Spot the error

Fri. 10/04/23 17:21
.post #62

On page 106 of Ron Paul's End The Fed, from the chapter entitled Conversations With Bernanke, appears this passage:

Ron Paul:
So my question boils down to this. How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?

Ben Bernanke:
Well, Congressman, first, just a small technical point. On the growth in money, money growth has been pretty moderate over the last few years. The increase in MZM is probably related to the financial turmoil. People have been taking their savings out of, you know, risky assets, putting them into the bank, and that makes the money data show faster growth.

Something bothered me about Bernanke's answer, but at first, I didn't realize what it was.

Anybody else spot it?

Moving money from one place to another doesn't create inflation?

I don't see it.

I think he's saying that it is "moving money out of risky investments and putting the money into banks", because banks aren't safe investments.

I don't know how I feel about that but you guys do know that the FDIC has begun to demand 3 years pre-payment on insurance premiums right? They in no way have enough cash on hand to cover a systemic failure, and it is the fiat-feds in charge anyhow.

Is it his reference to MZM as an inflationary indicator?  MZM doesn't include Federal Reserve credit which is a significant source of the monetary base...?  Therefore, he is minimalizing the actual level of inflation.

I really don't know...just a guess.

Anyone know the date of that quote?

Fri. 10/04/23 18:31 EDT
.post #63

E. R. Olovetto:

I think he's saying that it is "moving money out of risky investments and putting the money into banks", because banks aren't safe investments.

haha! That's not it, but it's a good point. I totally missed that.

No, Bernanke's error is much more blatant.

Sam Armstrong is "on the right track."

Lewis S.:

Is it his reference to MZM as an inflationary indicator?

Nope; much simpler and more blatant than that.

Daniel Muffinburg:

Anyone know the date of that quote?

November 8, 2007, according to page 104, and no cheating with Google. Try to figure it out.

The FDIC generally holds about 1% of deposits.

Is it that merely moving money from an asset to a bank account causes inflation which would not occur in the absence of fractional-reserve banking?

"money growth has been pretty moderate over the last few years."

just a guess, was the fed printing money wildly before he said that?

So when you take your savings out of a risky asset and put it in a bank, somebody gives you the money for that asset. The economy on net doesn't gain any money supply. The money had to come from somewhere so (assuming the Fed didn't pay you for your asset) somebody used already existing money to exchange for your risky asset. Therefore the money data wouldn't grow because I sold a risky asset and put that money in the bank. Is that about right?

Sat. 10/04/24 10:10 EDT
.post #65

polskash:

Is it that merely moving money from an asset to a bank account causes inflation which would not occur in the absence of fractional-reserve banking?

Nope.

Smiling Dave:

just a guess, was the fed printing money wildly before he said that?

Yeah, I don't buy Bernanke's description of money growth as "pretty moderate" either...but that's not the error.

Sam Armstrong:

So when you take your savings out of a risky asset and put it in a bank, somebody gives you the money for that asset. The economy on net doesn't gain any money supply. The money had to come from somewhere so (assuming the Fed didn't pay you for your asset) somebody used already existing money to exchange for your risky asset. Therefore the money data wouldn't grow because I sold a risky asset and put that money in the bank. Is that about right?

Bingo!

This blogger also spotted Bernanke's bullshit.

EScroogeJr:

A risky asset is not a mattress that you can take your savings out of. In order for you to generate some sales proceeds to put in the bank, you must find a buyer for your asset, and that buyer has to take the same amount of money out the bank, either in the form of cash, or as credit. ... It follows that the buyers of those securities had to remove cash from the bank at least at the same rate as the rate at which sellers were deposing their cash proceeds. So these transactions, which actually indicate nothing more profound than changes of ownership, cannot explain the growth of MZM. The reality is that one 2008 dollar is worth 80 cents of 2007 money because of overproduction of dollars by Bernanke & Co.

I really enjoyed this whole thread. I would love more of the same, riddles of this sort.

The answer is obvious [after the fact] and enlightening.

Thx!

Oh, one lil thing. Say the asset was paid for in cash that was not in a bank, but under a matress or anywhere but a bank. So the magic of fractional reserve banking doesn't apply to it. But once it's put into a bank, Fractional reserve banking blows it up into ten times as much. Isn't that a partial justification for Bernanke's statement?

Haha... I thought it was something work with the books pubishing. For example, a misspelled word or something. :P

Sat. 10/04/24 13:45 EDT
.post #70

Smiling Dave:

Isn't that a partial justification for Bernanke's statement?

I guess, in this case, Bernanke's statement is justified, although I think it's quite clear he was talking about the more common scenario.

Several points, however, regarding transferring money from mattress to bank account:

1. The re-entry of the mattress money, prior to being multiplied by the fractional reserve system, is not inflation, since no new money has been created "out of thin air."

2. The increase in MZM, even after accounting for the multiplier effect, only offsets the same DECREASE that occurred when the money originally went IN to the mattress.

Another point:

Notice how Bernanke, through the use of a metaphor ("taking money out of risky assets") commits a "lie of omission": He focuses on only one side of the transaction, while ignoring the other. This is the error Henry Hazlitt warned about in Economics In One Lesson.

Smiling Dave:

I would love more of the same, riddles of this sort.

Here's another, easier one, from page 107:

Ron Paul: But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar?

Ben Bernanke: If somebody has their wealth in dollars and they're going to buy consumer goods in dollars - it's a typical American - then the decline in the dollar, the only effect it has on their buying powers, it makes imported goods more expensive.

 

Daniel Muffinburg:

Haha... I thought it was something work with the books pubishing. For example, a misspelled word or something.

haha! Well, that's partially my fault. I should have titled the thread "Spot the fallacy."

Ben Bernanke: If somebody has their wealth in dollars and they're going to buy consumer goods in dollars - it's a typical American - then the decline in the dollar, the only effect it has on their buying powers, it makes imported goods more expensive.

I see two flaws.

1. Imported goods are a HUGE amount of what Americans buy.

2. The way the dollar is devalued is not by some decree. After all the dollar and all currencies are subject to supply and demand like everything else. The dollar is devalued by printing more of it. [Jonathan Catalan's latest post in Mises' Daily taught me this].

So that devaluing the dollar= printing more dollars= inflation= price of EVERYTHING  goes up.

Sat. 10/04/24 17:01 EDT
.post #72

Smiling Dave:

I see two flaws.

Both good points, but neither is the fallacy that I noticed.

Hint: You said: price of EVERYTHING goes up.

Now re-read Bernanke's statement.

I give up. Unless you meant that bernanke said only imports go up, when inreality everything goes up. But that's my point 2 in the earlier thread.

It occurs to me that the "top ten economic fallacies" thread is a good riddle source. What is the rebuttal to those top ten fallacies. Work lies ahead for the energetic.

Sun. 10/04/25 11:56 EDT
.post #74

Smiling Dave:

Unless you meant that bernanke said only imports go up, when inreality everything goes up. But that's my point 2 in the earlier thread.

Argh! I apologize. You nailed it.

Bernanke suggests that the dollar's declining value is only in terms of foreign currencies, without affecting domestic purchasing power. He tells this lie to avoid admitting the secret, unpleasant truth: that inflation steals wealth from those who earn it and transfers it to the Fed and government. The Fed can lend without limit, while the government can spend without limit. The slaves get to pay the price.

Wed. 10/04/28 09:01 EDT
.post #87

Here's a video (8:17) I became aware of in another thread. Produced by/for the European Central Bank, it ostensibly teaches about "price stability" while covertly slipping in some pernicious, fallacious propaganda. The video:

Price stability: why is it important for you?

From the ECB website:

ECB:

Teaching economics to young teenagers? Then this kit about price stability might help. It consists of an 8-minute cartoon, a pupil's leaflet, which explains price stability in simple terms, and a more detailed teacher's booklet. The kit has been produced by the ECB together with the national central banks of the euro area.

Spot the fallacies, hidden assumptions, lies of omission, inconsistencies, etc. The idea is to perform a "differential diagnosis," Austrian-style, i.e., to show how an Austrian evaluation explains what the official version fails to.

Note: I haven't read the "more detailed teacher's booklet," but it could prove to be a gold mine of nonsense and hoodwinkery..

Happy deconstructing!

About errors in the video:

I think it was ok until they start speaking to the banker about five minutes in. Then the errors begin.

1. That 2% inflation a year is good. Why is losing 2% of my money good? Why is losing any percent of my money good?

2. That it can be controlled by the interest rate. He explains that if interest is high, people will be reluctant to borrow money. So that he is kinda covering up the fact that fractional reserve banking is the problem. If there was no FRB, then borrowing money from a bank would not increase the money supply.

3. He says that deflation is bad too, for the usual fallacy that people may wait a little while before spending money.or investing. What is the evidence for such a claim? Or that it hurts the economy in practice? Hazlitt's book on inflation explains that deflation historically has been harmful only when it was introduced as a shock into the economy, such as a sudden return to the gold standard. Even then it was refusal of people to accept a drop in nominal  wages and prices [of things they are selling] that did the harm, not the actual deflation. The reason deflation is "bad" is because the biggest debtor in the country, the govt, will lose money from it.

Other than that, there were some good points in that movie.

1. His emphasis that inflation is bad. Most of the movie was devoted to that. In the USA the theme is always that inflation is good.

2. His pointing out that inflation means the price of EVERYTHING goes up. Otherwise it's not inflation.

3. His putting the blame for inflation squarely where it belongs, on an increase in the money supply. As opposed to blaming the consumer, for example.

Wed. 10/04/28
.post #88

Smiling Dave:

I think it was ok until they start speaking to the banker about five minutes in. Then the errors begin.

1. That 2% inflation a year is good. Why is losing 2% of my money good?

Let's go back a bit earlier to the "bread market" scene, while keeping in mind that, because inflation is theft, there are losers AND winners. Does this scene accurately portray all the economic actors?

1. The old lady represents the losers.

2. The teenagers neither win nor lose, because as soon as they get the new money, prices rise. The hidden assumptions here are:
(a) Everyone's stock of money increases simultaneously;
(b) Everyone (including bread merchants and their suppliers) is aware that the windfall is universal.

3. Where is the winner? Presumably, it's not even a human being, but some metaphorical "monster," who just "gets pleasure" by showering everyone with new money. But from where does he get it?

4. Then, the ECB is portrayed as some benevolent and altruistic entity that keeps both the inflation and deflation monsters in glass jars, where they can't run amok. The ECB is the crimefighter, the good guy.

What's wrong with this picture?

Basically, everything except #1.

In #2, both assumptions are false. In addition, they contradict the old lady, whose stock of money doesn't increase. In reality, some people get the new money earlier than others, and they are the primary beneficiaries. Anyone who spends the new money before prices inevitably rise is a "winner." Others, like the old lady, are "losers."

The video fails to distinguish between fractional-reserve inflation, which is limited by the reserve ratio, and central bank-created inflation, which is theoretically unlimited...which brings us to #3 and #4.

In a sense, there is an "inflation monster," but it doesn't give new dollars away "for fun"; it lends new dollars for profit.
To whom? To governments.
From where does it get this new money? It "creates" it by pushing buttons on a computer keyboard and crediting government accounts.
Is the ECB "fighting" this monster? No; it is this monster! Any central bank legally empowered to "monetize" government debt is an inflation (and deflation) monster.

Totally agree, a really good post.

Thurs. 10/04/29 20:30 EDT
.post #90

The following passages are transcribed from a book I picked up for the specific purpose of quote-mining specious arguments. It's a book on economics "for people who hate capitalism," written by a left-leaning philosophy teacher.

In this chapter, entitled Incentives Matter, he attempts to undermine the idea that minimum wage laws create unemployment. He begins the discussion sarcastically:

Take an issue like minimum-wage laws. A lot of young hotheads, fresh out of Economics 101, find it crushingly obvious that minimum wage laws create unemployment. Indeed, they regard it as a truth somewhere between "2 + 2 + 4" and "p implies p" on the scale of self-evidence.

After defining a "synthetic a priori judgment" as "...that's when you figure out how things in the world must be, just by thinking about it," then telling us that "In reality, things are a lot more complicated," he tells us "...there is a very lively debate among economists about whether an increase in the minimum wage actually produces unemployment. For the moment, at least, no one has succeeded in providing convincing empirical evidence that it does." (my emphasis)

Ok, so much for the foreplay. Here is the passage that I believe contains the specious argument:

An increase in the minimum wage could also have an "efficiency wage" effect, leading to a reduction in shirking. Henry Ford once described his decision to double the wage of his workers as "one of the finest cost-cutting moves we ever made," because of the increase in productivity that it generated. When people feel that they are being treated fairly, or even generously, this typically activates a norm of reciprocity, which can generate greater work effort.

Happy debunking.

If a higher wage was beneficial, employers would pay it. Minmum wages are about pushing wages above optimal. And the optimal wage varies between jobs and workers, minimum wage laws purposely don't consider that.

An increase in the minimum wage could also have an "efficiency wage" effect, leading to a reduction in shirking. Henry Ford once described his decision to double the wage of his workers as "one of the finest cost-cutting moves we ever made," because of the increase in productivity that it generated. When people feel that they are being treated fairly, or even generously, this typically activates a norm of reciprocity, which can generate greater work effort.

This is a hard one. Ok here we go:

1. Just because it worked for Henry Ford doesn't mean it will work for everyone. Now the author admits that when he writes "could" have that effect. It's at best anecdotal evidence. Maybe it works one time in a million.

2. In any case, when there is a minimum wage law, who will the workers reciprocate to? Will they feel grateful to kindly old Henry Ford, who was FORCED to give them the wage by law? Maybe he means they will rreciprocate and be more honest when filing their taxes, in gratitude to the govt.

3. And what of the new workers who will start out with the new wage? They will feel no need to reciprocate.

4. Finally, as extension of 1. it's a question of looking at the big picture. Say 30,000 people won't get hired, or will actually lose their jobs, as in the recent story of the Island of Samoa. And 40 people with existing jobs below minimum wage will feel grateful and work a bit harder. Was it worth it?