Bernanke and the Potemkin Economy

On July 11, The Center for Vision & Values posted my article decrying the insulting name-calling directed toward Federal Reserve Board Chairman Ben Bernanke. The very next day, Bernanke made me question my forbearance by telling Congress that a third round of “quantitative easing” or “QE3” could be a near-term option.

Now it’s my turn to call Bernanke a name, but I’ll use a clinical label, not a crude one. He is an inflationist, although he may prefer the label “anti-deflationist.” He so fears a deflationary spiral that he will create however many dollars he believes necessary to avert deflation.

Bernanke’s repeated attempts to patch over the nation’s economic weakness, rottenness, and dead wood with newly created dollars remind me of the “Potemkin village” ruse. The Soviet communists duped foreign visitors into thinking that communism was a viable and prosperous system by steering them to sham factories, stores, villages, etc. that appeared productive, bustling, and attractive. In reality, Potemkin villages were like movie sets, built to disguise the widespread poverty and backwardness that characterized life in the “workers’ paradise.”

Official statistics insist that the Great Recession ended two years ago. Yet unemployment is creeping up, record numbers of workers are remaining unemployed for record lengths of time, income is down for small proprietors, and millions of people feel as though the recession never ended.

It is proverbial that statistics lie. One such statistic is the gross domestic product. GDP has risen modestly the last two years, supposedly indicating growth rather than recession. Here is the flaw in GDP: By definition, GDP=C+I+G. In other words, GDP equals the sum of consumer spending, private investment, and government spending. (There is also a problematical addendum of net exports, reflecting the mystical mercantilist notion that a country is richer if foreigners obtain more goods and services than domestic residents do, but let’s omit that here.)

In the last few years, GDP has increased by approximately one third of a trillion dollars, while the government component has risen by closer to a full trillion dollars. That means that the private sector (consumption and investment) has shrunk. Government has cannibalized private sector spending and jobs. GDP creates a Potemkin-like superficial appearance of economic growth, but the private sector, the heart of the economy, is suffocating. The private sector share of GDP has contracted to its 1998 level. 

Another Potemkin-like aspect of our economy involves the chasm between the economic fortunes of Wall Street and Washington on the one side, and Main Street on the other. Chairman Bernanke’s QE1 and QE2 policies helped to propel a huge advance in the stock market over the last two years. The political and financial elite have been prospering, but, relatively speaking, aside from potentially unrealized gains in his 401K, that Fed-generated glitter may not have helped Joe Six-pack.

Here is what we need to understand: Bernanke and Co. have immense powers, but they don’t have the right power. They can control short-term interest rates; virtually dictate the policies and practices of American financial institutions; artificially boost asset prices by purchasing whatever quantity of them they choose; bail out politically connected enterprises; and do many other things by virtue of their power to create dollars without limit. Yet, the one thing that Bernanke and the Fed cannot do is generate prosperity and thereby raise standards of living. They can benefit some at the expense of others by deciding which assets to purchase and where to deploy new dollars—that is, they can redistribute wealth, but they can’t create it.

Question: Are there any grownups who really believe that our country can get richer by printing more money? If so, why not just mail everybody a check for $20 million? Even better, why not give every household its own little printing press so that whenever someone gets laid off or isn’t generating enough income, he can create the wealth he needs by printing it?

There is really only one way out of Ben Bernanke’s Potemkin-like economy. It isn’t to replace Bernanke with a supposedly “better” central banker. Rather, we need to abolish the central bank and foreswear the fiat money that enables the Fed to create the cruel façade of Potemkin-like illusions on the rest of us.