Did Ben Bernanke really just say that?

While addressing the House Financial Services Committee recently Federal Reserve Board Chairman Ben Bernanke said something quite astonishing.  Responding to an absolute drilling from Representative Ron Paul, Bernanke claimed that the devaluation of the dollar will not affect the purchasing power of the dollar assuming the dollar is being spent in domestic markets.  To quote the Chairman:


“If somebody has their wealth in dollars, and they’re going to buy their consumer goods in dollars, and it’s a typical American, than the decline in the dollar, the only effect it has on their buying power is it makes imported goods more expensive.”


Let’s analyze this comment for a moment.  First, this seems to dismiss the fact that a substantial percentage of consumer goods are indeed imports.  The devaluation of the dollar will necessarily increase the cost of those items to end-user consumers, which will assuredly have an impact on all rungs of society.


But what of the domestically produced items that Mr. Bernanke claims will not become more expensive in real terms?  Indeed, assuming these products compete with foreign produced goods, they absolutely will increase in price.  And to come to this conclusion, one needs only access a few very basic economic assumptions.


Consider first, as an example, the case of China and the repetitive devaluation of the Chinese yuan as a means of increasing export sales.  The policy artificially reduces the value of the Chinese currency as a method of ensuring reduced prices for Chinese goods abroad.  China uses this policy to prop up their labor market and reduce unemployment in their massive work force.  Unfortunately, the policy creates an inverse effect for foreign imports, as the yuan has a reduced value on the global market.


The next and very easy step in logic, then, is that domestic suppliers are afforded an advantage in competition, as they are not subjected to the detrimental exchange rates imposed on the foreign producers.  Let us now return to the present situation in the United States.


As has been noted, the devaluation of the dollar, much like with the yuan, will produce a situation wherein domestic suppliers now have an economic advantage against foreign suppliers.  Is it likely, then, that those domestic suppliers will simply maintain their prices and reap a nominal increase in sales?  Clearly, as even a very limited understanding of supply curves suggests, this will not be the outcome.  Instead, on an aggregate level, the supply curve will shift to the left, resulting in an overall increase in prices on the market.


Ultimately, then, we can see a subsidization effect taking place.  But where do the subsidization dollars come from?  The answer is from the holder of the American Dollar through the indirect tax that is inflation.  Let me restate this in other terms.  Every inflationary move utilized by the Federal Reserve equates in to an indirect tax on American citizens through a devaluing of the legally stipulated domestic currency. 


How, then, can Ben Bernanke, the Chairman of the Federal Reserve Board, possibly claim that the expansionary policies utilized by the Fed to prop up the economy will not have a meaningful effect on the average American?  Well, he’s either lying through his teeth, or he fails to grasp some quite basic economic assumptions.  Frankly, I’m not sure which would be worse.


 You can watch a video of the exchange between Congressman Paul and Chairman Bernanke here.



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# November 9, 2007 9:04 PM

Dana Getman said:

your points are well made as usual.  Technical correction:  China's policy is to peg the yuan to the dollar.  One additional point on Ben's commentary:  consider the importation of an intermediary material by a US manufacturer (e.g. any internationally traded commodity, especially those priced in USD) and the impact on pricing of the final good.  Ben's caught in a trap, he really should be raising interest rates but chooses to print money to save the financial district.  May not be a bad decision today but we will pay for it later.  Clearly, if he were to be more forthcoming in his testimony, he would have to explain his choices.

# November 11, 2007 7:51 AM

Tapsearch Editor said:

Congresswoman Allyson Schwartz did ask Fed Chairman Ben Bernanke what was the best way to spend any extra money recieved from the economic stimulus package. She asked if people should use the money to pay down their credit card debt.

Bernanke said paying now a credit card debt would be a "negative" - so credit is the life line for consumerism.

He said the best way to spend any extra money would be to spend it on domestically produced items to best help the economy.

If Greenspan said this many years ago, we would not have any need for an economic stimulus package today.

It is  nonsensical to use stimulus money and shop at places like Wal-Mart because the money quickly fans out to the places where the  products are made. It does not stay in the USA to recyle our economy.

This is the problem with so called Free Trade that has made production portable ready to be moved again and again for the sake of cheaper labor.

See www.bizarrepolitics.com/ben-says-buy-usa and then see a satirical commentary about the things to come if we do not start buying domestically produced products at www.bizarrepolitics.com/china-direct-retail-stores   Welcome to the the New World Dis-Order  

# January 21, 2008 7:43 PM