T Nation

Idiot Economists

By Lucia Mutikani

NEW YORK, June 3 (Reuters) - The dollar surged on Tuesday after Federal Reserve Chairman Ben Bernanke warned the weak U.S. currency posed a risk to inflation, adding to views the central bank could raise interest rates later this year.

Bernanke’s rare warning, made during an address to a conference on monetary policy in Barcelona, Spain, was seen by some market participants as the Fed’s version of a “strong dollar policy,” lending the embattled currency much needed support.

“The fact that these dollar supporting remarks have emerged from an institution with the means to control interest rates is somewhat unprecedented and bears the signs of the central bank’s bid to support the U.S. currency,” said Ashraf Laidi, chief FX strategist at CMC Markets in New York.

The euro <EUR=> dropped to $1.5411, its lowest level in nearly three weeks, surrendering overnight gains that had pushed it as high as $1.5628. In late New York trade, it was quoted around $1.5461, down 0.5 percent on the day.


So let me get this straight, a weak dollar causes inflation?  No sir!  A weak dollar is the [b]result[/b] of inflation which is caused by continually expanding credit and not allowing for market corrections.  

Does this guy not understand a simple concept like marginal utility?  The more of something there is the less utility (value) it provides -- i.e., we require more of it to satisfy our utility.  What would happen to the value of Micky Mantle baseball cards if someone just started printing them off?

If the Secretary of the Economy [sic] doesn't even understand simple concepts then we are in serious trouble.

[quote]LIFTICVSMAXIMVS wrote:
… A weak dollar is the result of inflation which is caused by continually expanding credit and not allowing for market corrections.
[/quote]

You can’t take the comments in the context of traditional economic theory, the expanding credit had little, if anything to do with inflation. Credit was extended (on a global scale) to attempt to ensure stability in the global banking system. Any impact on inflation was secondary, but as the banking system re-establishes its inter-banking lending practices, the central banks will be able to go and clean up the money supply/inflation mess (and it won’t be pretty).

[quote]Ruggerlife wrote:
LIFTICVSMAXIMVS wrote:
… A weak dollar is the result of inflation which is caused by continually expanding credit and not allowing for market corrections.

You can’t take the comments in the context of traditional economic theory, the expanding credit had little, if anything to do with inflation. Credit was extended (on a global scale) to attempt to ensure stability in the global banking system. Any impact on inflation was secondary, but as the banking system re-establishes its inter-banking lending practices, the central banks will be able to go and clean up the money supply/inflation mess (and it won’t be pretty).[/quote]

I am not sure how you are defining inflation but inflation is expansion of the money supply – which can only be done when new money is introduced via fractional reserve lending. As a result prices rise due to the law of marginal utility.

In order for the fed to reduce the money supply banks would have to call in all outstanding loans. The money that is lent out cannot just be taken back. This would lead to a massive depression.

Anything the fed does results in a lose-lose situation.

[quote]Ruggerlife wrote:
LIFTICVSMAXIMVS wrote:
… A weak dollar is the result of inflation which is caused by continually expanding credit and not allowing for market corrections.

…[/quote]

Didn’t they expand the dollar supply first, thus weakening it? Inflation then followed. I am not sure what you are getting at.

[quote]LIFTICVSMAXIMVS wrote:
I am not sure how you are defining inflation but inflation is expansion of the money supply – which can only be done when new money is introduced via fractional reserve lending. As a result prices rise due to the law of marginal utility.

In order for the fed to reduce the money supply banks would have to call in all outstanding loans. The money that is lent out cannot just be taken back. This would lead to a massive depression.

Anything the fed does results in a lose-lose situation.[/quote]

I didn’t make my point very well. Basically I was just pointing out that the money supply issue was a “side effect” of what the central banks around the world were attempting to avoid. That being a severe global financial system meltdown resulting from the unwillingness of financial institutions to lend to one another.

As for not being able to reduce the money supply, that is not completely true. I’m not sure if a central bank has means to “pull” money from the system, but it can force financial institutions to curb lending (through capital requirements) which on a global scale reduces the amount of credit extended in the economy.

[quote]Zap Branigan wrote:
Didn’t they expand the dollar supply first, thus weakening it? Inflation then followed. I am not sure what you are getting at.[/quote]

Prices don’t inflate. The money supply inflates. Prices respond to it and is mistakenly called inflation. Prices are a response to the aggregate choices people make in the market along with the money supply. It is conceivable that prices can still drop even when the money supply does not; this could be a reflection of either really high supply or very low demand for a particular commodity.

Prices do not respond instantaneously to monetary inflation. It takes time for those signals to be noticed in the market – i.e., demand rises disproportionately across various sectors, etc. Basically what we are seeing is the result of credit expansion made by fmr. Chmn. Greenspan.

[quote]LIFTICVSMAXIMVS wrote:
Zap Branigan wrote:
Didn’t they expand the dollar supply first, thus weakening it? Inflation then followed. I am not sure what you are getting at.

Prices don’t inflate. The money supply inflates. Prices respond to it and is mistakenly called inflation. Prices are a response to the aggregate choices people make in the market along with the money supply. It is conceivable that prices can still drop even when the money supply does not; this could be a reflection of either really high supply or very low demand for a particular commodity.

Prices do not respond instantaneously to monetary inflation. It takes time for those signals to be noticed in the market – i.e., demand rises disproportionately across various sectors, etc. Basically what we are seeing is the result of credit expansion made by fmr. Chmn. Greenspan.[/quote]

Agreed. I still don’t know what you think is incorrect. First the money supply increases and then prices rise. Inflation is measured by an index of prices. The original post seemed correct.

[quote]Zap Branigan wrote:
Agreed. I still don’t know what you think is incorrect. First the money supply increases and then prices rise. Inflation is measured by an index of prices. The original post seemed correct.[/quote]

Using an index of prices gives an accurate, yet indirect measurement of inflation. I agree with Lifty.

[quote]LIFTICVSMAXIMVS wrote:

By Lucia Mutikani

NEW YORK, June 3 (Reuters) - The dollar surged on Tuesday after Federal Reserve Chairman Ben Bernanke warned the weak U.S. currency posed a risk to inflation, adding to views the central bank could raise interest rates later this year.

Bernanke’s rare warning, made during an address to a conference on monetary policy in Barcelona, Spain, was seen by some market participants as the Fed’s version of a “strong dollar policy,” lending the embattled currency much needed support.

“The fact that these dollar supporting remarks have emerged from an institution with the means to control interest rates is somewhat unprecedented and bears the signs of the central bank’s bid to support the U.S. currency,” said Ashraf Laidi, chief FX strategist at CMC Markets in New York.

The euro <EUR=> dropped to $1.5411, its lowest level in nearly three weeks, surrendering overnight gains that had pushed it as high as $1.5628. In late New York trade, it was quoted around $1.5461, down 0.5 percent on the day.


So let me get this straight, a weak dollar causes inflation?  No sir!  A weak dollar is the [b]result[/b] of inflation which is caused by continually expanding credit and not allowing for market corrections.  

Does this guy not understand a simple concept like marginal utility?  The more of something there is the less utility (value) it provides -- i.e., we require more of it to satisfy our utility.  What would happen to the value of Micky Mantle baseball cards if someone just started printing them off?

If the Secretary of the Economy [sic] doesn't even understand simple concepts then we are in serious trouble.[/quote]

I'm going to go out on a limb here and suggest that Bernanke is neither an idiot nor unable to comprehend 'simple economic concepts' that come so easily to you.  Then again, I could be wrong about that.  Perhaps you could do us all a favor and offer Ben a few pointers on rudimentary economic concepts -- I don't see why he wouldn't be receptive to the idea.  

I’d suggest that the defect in the wording in the story is likely due to the reporter…

[quote]BostonBarrister wrote:
I’d suggest that the defect in the wording in the story is likely due to the reporter… [/quote]

Most likely, but who wants to debate that?

Actually, Nassim Nicholas Taleb said recently in an interview that he wouldn’t even trust Bernanke to drive his car. He believes him to be profoundly incompetent.

[quote]BostonBarrister wrote:
I’d suggest that the defect in the wording in the story is likely due to the reporter… [/quote]

Good reason to never trust the news, though I actually believe that Bernanke actually said this.

[quote]katzenjammer wrote:
Actually, Nassim Nicholas Taleb said recently in an interview that he wouldn’t even trust Bernanke to drive his car. He believes him to be profoundly incompetent.


[/quote]

I read the article.

WTF is up with his training regimen?

All in all,not really too much new in his viewpoint.

I’ll do a bit more reading before making up my mind,but for now i’m not sure that his criticism of Bernanke really has too much merit.

It’s missing, perhaps, a larger context.

Have you by chance read The Black Swan - he’s very suspicious in general of economists - particularly American academic economists - who rely far too much on abstract modeling. He’s an interesting guy - and his views have some authority in my opinion.

[quote]katzenjammer wrote:
It’s missing, perhaps, a larger context.

Have you by chance read The Black Swan - he’s very suspicious in general of economists - particularly American academic economists - who rely far too much on abstract modeling. He’s an interesting guy - and his views have some authority in my opinion.

[/quote]

No,I haven’t read it,I’ll get me a copy.

I’m in agreement with the whole suspicion issue,but it is always easier to be a critic than to be one actually having to make the hard calls with very little wiggle room.

[quote]SinisterMinister wrote:
Perhaps you could do us all a favor and offer Ben a few pointers on rudimentary economic concepts – I don’t see why he wouldn’t be receptive to the idea.
[/quote]

Because Nixon came down from the mountain and commanded, “We’re all Keynesians now.”

And so it was…

Seriously though, what good would the truth do Bernenke? He and his banking cohorts could no longer continue to profit off of a bankrupt and corrupt system.

Economic insight is easy for anyone to gain with a proper method of inquiry.

[quote]Neuromancer wrote:
katzenjammer wrote:
It’s missing, perhaps, a larger context.

Have you by chance read The Black Swan - he’s very suspicious in general of economists - particularly American academic economists - who rely far too much on abstract modeling. He’s an interesting guy - and his views have some authority in my opinion.

No,I haven’t read it,I’ll get me a copy.

I’m in agreement with the whole suspicion issue,but it is always easier to be a critic than to be one actually having to make the hard calls with very little wiggle room.[/quote]

Agreed. He got lucky once and made a fortune. I don’t think his fund did so well but I don’t know if it went to shit before or after he sold it.

He is entertaining and opinionated but I haven’t read any of his books, just some stuff online.

Taleb is interesting, and he has some good insights: people generally undervalue events with small probabilities - and also assign small probabilities to things outside their normal experiences. Then when one occurs, people over-react to it because now it’s in their experience and they assign it too high a probability.

That said, Taleb has a very high opinion of his own intelligence, and too small a regard for others’ intelligence.

Bernanke is a great guy to have had in charge with the subprime mess coming due - something he didn’t cause, BTW.

[quote]LIFTICVSMAXIMVS wrote:
So let me get this straight, a weak dollar causes inflation? No sir! A weak dollar is the result of inflation which is caused by continually expanding credit and not allowing for market corrections. [/quote]

You guys do understand that in a global economy prices can rise and fall due to relative valuations between currencies?

I’d suggest that there is not just one singular cause to be blamed for price inflation.