the malinvestments involved are liquidated far more efficiently than in our planned economies, as the last two years has demonstrated. That has been shown as a huge weakness of our Nanny States. Philosophy aside – although that can never be – laissez faire is the most efficient and properous way to run a (free) society.

    Enjoy the beer, I’ll be soon drowning my depression in a few Friday night ones also.

  • @Tribeless

    “Then if economists believe they work in this sort of philosophical vacuum, that explains why, as Hayek prescribed, modern life has been one long march to the planned society”

    Ahh but if we say that the initial economic model is within this sort of “vacuum” then we are also stating that economists cannot reach a conclusion solely from that model – which implies that there is no reason to expect a movement towards socialism from objective modeling.

    What I was saying in the above statements was that the economic method attempts to be as objective as possible, and that is why such disparate economic schools (who reach very different conclusions) can be said to be using the same method – but applying different value judgments.

    “laissez faire is the most efficient and properous way to run a (free) society.”

    Ahh, but this is just not true. I agree with you that expecting “perfection” is ridiculous – the best type of society that is practical will not be “idealistically perfect”.

    However, if we view the formation of groups, and of government, as a social contract we cannot necessarily define what is the best way for society to organise itself. What an economist would say is that we need to use revealed preferences, prices, and any other mechanisms we can find to reveal value – and if we are going to have an institutions do anything it should be premised on the idea that there is something impeding voluntary trade, or that there is external damage from individuals trading. Otherwise leave it be.

    “Enjoy the beer, I’ll be soon drowning my depression in a few Friday night ones also.”

    The beer was good. I am looking forward to next weekend for sure 😀

  • Tribeless

    Ahh but if we say that the initial economic model is within this sort of “vacuum” then we are also stating that economists cannot reach a conclusion solely from that model – which implies that there is no reason to expect a movement towards socialism from objective modeling.

    Which seems to be in the face of the fact that we are, yet, on a long movement toward socialism and Statism in the West. Even your very own Gareth Morgan, disappointingly, has been reaching on every issue lately for the State’s gun at my head. Why?

    Ah, the economist’s utilitarianism. Remember?

    Utilitarianism leads to a tyranny of the majority leads to statism (as politicians bribe for votes) all of which has to be justified by the common good (namely, a miss-placed altruism, namely socialism or, as bad, mysticism/religion). There is no room in what is always created for an individual to live his life in freedom from others, and most certainly the coercive apparatus of the the State. Your ‘practical’ society snuffs freedom out first.

    Economics is not a set of levers operating independently of the transactions between individuals that make up ‘a society’, indeed those transactions are economics, and thus cannot be separated from first, philosophy, and second, politics: there is no vaccuum, and it has been dangerously naive to believe that there is, or has been.

  • @Tribeless

    Utilitarianism doesn’t lead to any sort of tyranny – it is only when someone applies value judgments they can get a conclusion.

    Going back to the initial point, I was saying that it is weird to say someone isn’t an economist when they are using the economics framework and merely have different value judgments.

    Disagreeing with what the Fed is doing is one thing, and can be based on these judgments. But saying that there isn’t an economic model there, and that Bernanke doesn’t understand economics, is taking it a step further – an unjustifiable step further. As Bernanke is using a model with a trade-off that all economists recognise (in an ordinal sense).

    “there is no vaccuum, and it has been dangerously naive to believe that there is, or has been.”

    When it comes to saying “I recommend policy X” there is no vacuum. BUT, when it comes to laying down the facts and describing the situation that is going to be analysed there is – the economic framework is just there to describe thing, you can apply any value judgments to reach any policy conclusion – but you then have to be ready to use them.

    I wouldn’t say treating the initial descriptive stage as relatively objective is dangerous – because by definition you can’t get a policy conclusion from that stage. All it is, is trying to sort out what data, and internal introspection regarding choice, tells us about how and why choices are made.

  • Tribeless

    I wouldn’t say treating the initial descriptive stage as relatively objective is dangerous – because by definition you can’t get a policy conclusion from that stage.

    But surely those data points don’t exist ‘out there’ divorced from all the ‘policy decisions’ and ‘value judgements’ that brought them into existence? You are saying that economists can ignore the history of transactions and interactions that led to those data points: economics belongs to the humanities, it’s not mathematics, so how could that possibly be?

  • @Tribeless

    I said more objective – there is no such thing as completely objective, I will agree with that.

    But, there is a world of difference between the claim “there is a short-run trade-off between inflation and unemployment” and the quantification, and valuation of, such a claim.

    So we can build a model, describe it, estimate things using data we know to be imperfect, and represent it all as clearly as possible. The ordinal conclusions to such studies are often agreed upon by economists of any school.

    But then, moving from that point to a point where we can make a policy conclusion, where we can state how large an impact will be, and how we should value it, is a massive step – and it is along these grounds that almost all people will disagree.

    Bernanke applied a widely agreed upon model, and used it to explain what he is doing. In this sense he showed a full understanding of economics itself. HOWEVER, it is perfectly reasonable to disagree, because people may have different views on the magnitude of the tradeoffs involved – or the way costs and benefits should be weighted.

    As a result, many will disagree – but this does not mean he “doesn’t understand economics” as has been claimed.

    I feel that you are taking to stark a difference between objective and subjective here – there is no truly objective things, and the best we can do (and what economists try to do) is to start with the elements that are as close to objective as possible, and make the value judgments required to move from there towards a conclusion transparent.