Bernanke: I Smashed The China; You Eat Off The Floor

Good God….

WASHINGTON (MarketWatch) — The nation’s weak labor market was “a national crisis” that required attention from the White House and Congress, Federal Reserve Chairman Ben Bernanke said Wednesday.

The nation’s weak labor market has come about due to multiple events, most of which Bernanke has encouraged if not outright caused.

Trade deficits are not sustainable in the intermediate and longer term.  Our trade policies are always touted as “beneficial” (e.g. more “free trade”) and yet they always lead to larger deficit positions with those nations.  But trade deficits drain capital, and absent the central bank “filling the hole” by allowing unbridled credit creation the problem is self-correcting as nobody can tolerate an indefinite drain of capital from their nation. 

The problem that “filling the hole with credit creation” causes is that while credit and capital are fungible credit is leverage while capital is not.  China’s “policy” of buying our treasuries is nothing more than a defense against the instantaneous inflation that would otherwise result from the inflow of unbalanced trade, but it is our fault that the imbalance exists in the first place.  At the same time those capital flows destroy manufacturing as it is capital, not leverage, that builds factories and industry in a sustainable fashion.

“Cheap money” policies simply encourage the replacement of capital with credit.  But the “prosperity” created by such is a chimera; unbacked credit creation is nothing more than a naked short against the currency in question.  That looks great when you’re trying to balance a trade deficit that would otherwise force you to stop due to deflation in your country (and inflation in theirs) but replacing capital with credit is a ponzi scheme as it relies on indefinite exponential growth at a rate that exceeds the credit creation rate — a feat that is mathematically impossible.

“We’ve had close to 10% unemployment now for a number of years, and of the people who are unemployed, about 45% have been unemployed for six months or more. This is unheard of,” Bernanke said in a question-and-answer session following a speech in Cleveland. He called for policies “that could help them find work, train for work and retain their skills.”

The solution to such a crisis is to do two things:

  • Stop with the freaking cheap money crap!  It must always be disadvantageous to use credit as a replacement for capital.  Capital formation is the bedrock of sound economic policy; it is only when new ideas, new businesses and hiring come from economic surplus that you have stable economic conditions, including actual growth.

  • STOP encouraging the offshoring of jobs.  You cannot lift up someone 10x your mass on your shoulders — you will simply be pancaked.  We are a nation of 330 million people, roughly, and the so-called “developing world” has roughly 10x our population between those nations.  There is no way we can allow “free labor” competition with literal rice-paddy-tending peasants who have a per-capital GDP 1/10th or less of our nation’s and not simply smash our per-capita earnings capacity into the dirt. 

Bernanke also urged policy makers to consider “strong housing policies to help the housing market recover.” Better housing policies would “clearly be very useful,” and would allow the low mortgage rates stemming from easy Fed policy to have more effect and help the economy recover.

If you do not own a house and wish to buy one, do you want prices to be low or high?

There is no difference between a big consumer durable good (houses) and cars, DVD players, bigscreen televisions or pairs of shoes.  We applaud “low prices” and call this competition when we go shopping for these items, but when it comes to housing we refuse to embrace free-market capitalism and instead continue to insist on financialization and ponzi schemes that massively distort the housing market.

This cannot work, it has never worked, and it will not work this time.  It is in fact the encouragement of this bubble economic nonsense that is Bernanke’s greatest legacy failure in that not only has he been ChairSatan and denied — repeatedly — that this would lead to ruin (his famous “housing prices will be supported by strong demographics” screed to Congress in 2006!) but in addition was at The Fed when Greenspan was feeding the bubble in the early part of the decade and through silence endorsed and adopted his idiocy.

Lock that jackass up and throw away the key.

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