As reported in the October 15 issue of The Washington Post, everybody's favorite dead man walking, Federal Reserve Chairman Benjamin Bernanke, is preparing to unsheathe the ultimate Keynesian weapon in the War Against the Recession . . . which (fortunately for Mr. Bernanke) has the easily remembered acronym, "WAR." It sounds better than the alternatives, anyway: WAG P3 ("War Against the Great Depression, Part III") or WAD ("War Against the Depression"), the former suggesting they might not be completely serious with this crazy fiscal and monetary bologna, the latter hinting at just how much the financial powers-that-be have made in manipulating the currency and restructuring the financial system to bring down the last remnants of private property and a sound monetary system.
And what, exactly, is this Ultimate Keynesian Weapon? (We tried "Year's Ultimate Crazy Keynesian Stuff" — YUCKS — and "Weaponless Attack on Currency, the Keynesian Offensive" — WACKO — before giving up and going with "UKW" that doesn't have another meaning. We can't always be clever, you know.) Anyway, according to the Washington Post, "The Federal Reserve is prepared to take new action to boost the economy, its chairman, Ben S. Bernanke, said Friday morning, because inflation has been too low of late and unemployment is poised to come down too slowly. The Fed's policymaking committee 'is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate,' Bernanke said in prepared remarks."
We again resist the urge to let loose with a semi-involuntary, "Huh?" and try to make sense of this nonsense. "Inflation has been too low of late." Uh, huh. I know that I seem to be spending more and getting less. How about you? Since when is having your pocket picked and the purchasing power of your wages reduced by currency manipulation through induced inflation, whether at a high or low rate, a good thing? That's not the good part, though. The juicy bit is the perceived necessity "to return inflation over time to levels consistent with our mandate."
Come again?
Enlighten me, O Great One. Where does it say that the Federal Reserve has a mandate to maintain high levels of inflation . . . or inflation at all? Section 2A of the current version of the Act clearly states that "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
Let me get this straight. The Federal Reserve Act seems to be saying that, in order "to promote the goals of maximum employment, stable prices, and moderate long-term interest rates," the Board of Governors and the Open Market Committee will "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production."
Read that carefully. The underlying assumption embodied in § 2A is that fostering production by maintaining money and credit policies "friendly" to private sector production of marketable goods and services will result in promoting full employment, a stable price level, and keeping interest rates steady. Now read again what Bernanke said in his "prepared remarks." He wants to increase the rate of inflation in order to bring down unemployment. He is not only putting the cart before the horse, he is unhitching the horse and driving it away with a whip. He then wants to hitch two carts together, evidently expecting them to draw each other while the peasants and the soldiers in his WAR eat the horses, thereby making it impossible to carry on the fight or do anything else . . . like move the cart.
What's wrong with that? It is, after all, the usual Keynesian balancing act between inflation and employment — like love and marriage, you can't have one without the other in the Keynesian system. (And, lest you missed the heavy-handed analogy, "eating the horses" is redistributing existing wealth and liquidating investment for consumption in preference to financing new capital formation.)
The problem is that Bernanke's (and Keynes's) program not only confuses cause and effect, it assumes that one effect is the cause of another. Really? Not according to § 2A of the Federal Reserve Act, under which Mr. Bernanke allegedly operates.
According to § 2A, both full employment and low inflation are the good effects — not the causes — of fostering production. You do not bring about inflation by lowering unemployment, or lower unemployment by causing inflation. On the contrary, you lower unemployment and keep the brakes on inflation by making it possible for people to produce marketable goods and services by means of their labor, capital, and land. Harold Moulton pointed this out in his 1936 book on the recovery problem in the United States (The Recovery Problem in the United States, obviously), and which (of course) we quote in our edition of The Formation of Capital. Jean-Baptiste Say and Adam Smith made similar noises in their day. Aristotle may even have had a few tidbits to add on the link between money and production, plus a possible comment or two about not confusing cause and effect.
Bernanke's remarks are thus a kind of "walking dead" of defunct ideas as John Quiggin put it in his book that I wish I'd stolen the title from before he published ("Cursed be he who said what I said before I said it!" — St. Jerome), Zombie Economics: How Dead Ideas Still Walk Among Us. I haven't yet had a chance to read Zombie Economics, so I don't know how insightful, intelligent, brilliant, etc. (i.e., how much he agrees with me) the author is, but it's a great description of how bankers like Bernanke and politicians like Obama have bought into the party line to such a degree that they no longer even question whether what they say makes sense. It's rather like the scene from The Ghost Breakers, starring Bob Hope and Paulette Goddard, that has what some people consider the funniest line Bob Hope ever delivered.
The bottom line is that the sooner the powers-that-be sprinkle a little salt of common sense onto their lunch (getting a Zombie to eat salt is the traditional way of breaking the spell, at least according to Haitian Voodoo priests and priestesses in the know) and start examining the claims of Capital Homesteading seriously, they are going to continue talking nonsense and, frankly, spreading hopelessness and despair.
Guy Stevenson and Dawn Brohawn contributed whatever it is you disagree with to this posting. All the good stuff is mine.
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