Tuesday, October 5, 2010

Ben Bernanke thinks that if the national debt rises too far, so will interest rates!!!

So how come Japan’s debt is 200% of GDP, yet interest rates there are around 1%? That’s about three times the U.S. debt to GDP ratio. And as to the U.S. itself, it has the largest national debt for several decades, while interest rates are at a record low!

This speech by Bernanke clearly demonstrates he hasn’t a clue. Much of the rest of the speech is based on the idea that if the deficit continues, the national debt will also rise. It seems Bernanke has never heard of Keynes or Milton Friedman. As both the latter two individuals made clear, a deficit can accumulate as additional national debt OR additional monetary base.

And as to the idea that extra monetary base means inflation, there has been an astronomic and unprecedented increase in the U.S. base in the last two years, with not so much as a tenth of 1% worth of inflation to show for it.

But Bernanke is not the only ignorant duffer at the Federal Reserve. There’s at least one other: Richard Fisher, president of the Dallas Fed.

This speech by Fisher is as hilarious as Bernanke’s.

This speech by Fisher devotes much space to casting doubt on the merits of quantitative easing. He then asks “The vexing question is: Why isn’t this liquidity being utilized to hire new workers and reduce unemployment?” (That’s the liquidity created by QE).

His answer is his own personal impressions gained from business people he has talked to. To quote: “My soundings among those who actually do the work of creating sustainable jobs and making productive capital investments―private businesses big and small―indicate that few are willing to commit to expanding U.S. payrolls or to undertaking significant commitments to expand capital expenditures in the U.S. other than in areas that enhance productivity of the current workforce. Without exception, all the business leaders I interview cite nonmonetary factors―fiscal policy and regulatory constraints or, worse, uncertainty going forward…”

Well, Fisher’s personal impressions, are no substitute for actual surveys of business opinion. And what is truly hilarious here is that Fisher actually cites a survey of employers’ views in his speech according to which the main problem facing businesses (by a substantial margin) are none of the ones he cites, but plain simple lack of demand or “poor sales” as they call it. (See p. 18 of the survey).

The problems he cites are far from being a total irrelevance, but they are not the MAIN problem cited by employers in the above survey.

Another survey shows similar results (See page 4).

The final bit of nonsense in Fisher’s speech is that he wants to see businesses “hiring and training a workforce”. Problem with that idea is that precious little training needs to be done: there are loads of unemployed skilled people just waiting to fill vacancies. Both the above surveys showed that employers regard a shortage of skilled employees as a total non-problem compared to other factors.

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