Monetary Policy

Ten Years Ago: Greenspan Sees Federal Debt Paid Off By End of Decade. Today: Bernanke Doesn't Know What a Dollar Is.

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It was the seventies. You can't judge!

Calculated Risk takes pity on Ben Bernanke by dusting off his predecessor's testimony to the House Committee on Financial Services, dated March 2, 2001.

Ten years ago, Objectivist-trained Fed Chairman Alan Greenspan dazzled us with visions of an $800 billion surplus in 2010, surpluses through 2030, and more:

The most recent projections from OMB and CBO indicate that, if current policies remain in place, the total unified surplus will reach about $800 billion in fiscal year 2010, including an on-budget surplus of almost $500 billion. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

These most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach and, indeed, would occur well before the end of the decade under baseline assumptions.

One thing Greenspan did get right:

With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating.

When asked by Rep. Ron Paul (R-Texas) to define the word "dollar," Bernanke today said a buck is an equivalent of "food, and gasoline, and clothes and all the other things that are in the consumer basket."

If Bernanke here is speaking as the Fed Chairman rather than as a wooly professor of economics, his answer is untrue. When calculating inflation, the Fed uses "PCE" or "personal consumption expenditures" rather than the "CPI" or "consumer price index" used by the Bureau of Labor Statistics. As the Federal Reserve Bank of St. Louis indicates here, PCE actually leaves out food and energy costs. So if Bernanke believes food and gas (prices for both of which are increasing sharply, you may have noticed) should be factored into the maintained value of the dollar, he should tell the other folks at the Fed next time there's a Fed barbecue.

Daniel Indiviglio explains why inflation means even the vague definition Bernanke gave would not hold up from one year to the next.

NEXT: Reason Writers Around Town: Veronique de Rugy on the Debt Ceiling

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  1. It’s all Woodrow Wilson’s fault, he passed the Progressive Income Tax, which gave the government additional revenues which encourages government to spend more.

    1. I couldn’t agree more.

    2. No, its Woodrow Wilsons fault because he sighed into law the Federal Reserve Act which is neither Federal nor a Reserve but a bankers cartel. Ok, the Progressive Income Tax law was just as bad. Then there was the whole WW1 thing which was bad too. Did he do anything right?

      1. Re: DJF,

        Did he do anything right?

        Yes, he did something right: He died, and did not return as a zombie.

        1. He hasn’t returned yet, you can’t be sure with Zombies unless you shoot them in the head, or cut off their heads, I can never remember which is the recommended method.

          1. Actually, I learned you have to fill their mouths with salt and sew the lips shut, and then cut their heads. At least, that’s what Kolchak The Night Stalker did…

            1. If anyone one would know, Kolchak would.

          2. I think to qualify as a “zombie”, you need to still have flesh sticking on your bones. Undead Wilson would be a skeleton by this time.

      2. He segregated the Navy and the Civil Service?

        Oh wait, those were bad things too.

        1. He also managed to keep blacks out of Princeton, although that was before he was president.

          He kept us out of war… oh, wait, nevermind.

          He held on to the power of presidency while being unable to actually wield it due to being debilitated by a stroke… well, I guess that’s not so bad.

  2. To be fair to Greenspan, a shitload of economic policies did change quite a bit between 2001 and 2010, as well as the initiation of two wars authorized military force instances, which are known to stress the budget.

    1. Not to mention the government bloated quite a bit during that decade.

      1. Y’all meat be to it.

        Would have been nice to have had some conservatives in power from 2001 on, instead of the radical interventionists we actually did have.

        1. “Y’all meat be to it.”

          That’s an od speech impediment you have there, Lith.

          1. It’ more or less a Spoonerism, od or not.

            (And I only lithp on Reason; too bad my email of lithping@hole.com doesn’t show.)

    2. Yeah, but the government bloat was largely made possible by Greenspan’s easy money. Low interest rates = cheap debt ==> big government.

      When we resurrect AR, she’ll rip his balls off.

      1. Do you think I’d have a shot at nookie with the Reaynimated?

    3. Did Rudy Giuliani teach us nothing? I mean, 9/11 changed everything!

      /facepalm

  3. Silly Reason! Economics is a complicated subject. Quibbling over definitions of such archaic theoretical notions as ‘the dollar’ is like arguing over how many angels might best be arranged to maximally occupy a pinhead. All kneel down before the wisdom of The Bernanke.

  4. “…if current policies remain in place…”

    There’s the rub. How many bad ideas came afterward?

    1. I think it might be easier to count how many good ones came out of the sum of decisions.

  5. The most recent projections from OMB and CBO indicate that, if current policies remain in place, the total unified surplus will reach about $800 billion in fiscal year 2010…

    BUT THEN 9/11 HAPPENED.

    Also, that picture. I can’t believe that’s what people looked like back in 2001.

    1. And didn’t they have color photography then? Or was this artistic?

      1. They look like Zombies.

    2. Also, that picture. I can’t believe that’s what people looked like back in 2001.

      If you are refering to the one with Ayn Rand in it, that isn’t from 2001. She died in 1982. It’s probably from the middle 70’s when Gerald Ford was president.

      1. You may or may not be living up to your name with that response.

  6. The Ben Bernank as Arthur Brown:

    “You’ve worked hard and you saved and earned – but all of it’s going to burn.”

    1. MUAHHHHHHHHHHHAHAHAHWAHHHHHHHHHHHHHHHHH!

      You should have seen him
      Lying alone in helpless silence in the night
      You should have seen him
      You would have seen his eye reflecting in the light

      1. Not bad, db, but if you were going with an Alan Parsons Project song for the Bernank, this might be better:

        I am the Eye in the Sky – looking at you,
        I can read your mind.
        I am the maker of rules – dealing with fools
        I can cheat you blind…

        1. That is most apropos, so as a reward I give you this up tempo number:

          http://www.youtube.com/watch?v=-BR6NJlk1_A

          1. Ah, another song about someone pissing money away. Very good.

  7. Everything Greenspan said was absolutely accurate. If, as he warned, fiscal discipline hadn’t evaporated like a piss puddle on an Arizona highway at high noon, we’d be OK.

    Remember: even with the Evil Bush Tax Cuts and the Nefarious GOP Blackmail Tax Relief of 2010, the budget would be balanced if we were spending at 2004 levels.

    So Greenspan was right: the Feds have plenty of income, and with fiscal discipline, could not only run a balanced budget but retire the debt.

    1. Remember: even with the Evil Bush Tax Cuts and the Nefarious GOP Blackmail Tax Relief of 2010, the budget would be balanced if we were spending at 2004 levels.

      Yep, housing has retreated to 2002 prices and it’s only sensible that federal spending revert to 2002 levels. But instead they found some idiot to run the Fed who volunteered to take an idiotic stab at propping up the housing market. Of course, I’m of the belief that Greenspan would have volunteered for the same duty if he didn’t have an easy way out (quitting).

      1. some idiot to run the Fed who volunteered

        You’re not giving him enough credit. Bernanke has an actual intellectual history(and it’s hard to resist insulting the Randians by saying “unlike Greenspan”). His studies of the Depression all point to one conclusion: Inflation is the path to happiness.

        Bernanke has governed the Fed precisely according to this principle. He believes money is fungible, perishable, and fictional.

        I don’t know whether he’s right or wrong about that. But after QE1, QE2, it is pretty clear that’s what he believes.

  8. Fuckin’ dollars, how do they work?

  9. I understand why food and fuel are left out of inflation models during normal economic times (I know, there needs to be a definition of normal.) But when you’re in the middle of a recession that has been muddled with retarded policy and the population is rapidly approaching a point of desperation with respect to providing for their needs, the two most important fucking things in any time in human history, any place, and any economy were food and fuel. So when the shit hits the fan, maybe using a different model might help a lil’ heh Helicopter Ben? God knows he’s willing to toss caution to the wind with throwing other crazy ass ideas out there.

    1. How does the saying go?

      “Civilization is only 3 meals away from collapse”?

      1. I reckon the Middle East today is an excellent example.

  10. US $ < Australian $

    *mind boggles*

    1. That does boggle the mind.

      When I was there in 1994 it was down around seventy cents. IIRC the low was around sixty.

      The Loony did the same thing. Now it’s as sound…as…well…a dollar. 🙂

      1. I recall a trip around Europe in summer of 2002, just after the first big euro expansion. For most of the trip, a euro cost about $.90, so it was like a perpetual 10% off sale (except in hella expensive Sweden and Switzerland). The day we flew out, the big news story was the euro reaching parity with the dollar. Now I long for the days of euro-dollar equivalency, as I’d kinda like to visit Europe again without losing my shirt.

    2. US $ is also < Canadian $.

      1. re: Isaac Bartram @ 5:04 – The Loony is the Canadian dollar.

        1. My bad. I saw “Loony” and thought “Bernanke”.

  11. Some of you financial types explain something to me.

    I read the Daniel Indiviglio linked article, and he seems to be making a distinction without a difference.

    Both the gold standard and the Fed dollar would be a moving target.

    Indiviglio indicates that due to inflation, the number of pears and apples that a dollar will buy changes. Wouldn’t it also on a gold standard? Since the dollar merely represents some specified amount of gold, you, in essence have that amount of gold in your pocket.

    In a gold standard economy, wouldn’t it also be safe to assume that the amount of pears and apples a specific amount of gold buys would also change?

    1. yes that’d be a good assumption.

      The difference is that if you were holding dollars and all of the sudden lost a lot of power to purchase pears and apples you’d know it was because either the supply of pears and apples went down and/or the demand went up.

      As it stands now its also possible the reason you can’t buy as many pears and apples is that some unaccountable beuarucrat decided it was for the greater good if a silent taxconfiscation of wealth took place.

      1. This is a good explanation, and perhaps something that Indiviglio might have made more clear. Either that or I lacked the intellectual fortitude to grok it from his article.

        But I do like (and agree with) your point about information.* With the Fed’s power to print dollars, is my purchasing power becoming weaker because they’re printing dollars, or because there are fewer goods to purchase?

        *disclaimer: I’m skeptical about the Gold Standard.

      2. Yeah, except the value of gold itself fluctuates with supply and demand of gold. The big difference between a gold standard and a colonial era tobacco standard or some post-apocalyptic petroleum standard is that gold is LESS consumable and perishable than other commodities, and the relatively low production rate makes the supply FAIRLY stable. But it’s best to remember that gold in and of itself only has as much value as we place on it – just like the dollar. Think of it more as a commodity-backed currency than a specific gold-backed currency. Governments can’t necessarily just print more money with a gold standard, but governments can and did fiddle with the value of gold-backed dollars/pounds/what-have-you just as they do with fiat currency. It was more difficult, but the results were even more disastrous.

        I’m hardly an economist, so take my analysis with a grain of salt, but gold-buggery always seemed a bit simplistic.

        1. That’s true enough, but a more stable benchmark (hell, any benchmark) for currency is better than a less stable one, or none at all.

          And, with a gold standard, the debauching of the currency is immediately visible, unlike with fiat currency, and the markets will punish it immediately. Which is also a good thing.

        2. You’ve both pointed out the big problems with a gold backed currency. I’ve always seen a gold standard as a compromise, but I believe the ultimate goal should be free banking.

          1. You’ve both pointed out the big problems with a gold backed currency. I’ve always seen a gold standard as a compromise, but I believe the ultimate goal should be free banking.

            I think it should be a gold AND a silver backed currency!

            1. And aluminum! Don’t forget aluminum!

  12. When asked by Rep. Ron Paul (R-Texas) to define the word “dollar,” Bernanke today said a buck is an equivalent of “food, and gasoline, and clothes and all the other things that are in the consumer basket.”

    What? No big screen TVs???

    1. Ironically, PCE does a better job of tracking the value of big-screen TVs than of food or gas. Big-screen TVs on which I would choose to watch Kolchak: The Night Stalker, by the way.

  13. When asked by Rep. Ron Paul (R-Texas) to define the word “dollar,” Bernanke today said a buck is an equivalent of “food, and gasoline, and clothes and all the other things that are in the consumer basket.”

    As it pertains to the Unisted States of America a “dollar” is a unit of legal tender without fixed or intrinsic value. In other words Ben Bernanke doesn’t know what the fuck a dollar is, but he knows enough to run America’s Banking Cartel.

    Somebody stop this ride. I want to get off.

    1. OK, but it’ll cost you a dollar.

      1. Can it be a 2015 dollar?

  14. Is there difference between prediction and reality due to:
    1) changes in Government policies (war spending, homeland security, prescription drug benefit, tax cuts, etc.), or
    2) false assumptions about growth rate of economy, medical costs, etc.
    I know these two things are strictly separable, but it would be helpful to know which one makes the most difference.

  15. Is there difference between prediction and reality due to:
    1) changes in Government policies (war spending, homeland security, prescription drug benefit, tax cuts, etc.), or
    2) false assumptions about growth rate of economy, medical costs, etc.

    Yes.

  16. I’m sorry, but Ron Paul is so dumb he hasn’t read Adam Smith. Money is a medium of exchange, which is the point Bernanke made, which Tim is pretending not to understand. Ron thinks that because inflation has made the dollar worth “less,” we’re poorer than we used to be. Like, in the good old days, a beer was 5 cents! Five cents! Can you imagine? You could get a six-pack for like a quarter! Wow!

    1. Dammit, whose turn was it to watch Vanneman’s cage? He’s been escaping more than usual lately.

    2. Jeebus, Bernanke was just flat wrong. If you take a dollar to the Federal Reserve and demand something — anything — tangible in return, you will get nothing. Not food, not gasoline, nada.

      Now, there are still people who will take your dollar and give you the above in exchange, but they could effectively quit doing that (via raising prices in dollars to infinity) if they lost confidence in the dollar.

    3. Money is a medium of exchange,

      True, if trivially so.

      which is the point Bernanke made,

      Did he? Saying “a buck is an equivalent of “food, and gasoline, and clothes and all the other things that are in the consumer basket” means nothing. At best, I suppose, its a tautology: “A dollar can be exchanged for a dollars worth of goods and services.” Read strictly, thought, its gibberish. A dollar isn’t the goods a consumer may purchase; its something he may exchange for those goods, which is a very different thing indeed.

    4. Inflation is bad because it makes it impossible to effectively save for the long-term. Adjusted for inflation, beer may still cost the same, but if you are on a fixed income, you are screwed.

      What I’m getting at is that inflation makes saving for retirement impossible and forces people to depend on stocks or selling their house to retire.

      We are going to witness firsthand with the Baby Boomers what happens when a massively large generation can’t retire because of inflation.

  17. “How much is that in Cruzeiros?”

  18. And in ten more years my twins will ask me, “Daddy’s what’s a dollar?”

    1. We’ll still have the neuvo dollar.

  19. These most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach and, indeed, would occur well before the end of the decade under baseline assumptions.

    So, there would have been no problem if we had simply locked in our baseline assumptions.

  20. Greenspan used to hang out with objectivists and wrote some really good essays on the gold standard, sound money and even abolishing the FED, views he has obviously long since abandoned. He calls himself a libertarian-republican but he’s obviously not that either is he? No. Anyone can see he’s no more of a libertarian than Bill Maher and he’s no more of an objectivist than he is a libertarian. It makes no more sense to claim his past associations as proof that he is a secret objectivist than to imply the same thing about Murray Rothbard. He’s a STATIST. Nothing more.

    1. “same thing about Murray Rothbard.”

      Wait, what? Are you implying that Murray Rothbard isn’t a libertarian, or did I just completely misunderstand you?

      1. No I was saying that Murray Rothbard used to hang with objectivists but no one calls him “Murray Rothbard (objectivist-trained economist)”. He’s a libertarian or an anarcho-capitalist and Greenspan is a big government conservative. It makes no more sense for Cavanaugh to blame Greenspan’s career on objectivism than it would if he gave objectivism credit for Rothbard’s career.

  21. When asked by Rep. Ron Paul (R-Texas) to define the word “dollar,” Bernanke today said a buck is an equivalent of “food, and gasoline, and clothes and all the other things that are in the consumer basket.”

    Bernanke would have gotten in a buttload of trouble if he had given a blunt, accurate answer:

    “A dollar is a unit of the monopoly fiat currency issued by the Federal Reserve, backed by nothing tangible and extra units of which are created out of thin air.”

    1. That’s a good point. The Fed can create dollars out of thin air by just the press of a button, but I haven’t seen anyone doing that with food, oil or clothes.

  22. ANSWER: A dollar is a unit of account.

    Do I win a prize or something?

  23. “Ten Years Ago: Greenspan Sees Federal Debt Paid Off By End of Decade.”

    Then George W Bush said “We’ll see about that.”

  24. For everyone’s intellectual curiosity: http://www.gti.net/mocolib1//prices/allyrs.html

    For any Federal Reserve apologists’ cognitive dissonance: http://www.youtube.com/watch?v…..re=related

    and:http://www.youtube.com/watch?v=HQ79Pt2GNJo

    Regards,

    Charles

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