Bernanke in Congress

Bernanke in Congress (Photo credit: Talk Radio News Service)

A while back, I posted an excerpt from investment manager John Mauldin‘s newsletter – an interview with Dr. Lacy Hunt (did you think that was a girl? Me too!), called “Face the Music” (direct link to PDF).

Today, at, economist Frank Shostak takes a look at this article and makes a few observations. Here’re a few snippets. These may not be the crucial bits of Shostak’s article, but they’re what caught my attention, and anyway this is my blog:

  1. According to Hunt the key factor behind the current world economic crisis — in Europe and the United States in particular — is a very high level of debt relative to gross domestic product (GDP). For instance in the United States, as a percentage of GDP, both public- and private-sector debt is currently at around 400 percent, while in the eurozone it is 450 percent.This way of thinking follows in the footsteps of the famous American economist Irving Fisher who held that a very high level of debt relative to GDP runs the risk of setting in motion deflation and in turn a severe economic slump. According to Fisher the high level of debt sets in motion the following sequence of events that culminate in a severe economic slump…
  2. the critical stage in this story is the stage 2, that is, debt liquidation results in a decline in the money stock.
  3. the fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary policies of the central bank and not the liquidation of debt. It is loose monetary policy that provides support for the creation of unbacked credit.
  4. According to Böhm-Bawerk, “The entire wealth of the economical community serves as a subsistence fund, or advances fund, from this, society draws its subsistence during the period of production customary in the community.”
  5. In his writings, Fisher argued that the size of the debt determines the severity of an economic slump. He observed that the deflation following the stock market crash of October 1929 had a greater effect on real spending than the deflation of 1921 had because nominal debt was much greater in 1929.We, however, maintain that it is not the size of the debt as such that determines the severity of a recession but rather the state of the pool of real funding. Again, it is not the debt but loose monetary and fiscal policies that cause the misallocation of real funding.
  6. By putting the blame on debt as the cause of economic recessions, one in fact absolves the Fedand the banking system it maintains from any responsibility for setting the whole thing in motion. Additionally, once it is accepted that debt can set in motion a monetary implosion and in turn an economic depression, it appears to justify the idea that the Fed must step in and lift monetary pumping in order to offset the disappearing money supply.

I notice that gold fell suddenly, on Bernanke’s announcement which suggested there would not be a further round of QE in the near future. So, do the markets believe Fisher or Shostak? As Dr. North puts it:

On February 29, Bernanke gave a soothing presentation to a House committee. The stock market dropped a little. Gold and silver dropped like a stone.

The media focused on Bernanke’s hint that QE3 will not be necessary, that economic growth is slow. Conclusion: monetary stability.


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