Bernanke’s Continued Insanity

There’s dumb and then there’s insane.  This is in the latter category.

Federal Reserve Chairman Ben S. Bernanke said while he’s encouraged by the unemployment rate’s decline to 8.3 percent, continued accommodative monetary policy will be needed to make further progress.

The decline in unemployment may reflect “a reversal of the unusually large layoffs that occurred during late 2008 and over 2009,” Bernanke said in a speech today in Arlington, Virginia.“To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

The problem is that these “accomodative policies” don’t work — because they can’t — when there is too much debt in the system.

There is too much debt in the system now.

This is the issue, at the end of the day, and why Bernanke’s moves are pushing on a string.  The only way you can “goose” production and consumption with loose policies is if you can entice people to borrow more money.

But when the system is too heavy with debt then there is no demand for more borrowing irrespective of how low interest rates are.  Leverage always has a cost and the overhang from it, and the carrying cost both in terms of perception and reality, is a brake on further acceptance of credit.

As the upper boundary is approached more and more of the debt simply is a roll-over of other obligations and thus provides no GDP improvement at all, as it’s not spendable.  As increasing percentages of the debt “issuance” are nothing more than recasting of existing indebtedness the impact wanes and in fact can go negative.

The folly that Bernanke continues to persist in is that we can “grow” our way out of the mess.  That would be a pleasant outcome if he could point to one time in the last 30 years when it worked. But he can’t — not even for one three month period, including the last serious crunch when Greenspan tried what Bernanke has done this time around.

In the 2000-2003 recessionary period the increase in new debt never once, not even for one three month period, led to a contraction of the “spread” between debt addition and GDP addition.

In other words the theory that Bernanke is using was tested and disproved by Greenspan about a decade ago.

We’re in trouble folks — there’s an insane pilot at the controls and he’s pulling up while in a monetary flat spin.

If someone doesn’t remove him from the left seat soon, we’re going to hit the ground at 400mph.

Discussion (registration required to post)