Bob Murphy explains the Ben Ber-nank’s policies to his son

For some reason I imagined Bob Murphy talking to his son when I watched this video:

My God, what a big mistake the Fed (and the profession) made in talking about monetary policy in terms of inflation!  The following would be the sort of video I’d envision if I was trying to explain things:

Son:  What’s all this QE2 talk about?

Bob the Austrian:  The Fed is printing more money to boost national income.

Son:  Why do they want to boost national income?

BTA:  Because we’ve had a severe recession and the economy is still weak, more income would make Americans better off.

Son:  But won’t that money just blow up more bubbles, isn’t a painful adjustment necessary after the housing bubble?

BTA:  You need to study Hayek.  The initial re-allocation of resources was necessary, but the secondary deflation that began in late 2008 caused an unnecessary fall in national income.

Son:  Why then do so may conservatives oppose QE2?

BTA:  They have two objections; they say it won’t have any effect, and they say it will cause lots of inflation.

Son:  But aren’t those two effects logically inconsistent?

BTA:  Yes.

Son:  Then why do left-wingers oppose the QE2?

BTA:  They favor fiscal stimulus instead.

Son:  But won’t fiscal stimulus balloon the budget deficit much more than monetary stimulus?

BTA:   Yes.

Son:  But why are so many countries opposed to QE2?

BTA:  The Chinese are worried that a weak dollar will cause the Chinese currency to also become weak, causing inflation.

Son:  But if the Chinese think the US dollar is not a good currency, then why do they fix their own currency to the dollar?  Did we request they fix their currency to ours?

BTA:  Not exactly.

Son:  Why is QE2 so unpopular with the public?

BTA:  Because the Ben Ber-nank keeps saying they are trying to create more inflation.

Son:  Are they trying to create more inflation?

BTA:  No, they are trying to raise NGDP.

Son:  If they rise NGDP is the hope that this will also raise inflation?

BTA:  No, they hope that for any given increase in NGDP they get as little inflation and as much real growth as possible.

Son:  Then why does the Ben Ber-nank use such an unpopular argument to sell such a good idea.  I think most Americans would like to see their incomes rise.

BTA:  The Ben Ber-nank was a professor of economics, not marketing.  In addition, the Ben Ber-nank has not been exposed to the incredible beauties of NGDP targeting, as his job at the Fed leaves him little time to read the wise thoughts of Friedrich Hayek and Scott Sumner

Son:  I can’t wait to read the thoughts of those two wise men.

PS.  Regarding the Hayek link; scroll down far enough and you’ll find his picture.



34 Responses to “Bob Murphy explains the Ben Ber-nank’s policies to his son”

  1. Gravatar of David Stinson David Stinson
    15. November 2010 at 15:18

    Cute but shouldn’t that be “the Scott Sumner”?

  2. Gravatar of Winton Bates Winton Bates
    15. November 2010 at 16:17

    If a someone is really concerned to avoid secondary deflation, then it seems to me they should not have too much trouble accepting that a little bit of inflation is a price worth paying.
    I’m no expert on what is going on in the minds of US conservatives who oppose QE2, but I would thought their concern might be the sudden emergence of a lot of inflation – i.e. velocity of circulation might increase suddenly and the Fed might not be able to soak it up liquidity quickly enough without adversely affecting the real economy.

  3. Gravatar of Full Employment Hawk Full Employment Hawk
    15. November 2010 at 16:27

    “BTA: You need to study Hayek. The initial re-allocation of resources was necessary, but the secondary deflation that began in late 2008 caused an unnecessary fall in national income.”

    Apparently the current Austrian cult, like Ron Paul, have not read that part of Hayek either.

  4. Gravatar of Full Employment Hawk Full Employment Hawk
    15. November 2010 at 16:31

    “Son: Then why do left-wingers oppose the QE2?

    BTA: They favor fiscal stimulus instead.”

    Both Krugman and DeLong are supporting QE2. They have finally accepted the fact that under the current political environment they are not going to get the second stimulus they want and that if anything is going to be done to get the unemployment rate down, monetary policy is going to have to do it. I came to the same conclusion much sooner.

  5. Gravatar of Benjamin Cole Benjamin Cole
    15. November 2010 at 16:40

    The Sarah Palinization of the R-Party now extends to formerly “serious” right-wing commentators.

    When rank partisanship totally replaces statsmanship, when blind obstuctionism replaces policy-making, you have the sort of vile excretum rising to the surface of the R-Party that we see today.

    Krugman asks today whether any Republicans will actually speak up for Milton Friedman. I think not.

  6. Gravatar of scott sumner scott sumner
    15. November 2010 at 17:01

    David, The one and only . . .

    Winton, I agree, I think the right is overreacting.

    Full Employment Hawk, There are plenty on the left who oppose QE. I recently saw Stiglitz, Robert Reich, and a few others whose names I forget. There’s a perception on the populist left that this is a bailout for big banks.

    I agree about DeLong and Krugman.

    Benjamin, There are a few conservatives who support QE. I don’t know which conservatives consider themselves “Republicans” so I can’t answer that question.

  7. Gravatar of Full Employment Hawk Full Employment Hawk
    15. November 2010 at 17:08

    A highly oversimplistic statement about inflation is that

    “Inflation is caused by too much money chasing too few goods.”

    A similarly oversimplistic statement about recessions can be made:

    “Recessions are caused by too little money chasing too many goods.” While is is oversimplistic, it gets at the gist of the problem.

  8. Gravatar of Full Employment Hawk Full Employment Hawk
    15. November 2010 at 17:16

    “There’s a perception on the populist left that this is a bailout for big banks.”

    As I have said before, the most serious problem macroeconomic has is that ideology based dogma plays much too much of a role in it, at the theoretical, empirical, and especially policy making level. That applies to the populist left as well as to the right. I hope that pragmatic people on both the left and right will get behind QE and other proposals for more expansionary monetary policly because at the present time it is the only game in town for bringing the unemployment rate down.

    I would support a second fiscal stimulus if I thought it could be passed, but obviously it does not have a snowball’s chance in hell.

  9. Gravatar of Carl Lumma Carl Lumma
    15. November 2010 at 17:40

    Here’s another rebuttal:

  10. Gravatar of Doc Merlin Doc Merlin
    15. November 2010 at 17:42

    @Full Employment Hawk:
    “As I have said before, the most serious problem macroeconomic has is that ideology based dogma plays much too much of a role in it, at the theoretical, empirical, and especially policy making level.”

    I agree partially, only I would say that it is the second most serious problem. I think the most serious problem is that modern macro has about a 8 data points to argue about, since almost all modern macro ignores data before 1960’s. Thats something I really liked about Reinhardt and Rogoff’s work in “This Time Its Different.” Using 500 years of data gave them a much more thorough understanding of crises.

  11. Gravatar of wkw wkw
    15. November 2010 at 17:54

    I animated it for you:

  12. Gravatar of David Stinson David Stinson
    15. November 2010 at 18:43

    This is pretty much unrelated but I have been meaning to ask whether you were related to this guy:

  13. Gravatar of Morgan Warstler Morgan Warstler
    15. November 2010 at 18:57

    “Yes, the people at the Goldman-Sachs”

    And you think Ben isn’t going to become the Pro-Austerity Cheerleader?

  14. Gravatar of scott sumner scott sumner
    15. November 2010 at 19:04

    Full Employment Hawk, I second your call for a pragmatic monetary policy that moves beyond ideology.

    Thanks Carl, That’s a more serious effort than mine.

    wkw, Thanks for doing that. I can see my screenwriting skills are below those of my opponents. NGDP doesn’t sound right when spoken–nominal GDP would have sounded better. But nonetheless I am very appreciative.

    David, I don’t believe I am related. I do have a few interesting stories about genealogy, however.

    1. I have a great uncle who taught economics at SUNY Buffalo. I don’t know anything more about him. My grandfather and uncle were in journalism (one as a reporter and one as a professor.) When i was young I wondered how I ended up with no journalistic skills, as my writing was quite poor.

    2. I have a cousin who did genealogy research and found our ancestor was the third person to settle in Newton, Mass. He built a house around 1637. But here’s the weird part. I grew up in Wisconsin and only moved here as an adult. Later I found out that the house I ended up buying is on exactly the same spot that my early ancestor lived–although his house had been torn down and replaced with a more modern two family home from 1923. And that’s in a metro area of close to 5 million people! Cue the twilight zone music.

  15. Gravatar of Greg Ransom Greg Ransom
    15. November 2010 at 21:26

    For the “wise thoughts of Friedrich Hayek” on stabilizing MV or NDGP or whatever you call it, try this:

    It’s hard to have “wise thoughts” about anything while looking at pictures of Salma Hayek.

  16. Gravatar of Greg Ransom Greg Ransom
    15. November 2010 at 21:31

    Be assured, Selgin and Horwitz and White have read that part of Hayek.

    And most of Sumner’s blogging NGDP targeting buddies have read it.

    These are most of the best monetary economists in the “Austrian” school or influenced by the “Austrian” school.

    Someone wrote:

    “Apparently the current Austrian cult, like Ron Paul, have not read that part of Hayek either.”

  17. Gravatar of Greg Ransom Greg Ransom
    15. November 2010 at 23:07

    Here’s a color version of the Sumner QE2 dialogue:

  18. Gravatar of THE HAYEKIAN CASE FOR QE2 « Taking Hayek Seriously THE HAYEKIAN CASE FOR QE2 « Taking Hayek Seriously
    15. November 2010 at 23:10

    […] THE HAYEKIAN CASE FOR QE2 By Greg Ransom, on November 15th, 2010 A dialogue by Scott Sumner: […]

  19. Gravatar of Drew Drew
    16. November 2010 at 00:07

    I’ve been thinking this over (particularly about the problem of aggressive monetary policy)and have come up with a theory. I’m relatively new to economics (only a BA) and have limited exposure to the writings of Hayek. But I would appreciate feedback as to whether this theory has any validity.

    First, over-capitalization (as demonstrated by expansionary monetary policy) leads to systemic mal-investments. Depending on the focus of the market, a particular sector will be targeted and will inherently absorb many more bad investments than other sectors.
    The build up seems obvious to all, my problem lies with why there’s apparent deflation after the bubble bursts. The problem I think lies that the bubble exists not just in one sector, but the entire economy. Prices are inflated beyond their true market value on a broad scale. Demand falls dramatically because (due to failing investments) real capital levels become apparent and credit becomes extremely tight. People are no longer able to finance the inflationary prices because of the restructuring of the credit market.

    The problem with sending more money into the market lies with failing to let prices fall enough. While prices remain high, inventories continue to pile up and production gets cut, hence worsening the unemployment problem. Demand won’t increase just because there’s more money on the market, because prices haven’t fallen to their market adjusted levels yet.

    I guess what my main question is, why is deflation bad? It stimulates demand a lot better than expanding available credit. It certainly seems a lot healthier for the economy than sending money into potential mal-investments again.

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. November 2010 at 02:48

    Bugger. I just linked to the video on your next post! (I should have realised you would have got there first.)

  21. Gravatar of Darf Ferrara Darf Ferrara
    16. November 2010 at 03:33

    I’m not sure that I understand why you support this. It seems like the Fed is just creating inflation at this point. How does this Fed action credibly commit the Fed to NGDP growth in the future?

  22. Gravatar of Ryan Ryan
    16. November 2010 at 04:03

    “The initial re-allocation of resources was necessary, but the secondary deflation that began in late 2008 caused an unnecessary fall in national income.”

    Two questions:

    1 – How can you accurately delineate the two events?
    2 – How can you determine what level of contraction is “necessary” versus “unnecessary?”

  23. Gravatar of David Stinson David Stinson
    16. November 2010 at 08:08

    “Later I found out that the house I ended up buying is on exactly the same spot that my early ancestor lived-although his house had been torn down and replaced with a more modern two family home from 1923.”

    Wow, that is very very cool.

    It would probably be good if you were related William Graham Sumner. I haven’t read anything of his but I just finished Boundaries of Order (by Butler Shaffer), an excellent book about property and social order, and there was this quote from Sumner:

    “Property is the most fundamental and complex of social
    facts, and the most important of human interests; it
    is, therefore, the hardest to understand, the most delicate
    to meddle with, and the easiest to dogmatize about.”

  24. Gravatar of HayekWasn’tAlwaysRight HayekWasn'tAlwaysRight
    16. November 2010 at 10:18

    “They have two objections; they say it won’t have any effect, and they say it will cause lots of inflation.”

    I believe the first objection is in relation to employment, not inflation.

  25. Gravatar of D. Watson D. Watson
    16. November 2010 at 11:21

    I was looking forward to your response. Thank you.

  26. Gravatar of ssumner ssumner
    17. November 2010 at 09:31

    Greg, Thanks for the link. I’ve always been drawn the the absurd, and seeing Hayek’s picture in the midst of all those photos of Selma Hayek somehow struck me as funny. There’s also a graph on time and production amidst all the photos.

    I agree about Selgin, Horwitz, and White.

    Thanks for the colorization.

    Drew, It is impossible for all prices to fall in relative terms. As a practical matter, if all prices of goods and services fall, you get unemployment because wages are sticky (so real wages rise.) And although there may be too much capital built in a boom, there is not too many people. We’d like to avoid high unemployment which is why Hayek opposed the sort of deflation that spilled over into lower wages and lower incomes. A little deflation can be OK in a healthy growing economy, but falling nominal incomes is a danger sign.

    Lorenzo, I have many commenters helping to provide me with the latest videos.

    darf, The Fed doesn’t directly control inflation, they directly raise AD (or NGDP) which then spills over into both higher prices and higher output.

    Ryan, You look at NGDP. It was growing in 2007 and early 2008, and was falling in late 2008. Technically you look at the growth rate relative to trend, but in this case the break was so sharp that it’s pretty clear that something went very wrong after June 2008.
    If you keep NGDP growing at 5%, the free market will provide the optimal amount of RGDP contraction during the bust. Of course like everything in economics this is an approximation–so I’d say roughly the right amount of contraction.

    David, It’s rather embarrassing to admit that I haven’t even read the most famous guy with the same last name (other that Sting–whose real name is Sumner) But from small excerpts I’ve read I gather he is a strong classical liberal.

    HWAR, Sometimes it is employment, but often they say swapping one near zero asset for another near zero asset won’t have any effect on NGDP. And how can one argue that raising inflation won’t raise RGDP at 9.6% unemployment? Is the SRAS vertical? Even real business cycle types have had to add nominal shocks to their models.

    D. Watson, You’re welcome.

  27. Gravatar of Matt Matt
    18. November 2010 at 10:25



    I take it that you implicitly accept that the FED must do this, and that government should be in charge of money issues.

    This is not a political issue (green, democrat, republican, libertarian, etc.). This is a natural rights issue. To the commenter that said there is a “feeling on the populist left that this is a big bank bailout”, that isn’t just a feeling, and it isn’t just the populist left. Look at the mechanics of this: FED buys treasuries on the open market; if the sellers get that time deposit money right now, and even if they just sit on it, they will be paid on excess reserves. If they take the money and go to the Wall St. casino, they’ll be paid or at least only lose with the proceeds of over-priced bonds they just sold to the FED (low yield bonds).

    As for looking at NGDP, for the life of me I can’t believe people take an aggregate like that seriously. The economy is human beings. Making decisions to improve their lives. Right now, my taxes are set to go up several thousand dollars next year, and why? Because the government can’t live within its means. Why? Because the FED gives it free, unchecked, unlimited money and allows them to purchase real goods with money from nothing. The idea that making nominal incomes higher now is going to solve the problem somehow is infuriating; the dollar over the course of my short life, with CPI as the indicator ever since Richard Nixon conjured it out of one of his lackeys, has collapsed in value from $1.00 to $0.18. How is that good? How can you honestly believe that is good for people? It STEALS wealth from the very people you are supposedly trying to teach your son will be helped by this QE 2, (and 3, 4, 5, ad infinitum).

    Bash away, I know I’m no economist, but I do know that it is flat out morally wrong to try to plan the lives of everyone according to your idea of what is appropriate, or consistent with some completely arbitrary mandate. Some job the FED has done living up to its dual mandate, eh?

  28. Gravatar of Matt Novak Matt Novak
    18. November 2010 at 11:10

    As an additional comment:

    Read here what the Ben Bernank has to say for his actions. Hint: the goal is to create more inflation (in prices).

    He says inflation (based on CPI, mind you) is running a bit less than 2 %. He uses this as an OK to go ahead and try to create more inflation (his own words!).

    At 2%, and 25 years, the saver of a dollar must save actually $1.64 in order to buy the same thing. In other words, this 2 % price inflation policy target, devalues the money of savers significantly.

    Just over the last 40 years, the FED has failed tremendously even according to this bogus (low inflation) goal. The dollar should only have fallen from $1.00 to $0.45 if their 2% target was met. Instead, by their own measure it is down to just $0.177. Their protected monopoly on money creation is the cause of a large scale transfer of wealth from regular people to the big banks, because they (and government, big military companies, big agriculture, big corporations, etc.) get the new money first.

    Respectfully, I would like you to explain how this is incorrect, if you think it is. Also, please explain how you reconcile your position that QE2 is not inflationary when that is what Bernanke himself says it should be.

    Can you explain how it is good to lose so much value in my saved dollars to Bob Murphy’s son? Or to my little 9 month old daughter?

    Thank you.

  29. Gravatar of Scott Sumner Scott Sumner
    19. November 2010 at 15:29

    Matt, Too many issues to explain them all:

    1. I don’t believe in natural rights.

    2. I am not an inflation dove, or a supporter of big government.

    3. Inflation of 2% a year doesn’t hurt savers (very much), because it’s factored into interest rates. If inflation is lower, interest rates will be lower.

    4. “The economy is people” is not a good economic argument. Sorry to tell you this, but that doesn’t solve the problem of what to do with monetary policy.

    5. It may be the case that 2% inflation is too high, and 0% is better. But even people who believe that (Bill Woolsey) agree a financial crisis is a horrible time to reduce inflation.

  30. Gravatar of Bob Bob
    23. February 2011 at 23:49

    Deflation? When and where was the risk of that in or after 2008? What you had was a bunch of suckers that bought into a overheated, overpriced stock market and forced up the price of assets to an unrealistic P/E ratio. With the failue of Lehman Brothers many corporations were taking advantage of the market cycle of late September to eary October, when corporations prepare their balance sheets and investors take profits, to sell off some of their assets to cover the loss created by their holdings in Lehman Brothers. There never was a risk of deflation, what you observed was deleveraging not deflation. With Congress engaged in reckless deficit spending and the Federal Reserve running the printing presses like wild there will never be a risk of deflation in the currency system. Consumers might be seeking value or as some put it consumer surlus, but that is not deflation either, that is market price fluctuation and is what we should see in a free market, where the consumer plays a role in price determination not the government. The risk today is hyperinflation due to the government abusing its power and printing too much money, which results in too much money chasing too few products. The Federal Reserve has been charging the taxpayers interest to print money to in turn use some of that money to buy US Bonds from Goldman Sachs at a premium to prevent a failed treasury auction, as foreingn investors have realized that the US Debt is toxic and not worth the risk to invest in any longer. What happens when all the foreign investors pull their money out of Dollar denominated assets? It will result in a failure of the dollar due in part to too much govenment debt caused by too much government spending and too much quantitive easing. What gives the government the right to steal the value of your currency in the first place when they have a Constitutional obligation to guarantee the value of the minted currency, we are not even supposed to be using a fiat currency like debt notes. One must understand natural rights ourside the Constitution first and foremost to even begin to understand the natural course of things. Governments do not create rights, they destroy rights, natural rights are those rights that man possesses when born into nature as a human being. Man is endowed by his creator with the right to life, liberty and the pursuit of happiness, the right to protect his life, liberty and property. The purpose of a government is to ensure that those rights are protected not to assign beuracrats to systematically re-educate the youth and to deprive man of his natural rights, that was the plan of the tyrants and dictators like Hitler in the Third Reich not America. I guess it was naive of the founders and framers of the U.S Constitution to think that future generations would be mature enough to perpetuate a form of government based upon self rule. Our system rewards the thieves and the lazy and penalizes the individual, the businessman and the wealthy because the first think that they are entitled to the possessions of the latter and the government facilitates the fraud, that is the first failure. Then the government institutes a progressive income tax and proprty tax to penalize the latter and facilitate redistribution of wealth, that if the second fraud and failure. Lastly government proceeds to shirk its duty and authorizes a cartel of private bankers to print fiat money in a wreckless manner after taking away all other forms of legal tender and steals the purchasing power of the currency, that is the last failure and fraud. “Whoever controls the currency of a nation controls the nation.” Look it up.

    Today you are free only becuse you think you are free, but tommorrow you will wake up and find you have been delivered into bondage by the very people who vowed to represent you, but in reality only represented themselves.

    As Benjamin Franklin had stated, “You were given a Democratic Republic, if you can hold onto it.” The United States of America was never intended to be a democracy with its styles of mob rule, but instead it was intended to be a Debocratic Republic, where the rights of the minority were upheld, even if that minority were but just one man.

  31. Gravatar of ssumner ssumner
    24. February 2011 at 18:37

    Bob, The CPI fell in the year after mid-2008. That’s deflation.

    Bentham described natural rights as “nonsense on stilts.”

  32. Gravatar of Doc Merlin Doc Merlin
    24. February 2011 at 19:21

    “3. Inflation of 2% a year doesn’t hurt savers (very much), because it’s factored into interest rates. If inflation is lower, interest rates will be lower.”

    Sigh, NO NO NO NO NO NO NO, Scott, here you are arguing from a price change, didn’t you just say that isn’t a good idea few months ago.

    Anyway, because of the mechanism the fed uses for monetary expansion, this is not true for the average person. Its quite the opposite. It creates a wedge between borrowers and saver. The rates on savings accounts /fall/ during monetary expansion, while borrowing interest rates rise.

  33. Gravatar of Bob Bob
    25. February 2011 at 21:49


    Again, it was deleveraging that caused the fall in prices, it was not deflation. You cannot have deflation when there is an expansion of the monetary system underway. When cheap credit caused the artificial run-up in prices in the first place, then the mother of all margin calls came due, it caused everyone to sell their holdings which created a bust cycle that only appeared to be deflationary. When you have to sell your holdings and assets to pay the bank and you let them go at fire sale prices that is deleveraging. The whole system of reporting inflation is a fraud to perpetuate the fraud carried out by both government and the Federal Reserve. When foreign investors sold their dollar denominated bonds and assets and converted the proceeds back into their own countries currency that increased the amount of dollars in the system and the effects are starting to become apparent now, deleveraging is not deflation.

    In reference to the following statement:
    “Bentham described natural rights as “nonsense on stilts.”

    If one has not taken the time to diligently research the subject matter then they are willing to believe anything and will fall for everything. If I were to tell you that the moon was made of Swiss cheese then must accept it as an undisputed fact also, correct. As you have most likely never been to the moon yourself, you would have no credible firsthand knowledge to base your dissenting opinion upon and would therefore have to accept my plausible explanation as being fact, but that does not make it right. We both know that the statement is false, or an outright lie and therefore can discredit it. I could expend an ample amount of time to educate you on the natural rights of man, however; based upon your quotation I don’t believe that you would be receptive nor accept the results if they differed from your views. To categorically excuse the topic of natural rights is to openly accept and excuse the brutal acts of tyrants in their quest for power and control. But if you were to ask yourself by what right does a tyrant rule by force upon the citizens and you object to his actions, and having previously dismissed the concept of natural rights, then what are the merits of your argument? Absent the natural rights from the creator, what rule establishes the proper course of things, and what is the proper argument against one neighbor using force against another? What makes any man equal to another when all men are otherwise born unequal in size, weight, and disposition? What rule otherwise is there, a whim, a hunch, a guess, or anything goes? Should Darwin’s theory come into play or should we be as the beasts in the wild that kill or devour one another at will? So you are saying that there are people in the world that deserve more or less protection from the law because they are more superior or more inferior to others.

  34. Gravatar of ssumner ssumner
    26. February 2011 at 11:33

    Doc Merlin, No, it makes little difference how the cash is introduced into the economy.

    Bob, Deflation is falling prices, if velocity slows down you most certainly can have deflation when the money supply is rising, as we saw in 2008-09.

    That’s quite a stretch to assume that just because I pay no attention to natural rights, that I also support tyrants and cruelty. Perhaps there are other reasons to oppose tyrants, like rules utilitarianism.

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