Deconstructing Fed Vice Chair Stanley Fischer on the Disappointing Global Recovery

Gerald Epstein, of the Political Economy Research Institute (PERI), interviewed by Jessica Desvarieux of the Real News Network:

More at The Real News

These passages caught my eye:

DESVARIEUX: So, Gerry, this week we had the Fed vice chair Stanley Fischer come out saying that he is disappointed with the global recovery. …

EPSTEIN: Yes. Well, he’s not the only one who’s disappointed with the recovery.

[rimshot. laughter]

DESVARIEUX: Okay. And [Fed vice chair Stanley Fischer] also said that it remained uncertain whether lower productivity growth and lower labor force participation rates are now a permanent feature. Can you break down for us what exactly he means by that?

EPSTEIN: Yes. So this debate is based–the way [Fischer’]s talking about this debate, it’s really based on a very mainstream, very conservative economic model, which says the following. It says long-term economic growth depends on a number of purely technical factors. Now, this is different than the way many of us here at PERI and elsewhere think about this, as being a result of a combination of historical, institutional, and political factors. So Stanley Fischer and the mainstream of economics profession say it’s just technological factors, and this depends, economic growth in the long-term depends on population growth. The faster population growth, the greater the growth of the labor force, so the more economic growth you potentially have. Number two, it depends on productivity growth, that is, the growth of output that each employee can produce; so the higher productivity growth, the faster economic growth can go. And the third factor is of innovation, economic innovation, technological change, new techniques, and so forth.

Now, what he’s leaving out in these three factors are factors such as the distribution of income and wealth and the level of aggregate demand in the economy, as emphasized by John Maynard Keynes. So you can have a lot of growth in technology, you can have a lot of growth in population, but if you don’t have demand, nobody’s going to buy the products that these factories are producing. And if income distribution is tilted way towards the rich who don’t consume very much, you’re not going to have much demand.

DESVARIEUX: So, essentially, Gerry, if I’m understanding you correctly, it’s wages. I mean, they’re not addressing the idea that people need to earn more in order for there to be more demand in the market.

EPSTEIN: That’s exactly right.

Is that what Fischer and all those guys really believe? That’s their model? Wowsers. We are in trouble.

Print Friendly, PDF & Email
This entry was posted in Economic fundamentals, Free markets and their discontents, Guest Post, The dismal science on by .

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Linus Huber

    Open letter issued in November 2013

    Honourable Governor of the Bank of France, Member of the Governing Council of the ECB and Chairman of the BIS Board Mr. Christian Noyer

    “Deflation is a cumulative process of decreasing prices, wages and output fuelled by negative expectations. Deflation is a pernicious spiral. It increases the burden of debt and creates an incentive to defer consumption and investment. Deflation is especially dangerous because once the process becomes entrenched, it becomes very difficult to stop.” (The Honourable Governor’s speech published in the Wall Street Journal, 21 November 2013)

    I certainly can agree with your statement when we analyse the present situation, Honourable Governor, but one has to expand on the above thought process and view this aspect under a much wider perspective which I like to address below. But first a few assumptions that are found in your arguments and require to be addressed.

    Price stability

    This expression is a misnomer that the central bankers are using as price stability does not really exist since decades but in reality we follow a policy of continuous low inflation which of course is not the same as price stability. Real price stability would allow years of slight inflation interchanged with years of slight deflation. When you, Honourable Governor are talking about price stability, you actually mean low inflation of the consumer price index which is used to measure the inflation rate. In an environment of real price stability, the value of currencies would not deteriorate over longer periods of time which obviously is not the case. It also is a fallacy to state that deflation is necessarily going to defer consumption as we clearly can recognise in the electronics industry that enjoys leaps and bounds of innovations by successful enterprises while due to increased productivity prices continuously decline. Part of this industry’s success may be the result of the fact that this industry is comparably young and governments did not over-regulate it as yet.

    Measure of inflation

    Measuring inflation is probably a very taunting task and to simply focus on the consumer price index is a rather one dimensional way of evaluating the impact of monetary policy on the economy and on society. It does not consider the impact of monetary policy on other components of the economy (e.g. house prices and financial products) which would be part of a real measure of inflation. When looking at the growth rate of the money supply in Western countries over the past 3 decades, we, however, can definitely recognise that that rate exceeded the rate of economic growth clearly and consistently which resulted in the presently high levels of debt in the range of 300 – 350% of GDP (gross domestic product) compared to a range of 120 – 150% 40 years ago. This is not called a monetary policy of price stability but must be named and addressed as inflationary monetary policy. Now, when you state that the money supply grew by 2,1% in September, one has to put this in relationship to economic growth in order to arrive at any sensible answer whether real inflation or deflation is at hand. If the rate of economic growth would have been 10% at the time when money supply grew by 2,1%, we may indeed have a deflationary monetary policy at hand, if, however, the rate of economic growth was below 2,1%, then we can talk about an inflationary monetary policy.

    GDP (Gross Domestic Product)

    In today’s world we associate growth of GDP with the well-being of a country’s population. First of all, GDP does not really give the proper information of an improved living standard but is determined by many factors that are not necessarily resulting in a bettered standard of living. Secondly, it is comparatively easy for a government to achieve a higher GDP even in absence of raising living standards for the people. Thirdly, the numbers are easy to manipulate and must be viewed with caution. What really improves the living standards and well-being of society are not necessarily measurable by this number. Real economic growth means that we have a greater ability to produce the goods and services that we value and as a result thereof improves the living standard of the population. In reality, this can happen even while GDP does not increase. Viewed from another angle, we have to differentiate between growth based on credit expansion (quantitative growth) and growth generated by productivity gains (application of innovated improvements to production and services which may be called qualitative growth). Your idea, Honourable Governor, that savers are best protected when growth (you certainly refer to quantitative growth here) is sustained is a rather poor argument and invalid for the saver looking for a risk-free store of value as your justification is applicable to savers with a propensity to enjoy risk only. It is not simply a problem faced by savers but policies that transfer the costs of risks from the credit markets to the currency distort markets as price mechanisms are affected and risk is incorrectly priced, facts that ultimately will destroy the market economy itself with being increasingly replaced by a centrally planned economy.

    By examining your basic assumptions about the problems of deflation, we first and foremost have to recognise the reasons that led to the present vast imbalances and difficulties which now would produce havoc when a period of deflation and re-adjustment is allowed to take place.

    Why did the relative growth of credit exceeded economic growth in the past 3 decades?

    The answer is actually very easy. More debt, especially using high leverage, produced enormous profits as the value of the currency was ever so slightly reduced but was never allowed to go into reverse (short spans of deflationary monetary policy). In other words, the inflationary monetary policy over the past decades since the gold-standard was abandoned and the temporary flare-up of a high inflation of the consumer price index was extinguished represents the real cause of this extraordinary credit boom, similar the credit boom that took place prior to the Great Depression.

    Why did Central Banks keep the inflationary monetary policy in place over decades?

    There are many reasons for this behaviour and the below list does not lay the claim to completeness.

    1. Dogma

    Exactly because of the dogma you, Honourable Governor, are stating above about deflation, a dogma that has established itself in economic circles and teachings as a result of the depression experienced some 80 years ago. However, it generally is ignored by the Central Bankers that the cause of that deflationary depression was the result of a prior inflationary monetary policy that created those massive capital misallocations and imbalances. This dogma and the influence of economists on the legislative branch of governments, governments who obviously love such policies, led to corresponding laws that allowed and cemented the Central Banks’ role in abusing monetary policy for achieving short-term and medium-term favourable economic outcomes. This resulted in a one way street without considering the longterm consequences and without disciplining risk takers on a regular basis which is best achieved by allowing short periods of a deflationary monetary policy to take effect and by maintaining the value of the currency.

    2. Self-reinforcement

    Early success of a policy tends to establish a feeling of control and power in decision makers. It is human nature to be recognised as someone whose efforts seem to yield positive results for society as it increases one’s self-esteem, high regard by others and well-being. Unfortunately, all those that were responsible for the present situation will be retired or even dead by the time when we will be faced with the results and can not be made accountable. But even those presently in charge and following the same policies that failed in the past, have implemented the system of immunity and self-serving benefits in order to be legally protected from any negative outfall of their policies. As a result of human nature, temporary measures often turn into projects and programs and are not put repeatedly under closer examination but proceed to expand ever further. We can recognise this very well with the temporary measure of QE (quantitative easing) that reached now a level of a regular policy instrument, whereas it was originally introduced as a short-term temporary measure against an uncontrollable collapse of the financial system. Instead of returning to a more market based economy at the earliest point in time possible, the temporary measure has switched to another acceptable tool of monetary policy and as a result is furthering the concentration of power and centralised planning.

    3. Election cycles

    The election cycles in most democracies may have supported these policies as they do produce a certain degree of short-sightedness in the decision makers. Any attempt to impose short-time pain on society will be subject to a corresponding reaction at the next election. Again, it is normal human behaviour to ensure one’s personal well-being and is in itself not a criticism of the decision makers themselves but should be considered by the electorate as such. The increase in the concentration of power is an additional feature that enhances this process in the form of a growing class of decision makers within these administrative bodies that try to increase their area of influence in order to secure their own personal future. To counter these forces is indeed a heroic task.

    4. Difficulty to admit failure

    Whether in government or quasi government institutions and increasingly in the business-world as well, decision makers, partially due to the personality change associated with increased power and influence, have lost the ability to be humble. They prefer their star-like life style and will attribute any failure to the actions of other parties without self-examining their own culpability. Officially recognised failure is treated with contempt and is to be avoided at all costs. It is another attribute of human nature that extends its tentacle into policy decisions. A similar situation governs the sphere of applied economic theories with all their questionable models.

    5. Sustainability – Confusion instead of education

    It is a rather difficult aspect to explain the implications from policies that encourage risk taking and seem to profit everyone while transferring purchasing power from those that act responsibly, maintain a life-style of self-reliance, live within their means, abhor unethical and dishonourable behaviour to those that follow short-term advantages, take increasing risks and jubilate in the glory associated with success in such endeavour. The resultant culture we are experiencing today and it shows up in an ever wider and measurable disparity of income and wealth. The idea to expanding the credit volume by transferring ever larger parts thereof onto the Central Banks’ balance sheets will not really solve the problem but increases it by amplifying and even institutionalising the aspect of “moral hazard”. The present development will, in the longterm, produce a serious clash between the societal classes and poison the political atmosphere dangerously. People tend to search for clear-cut solutions in such times because decision makers following delusional and questionable economic theories missed their chance in educating and involving the population properly.

    6. System stability

    Great misconceptions in this regard exist in the field of economics as well as with decision makers. The cost of risk does not magically disappear when distributed to society at large but simply is transferred from risk takers to those who act responsibly, self-sustainably and live within their means. The artists of manipulation attempt to mitigate the costs of risk but do not realise that as a result thereof, they achieve a much higher level of systemwide risk taking with their interference. Risk is a part of life and we have to not only embrace it but to ensure that a risk taker will be faced with the consequences of his behaviour in order to achieve system stability. This aspect is especially applicable to the financial industry that was encouraged to ever higher risk taking and leverage exactly because the authorities designed programs and measures to increase system stability. Central Banks should have demonstrated a general attitude of thoughtful disinterest in the well-being of the financial firms and not have been eager to avert any minor and digestible crisis but let it play out on its own. Such conscious inactivity by the authorities would have enhanced system stability in that it would have instilled a degree of caution and discipline in the actors within the financial sector.

    7. Revolving door syndrome

    It is a well-known fact that personnel active in the supervision of the financial industry often switch between the supervised and the supervising institutions within one’s career. Naturally, when one ensures future employment with potentially great rewards, his attitude as regulator is being affected. It represents a rather dubious rewarding system to those who know to play the game well.

    Honourable Governor, the present programs of Central Banks are simply transferring a real solution into the future, a situation that is accompanied by ever increasing dangers for the society at large. A real solution has to contain the following attributes.

    1. It must involve the informed participation of the population in the finding of the solution in order to be socially acceptable.
    2. It must end institutionalised “moral hazard”.
    3. It must resolve the TBTF issue once and for all.
    4. It must be a one time and comprehensive action.
    5. It must enhance Free Market mechanisms for the finance industry.
    6. It must include new rules for monetary policy that ensure no occurrence of such a crisis.
    7. It must ensure clear restrictions on government debt.

    Similar to the way of breathing, where breathing in (inhaling) can only function successfully after the prior act of exhaling, phases of inflationary policy have to alternate with phases of deflationary policy as otherwise unhealthy developments manifest themselves. For this reason I take the liberty to reword the your above stated quotation. 

    “Inflation is a cumulative process of increasing prices, wages and output fuelled by artificially generated positive expectations. Inflation is a pernicious spiral. It decreases the burden of debt and creates an incentive to advance consumption and investment. Inflation is especially dangerous because once the process becomes entrenched, it becomes very difficult to stop.”

      1. Linus Huber

        Of course do prices for individual items change all the time. This is the function of prices to ensure the most efficient allocation of capital and is different to increasing general price levels due to credit booms that distort this fundamental purpose of the pricing mechanism. The idea that growth expressed in the form of gdp is to be maintained by expanding the credit volume in excess of actual growth rates of the economy and this will enhance the wellbeing of the population is faulty. This is the real reason that is used to defend ever increasing price levels of the cpi and that is understood with inflation today. Linear developments are generally, as a result of reflexivity, subjected to sudden phase transitions as it violates the principle of sustainability.

    1. Whine Country

      Your studies and training on the subject are far greater than mine, but to my eye they are correct and to the point. I studied and labored as a CPA for most of my career and could never reconcile what I have always considered accounting nonsense by economist types and have always wondered why those responsible for designing a system of properly accounting for our business (the accounting profession) have always stood on the sidelines of economic discussions while the economists make up there own incompatible (and for me incomprehensible) system. Oh well, live and let live I guess. But the one thing that I find absolutely incredible about economists version of “accounting” is that, while the father of monetarism, St. Milton Friedman once and for all established the bedrock principle that inflation is always and everywhere caused by increasing the money supply. (Although he left it to others to decide just how much the money supply could be increased because he certainly did not mean it should never be increased.) it is only an increase in certain things that should cause us alarm. Says who? So increased money supply = increased inflation, QED, St. Milton Friedman. So when we increase the money supply the prices of all kinds of things rise, that’s inflation. (If it walks like a duck, quacks like a duck…., Sam Ervin) But the geniuses that we call economists tell us NO IT’S NOT! Inflation is only when the consumer price index goes up, and then only when it goes up more than we say it should. What kind of bullshit is this? Friedman never said that and they know it. Inflation is an increase in the price of things that we buy with money – including the increased money that is put into circulation. I say again,…the things we buy with money. Price stability is price stability of all things that we buy, not some generally accepted or legislated group of things that TPTB agree upon. When I was young I would watch Monday Night Football with Howard Cosell. Although I played and watched a lot of football, I always marveled at how Howard could watch the same game as me and when it was a low scoring game he would always know if it was because one team had a great defense or the other one a shitty offense. No matter what, he knew the difference. Same with inflation or price stability. I have the same feeling with economists. When the generally accepted list of goods and services are behaving badly but the prices of stocks, bonds, yachts, airplane travel, etc. etc (fill in your own list here) are skyrocketing they know the difference and we don’t. I would expect better from a medieval sorcerer or a snake oil salesman. When are we going to wise up?

        1. skippy

          Per Milton and quantity theory –

          “Laura Elizabeth Teller So in your haste to thicken your populist rhetoric, you whine that “money is going to Wall Street rather than Main Street”.

          Now the argument here is not whether that’s a good thing or a bad thing, but whether it’s an INFLATIONARY thing.

          Since it’s all going into “financial assets” and not to “Main Street”, Daniel, what is your quest, what is your favorite color, and what is the velocity of that newly minted “money” (reserves)?

          [cue the bridge keeper theme from Monty Python And The Holy Grail]

          it’s velocity is zero, Daniel.


          Let’s run that through the equation of exchange, shall we?

          dMdV = dPdQ

          dV = 0

          Hey, I see where this is going.

          If dV is zero, then the effect on the price level is *zero*.

          In other words, the inflationary effect of all that “money printing” is *exactly* zero.

          So much for quantity theory.”

          Skip here… sadly some use the wrong optics when looking at complex problems and compound the issues, by the application of reductive logic exercises conducted in a vacuum.

          Skippy… when some can eventually move beyond the necessity of viewing money as attached to physical objects and realize its true state [a problem of time and space w/ humans as agents] then things might change i.e. political remedies…

          1. Linus Huber

            “it’s velocity is zero”

            Wow, what a great discovery.
            And the conclusion is therefore that it does not have any effect on the economic actors’ behavior… And if one is able to recognize some changed behavior, what are the premises for it? E.g. could it be the strong conviction that no matter what, any difficulties will be met by further printing (just one possibility)? By the way, don’t we know by now that as more mathematical mumbo-jumbo is used to refute an argument the more the real motivation and recognition of the wider economic context behind it is being obscured and ignored.

            “when some can eventually move beyond the necessity of viewing money as attached to physical objects and realize its true state [a problem of time and space w/ humans as agents] then things might change i.e. political remedies…”

            Certainly, when money is not anchored (commodity based), the whole aspect of monetary policy becomes automatically arbitrarily (political) whereas dogmas and theories provide the useful justifications for the increased power provided to those few with the added advantage that those closest to them can benefit greatly. The experiment is still a work in progress.

            Lets step back once and ask ourselves, what people would choose as medium of exchange if given a choice? Does anybody really believes that a well-informed population (with the exception of economists, government bureaucrats and bankers that profit from all the manipulation in the form of their employment) would select a currency that is going to be debauched at will or would they prefer money that maintains its purchasing power over the long haul? That does not mean that the people have any chance in this make-believe democracy where power concentration still continues to grow.

            1. skippy

              Walls of uninformed rhetoric are not compelling in my book, but yeah, a segment of our society has been hell bent on its ideological mission for quite some time now. Those that forwarded [payed for] the free market meme have some splaining to do methinks.

              If the sovereign is a social democracy the powers belong to its citizens, where if, it is a purely market based society, it belongs to the most powerful consumers.

              skippy… so who are the most powerful consumers and how do they dictate societal norms?

              1. Linus Huber

                It may be that those who debauch the currency in the form of central planning and therefore ameliorating the markets reaction again and again should do some explaining which basically produced the desire to deregulate in order to risk-free reap an ever higher part of the cake.

                1. skippy

                  What central planing was involved in creating massive amounts of private moneys on wonky premisses and in too many cases out right fraud. Sure as our host discussed in great detail back in the day, the Swedish option, yet, the payment system could not be allowed to implode or does a global depression sound like a good palatine in your mobs tombs.

                  skippy…. seriously the ninnys that got this ball rolling and now cry about the state of things, need psychiatric help.

          2. ewmayer


            No, the velocity is perhaps “lower than one might otherwise expect”, but it ain’t zero.

            Those run-ups in “financial assets” translate into real profits for the banksters and financial-asset-heavy class. And while they might not spend quite the same percentage of those profits as welfare recipients do of their aid checks, they still spend – you think it’s an accident that NYC real estate, especially at the high end, has gone nuts in the past 5-6 years?

            QE and ZIRP have produced nationwide re-bubblings in financial assets and housing, and while none of our concurrent re-bubblings (except for those in stawks and junk bonds) is individually as large as the bubble it is echoing, we now have all of our recent bubbles rolled into one. There is your QE+ZIRP – caused inflation. Just because it is again going to end in very painful deflationary fashion, doesn’t mean folks getting priced out of even humble lodgings in “once again red-hot!” areas for real estate is in some way “less real”. The fact that this is all occurring against a backdrop of declining real wages for the lower 99% – i.e. that with the current Fed-induced multi-bubble even the artificial “feel rich” aspect is lacking for all but the oligarchs – makes it even worse.

              1. Linus Huber

                M2 velocity stands at 1.577. At the hight of the Nasdaq boom in 2000 it stood at 2.0. If it turns upwards, we will see serious inflation.

                1. skippy

                  Money is created through balance sheet expansion on the part of the issuer, so, what allows this to occur so easily… eh.

      1. elbridge

        “”St. Milton Friedman once and for all established the bedrock principle that inflation is always and everywhere caused by increasing the money supply. (Although he left it to others to decide just how much the money supply could be increased because he certainly did not mean it should never be increased.)””
        Friedman’s statement that inflation can only be caused by dollars, was, I think, meant to be kind of axiomatic.
        Surely nobody here has shown any different.
        But he was very ‘limited’ in what he saw as an accommodating growth in the money supply, having on more than one occasion proposing a Constitutional Amendment to limit growth of money……beginning in the 3-5 percent range.
        Hard to believe, but Friedman was anachronistic on money and capital, backing progressive reforms to solve he inflation-deflation cycle, including the Chicago Plan of more recent presence by Benes and Kumhof of the IMF.

        Friedman was clearly in the Money-by-Rule category of thinking, accomplishing monetary operations through a publicly-administered sovereign fiat system.
        See e.g. his “Fiscal and Monetary Framework for Economic Stability”.

        1. skippy

          Ref. Benes and Kumhof.

          Benes and Kumhof included a massive debt jubilee in their system for switching to full reserve banking because they thought that to dispose of debt based money, it is necessary to dispose of the relevant debts. Its just a bailout for the criminals with tacky – help the downtrodden PR/Marketing – ploy.

          It just attempts to fill the criminal black hole created by all the endemic fraud [fraudulent credit issuance] and then make all the sundry depositors equity holders, in the criminal institutions, after its gifted a pardon via massive money creation by the state.

          Skippy… Oh Garçon… check please!

        2. Linus Huber


          Even that kind of system would be better than the present system that institutionalizes moral hazard, provides incentives to ever higher leverage (less so for banks at the moment) and turns the whole financial system into a casino.

          1. skippy

            Money is a social construct e.g. if those that dictate society’s norms are corrupted, then any tool is subject to that corrosive element… within society.

            skippy… same mobs, same problems… attempt to fix a human problem by tinkering with the objects… and not the agents…

            1. Linus Huber

              “Money is a social construct e.g. if those that dictate society’s norms are corrupted, then any tool is subject to that corrosive element… within society.”

              I agree. It is therefore a problem of the avoidance of change that represents the problem or expressed in another way, any system will corrupt over time as those in charge (and their allies) will learn how to take advantage. We may have to re-invent democracy (no professional politicians, short terms etc.), direct democracy, return of decision-making processes onto the lowest possible hierarchical level where accountability increases.

              1. skippy

                “return of decision-making processes onto the lowest possible hierarchical level where accountability increases.”

                Sounds like barter theory.

        3. ewmayer


          Unless he elaborated elsewhere, Friedman needs to better define what he means by “money supply”.

          If one includes credit – in the form of both public and private borrowings – in money supply, then one is on the right track: “If it spends just like money, it’s money.”

          Equally importantly, it is crucial that said debt be marked to market – that explains why episodes of high indebtedness – such as brought on the GD and the GFC, and the “lost generation” in Japan – typically end in deflationary fashion: Even though the nominal debt remains high, the market value is much lower due to defaulted (and its kissing cousin, ‘nonperforming’) debt, and as long as the debtors remain deeply in hock, they are spending-constrained. (The private and below-sovereign-level public debtors, that is.)

  2. John

    With millions in poverty and out of work Fed economists can only come up with — TINA — there is no alternative. Making matters worse the same folks who now preach self-destructive TINA also backed policies that toppled the world economy. Instead of being run out of town to face some of their own economic prescriptions, policy economists get to keep their jobs without as much as a critique outside of acadamia. Great work, guys.

    1. Banger

      TINA exists because TINA. Or, to put it another way, economic policy is purely and I mean purely a political policy designed to keep those in power in power–as a one time Presidential candidate famously said “it’s that simple.”

  3. Johnny Lunch Box

    With home prices up 500% from the early 1990’s and most retirement plans now being funded by the individuals and most corporations that have done away with family health plans all while wages have not increased for the last 20 years. Top that off with inflation on food, fuels, taxes, cars and then toss in job insecurity, part time work and the never ending cycle of job loss’s as we export our jobs over seas. And yet folks wonder why the economy is in the toilet??? HUHHH. Wage increases won’t help us it just helps the government with more taxes.. What we need is some hard core deflation to bring prices down for the consumers. Lets get back to reality

    1. Ben Johannson

      If rising wages aren’t helpful then why bother complaining that wages haven’t risen in twenty years?

      1. Johnny Lunch Box

        It was a statement to the facts. Wage increases help to keep up but in my experience every time workers get a raise the merchants were right there to take it away by raising their prices. Uncle Sam is the benefactor as he gets to tax more wages. Local Governments also make out on Real estate taxes as home prices climb 500% over what they were in the Late eighties.
        Home values make folks look good on paper but dam few people are able to sell their homes at these prices as they are unafordable unless you were fortunate enough to have sold one and are wanting to move up. Most folks who get lucky and sell will take the money and run.
        A 200.000.00 dollar home will cost about 2.400.00 a month to own with Taxes, interest, Principle payback and up keep and you mow the grass. If it looses 10% in value in a year you can add another 1700 a month to that cost. The American dream of home ownership has been the American Nightmare for most folks Just Saying!


    2. LeftCoastIndependent

      Right on LunchBox. We have had a coordinated effort to lower wages in this country for a long time now. Union busting, off shoring, out sourcing, lay offs, you name it. And every President since Reagan has been in on it. Meanwhile, we have Central banksters who have a target 2% inflation rate. As the gap widens between wages and inflation, the worse the economy will be. Main St. is tapped out and Wall St. should end up paying the price, but thanks to the Central bankster folly of QE and ZIRP, the elitists have managed to save themselves, for now anyway. Personally, I’m looking forward to the next big crash. Unfortunately, it always takes a disaster to bring about change.

  4. Linus Huber

    Open letter to Stanley Fischer at the beginning of 2014

    Cantillon Effect

    Honorable Mr. Stanley Fischer:

    Based on your past activity as a professor at MIT, your resent job as the Governor of the Central-Bank of Israel as well as the great acknowledgement you enjoy within the economic profession, you have a decisive influence on the mindset of the decision makers at the helm of Central-Banks. It therefore is not surprising that your name frequently appears as a potential candidate for the function of the Vice-Chairmanship at the Federal Reserve. Please accept my great admiration and respect I like to express for your professional success which is part of the reason I eagerly consume your publications and speeches (e.g. In most of these lectures I regret the absence of the following aspects which should play a prominent role for central bankers: Sustainability, credit volume (in relation to gdp), longterm inflation (currency devaluation). For this reason I like to address some aspects that often get ignored by economists:

    Cantillon is widely credited as the first to show that changes in the money supply and credit have important impacts on the economy by changing relative prices. He showed that an increase in the supply of money would cause economic expansion, but that ultimately the process would be self-reversing as prices would rise and imports would increase, sending money back out of the economy. Cantillon further showed that monetary inflation does not affect all prices equally or at the same time, but in sequences that depend on the spending behaviour of money holders all along the channels of monetary flows.

    Cantillon effects are the real fundamental changes in resource allocation that result from changing relative prices between the time of the creation of new money and the full adjustment to the increase in supply. For Cantillon, an increase in commodity money, such as silver, would increase employment and prices. It would impose „forced savings“ and lower real incomes on those whose income was not changed due to monetary inflation, possibly leading to unemployment or emigration. If the money supply increased due to a balance-of-payments surplus, then the additional money could cause an increase in manufacturing or expansion in whatever the new money holders chose to spend their money on. In response to the change in relative prices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly specific capital good that may not be well suited to the alternative production processes of the post-adjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.

    The concept of creative destruction (Schumpeter), that is required to attain system-sustainability is generally ignored as well but all attention is focused mainly on the questionable instrument of the consumer price index for the purpose of measuring inflation, an index that does cover a limited area of economic activity and therefore is unable to provide sufficient information for the decision making process with regard to money supply growth and interest rates. Since decades the objective of price stability is a farce and the actual goal is/was at all times a slight rate of inflation (despite the fact that due to major productivity gains that have a downwardly influence on prices) with longterm effects on the population and especially the banks that are not recognised in that everyone and especially banks try to operate with the highest possible leverage to attain profits which resulted in the explosive growth of the credit volume (part of the money supply) and the associated creation of bubbles. Deflation is considered evil without even considering the idea that real price stability must contain periods of slight deflation in order to achieve system stability, a process that could well be compared with the act of breathing in that inhaling does provide the wished for positive results only after one exhaled. The size of the systemwide credit volume (in relation to gdp) burdens increasingly its carrier, the economy, to such a degree that its dynamic is slowly lost. Even Keynes was aware of the effects of debasing the currency:

    „By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Those to whom the system brings windfalls, … become „profiteers“, who are the object of the hatred (e.g. Bankers)… the process of wealth-getting degenerates into a gamble and a lottery… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.“

    Below I like to address a few points that you brought up in your speeches and publications.

    The function „market maker of last resort“

    When the market (which means all the market participants) decides that certain securities are extremely risky and as a result their prices collapse, that is not a sign that the market does not function properly but that it claims a considerably higher risk premium. Of course the central banks may intervene under such circumstances but we must be aware that the result is not the making of a market but the exact opposite in the form of price fixing by a central planning organisation, a situation that reminds me of the expression „in order to save the village we had to destroy it“. With such actions we abandon the Idea of free markets and move increasingly in the direction of central planning. In how far central planning a desirable objective is, I leave to you, Honourable Mr. Fischer, to decide. It demonstrates very well that the centrally controlled fixing of the price of credit (interest rates) leads to further price controls in the longterm. The government’s function should be limited to organising the market place where the different actors can operate according to established rules.

    The significance of a strong and robust financial system

    I agree with you, Honourable Mr. Fischer, that the financial system must be strengthened which best can be achieved by increasing the capital quota at financial institutions. A robust financial system will always adhere to the principle that the cost of risk stays with the risk taker and is not transferred to the general population via currency devaluation. Real price stability that entails periods of slight deflation as well of slight inflation would reduce risky behaviour considerably. In this context I like to remark that the provision of additional authority and power to those that misdiagnosed and proved their incompetence takes only place in government or government supported entities as they are not exposed to the law of the free market whereas the gain in power of the economy’s unproductive part continuously increases and as a result ruins society step by step, even if such a process takes place in slow motion and even if it is not recognised by the population.

    The requirement of macro prudential supervision

    If we are not in a position to recognise the longterm negative effects of inflationary monetary policy, the need for supervision and control increases. It is a further expansion of the bureaucracy and economic planning, a fact that will have a rather paralysing and cumbering effect on economic activity. A side effect that should not be ignored is the fact that increased regulation producing comparably higher cost for smaller companies and therefore will work diametral inverse to the stated goal of resolving the TBTF Institutions. The Idea to face any minor digestible crisis with easy money was the real reason of the increase in risky behaviour and harmful to the system’s stability. It is necessary that the costs of insuring such risks is carried by the risk takers what obviously is not the case today but instead the costs are transferred via different mechanisms to the population at large. The urge for increased regulation is the manifestation of these aberrations and try to correct current as well as past errors of judgment on the part of the decision makers who increasingly look like arsonists that get celebrated as heroic fire fighters who saved the world. E.g. similar conclusion reaches a working paper by the Cato Institute issued by George Selgin, William D. Lastrapes, Lawrence H. White at the end of 2010 (

    Behavior towards bubbles

    Your idea that a future collapse of the stock market may not have major implications for the financial system is comparable to the Fed’s evaluation in 2006 that the real estate market will have little implications for the whole economy. All components (bonds, real estate, stocks) are interconnected to such a degree that a collapsing stock market will result in not foreseeable dislocations in other markets, e.g. by a sudden recognition of newly perceived risks that will claim further measures and further price distortions. The implications of institutionalising moral hazard by rule free and arbitrary behaviour of central banks in applying measures based on the principle „whatever it takes“ is not comparable with a one-off situation when a problem is resolved in a principled way but simply transfers the difficulties onto a higher hierarchical level and transfers the resolution into the future, a process that increases systemic risks. I understand your argument, Honourable Mr. Fischer that each insurance scheme contains a certain degree of moral hazard however comprehensible and socially acceptable fixed rules are absolutely necessary as otherwise unfavourable developments solidify.

    Difference between liquidity and solvency

    You recognise the difficulty, that in an actual situation it is hard to evaluate what kind of crisis is taking place. Measures by a central bank that contain massive monetary easing have a strong influence on the aspect of solvency as asset prices are artificially boosted but the quality of the base money is subjected to deterioration and with the mechanism of devaluing a currency, the costs of risk is transferred to society at large. The valuation of assets (mark to model instead of market) contains a further level of reduced transparency and influences system stability negatively. Bagehot, the economist you refer to in your publications, was very clear with his idea of „lender of last resort“ for banks in a problem with liquidity in that the securities offered by banks in lieu of liquidity had to be of the highest quality and that the conditions for the provided liquidity must be at punishing rates in order to motivate the banks to behave in a diligent and careful manner.

    Honourable Mr. Fischer, I can understand that when involved in all the details of the activities of a central bank on a daily basis, the danger to view the big picture through the lens of one’s own function is normal human behaviour and that it takes a heroic effort to question one’s own believes. Nevertheless, I hope that with your extraordinary great intellectual capacity you will be in a position to comprehend the historical context, the effect of monetary policy on society (e.g. the continuous thinning of the middle class – Gini coefficient) and the economic actors as well as the question of sustainability in the pursuit of a linear inflationary monetary policy and that you will find the time to reflect on it.

    I wish you, Honourable Mr. Fischer, all the best for the recently arrived New Year 2014 and remain

    with great respect,

    1. MRW

      For Cantillon, an increase in commodity money, such as silver, would increase employment and prices.


      It would impose „forced savings“ and lower real incomes on those whose income was not changed due to monetary inflation, possibly leading to unemployment or emigration. If the money supply increased due to a balance-of-payments surplus, then the additional money could cause an increase in manufacturing or expansion in whatever the new money holders chose to spend their money on. In response to the change in relative prices, more resources are allocated to long-term capital goods.

      Completely incomprehensible.

  5. Ben Johannson

    However, it generally is ignored by the Central Bankers that the cause of that deflationary depression was the result of a prior inflationary monetary policy that created those massive capital misallocations and imbalances.

    Vulgar austrians make this argument repeatedly, but there simply was no inflationary monetary policy that could conceivably account for the Great Depression, nor can they coherently explain how a “misallocation” can result in an economic contraction of 25% when austrian business-cycle theory assumes efficient market mechanisms for resolving failures.

    1. ewmayer

      There was no inflationary monetary policy per se by the central wankers, but there was a massive consumer credit boom:

      The Roaring Twenties Bubble & the Stock Market Crash of 1929

      Long story short, the whole “buy now, pay later” paradigm we take for granted today really got rolling in the 20s – i.e. banks “financially innovating”:

      “Products that had once been too expensive were suddenly affordable due to new forms of financing that made it possible for families to spend beyond more existing means.”

      1. OpenThePodBayDoorsHAL

        Debt brings forward demand from the future to the present. So long as debt service is ZIRP (or NIRP) we can continue to substitute debt for income, anyone should see though that process cannot go on forever. They know this, that’s why they’re so eager to debase. Focus on the money, people: as Volcker stated, the current madness (“inflation targeting”) of 2% means that over the 30 years of the average worker’s life you will have confiscated >70% of his purchasing power. And everyone sits around like priests in Galileo’s day, coming up with ever more complicated formulas that prove the Earth is the center of the universe.

      2. ewmayer

        p.s.: While “inflation targeting” was not yet all the rage with the CBs, they were far from passive actors in the 20s bubble, especially when the initial wave of credit-mania fueled by private actors (department stores, auto dealers, etc) began to flag:

        While there was a brief depression during the first part of the decade, it eventually receded under the stewardship of President Warren Harding and his institution of federal spending and tax cuts. When Harding died suddenly in 1923 and Calvin Coolidge took control of the economy, matters began to change.

        By the middle of the decade, the economy had once again become sluggish as the Reserve banks relaxed requirements for credit and more than $500 million was created in new money. Loans totaling more than $4 billion were made available to the American public. The hope was that such measures would stimulate the economy; however, the opposite occurred as more and more consumers took on an increasing amount of debt and the price of stocks and real estate began to skyrocket. In 1926, Coolidge supported the Revenue Act, which reduced taxes on individuals with higher incomes but offered little relief to middle-income families (Chris Butler, 2007).

        Sound familiar? It should.

        (Linked article needs some copy editing, though – I shall look for a more authoritative reference, beginning with a revisit of Galbraith’s The Great Crash 1929 to see what details it provides regarding the preceding near-decade of credit mania.)

      3. MRW

        “The Roaring Twenties Bubble & the Stock Market Crash of 1929”

        The government ran a surplus for eight years (1921-1929). What do you expect?

  6. MikeNY

    Theoretically, yes, this is what they actually believe.

    Practically, they only believe in trickle-down.

    1. craazyboy

      ‘Tis true. It’s like the x-files – they wanna believe. They want us to believe too, but this first week econ 101 explanation of economics is sorta like if you wanted to study early Greek culture and the professor tells you there was Earth, Water, Wind, Fire and that’s it. Then the Greeks made babies and the world economy grew!

      EPSTEIN is good. He ticked off all the reasons that have accumulated in my mind over the years that sorta help flesh out the real story.

  7. Jim Haygood

    Good to see such a commitment to diversity at the Fed. Stanley Fischer is the first Zambian-American to advance to Vice Chair of the Fed, stepping into the shoes of Roger Ferguson. Looks like America! /sarc

  8. Doug Terpstra

    Right, here we have the former chief of Israel’s central bank, an Israeli (dual) citizen and AIPAC neoliberal, managing Americans’ perceptions. He was appointed by Obama to tell us to get used to permanent disemployment. TINA. Forget about demand-side stimulus; there’s only supply-side monetary policy, “MMT for me, austerity for thee” as DownSouth used to put it.

    When are people going to wise up to these wisenheimer banksters? Their economic and foreign policy is literally killing us. How is it Obama gets away with appointing an Israeli citizen, Israel’s former central banker, to run (under Yellen of course) the US “Fed” and tell Americans to suck it up?

  9. Ben Johannson

    Is that what Fischer and all those guys really believe? That’s their model? Wowsers. We are in trouble.

    It’s actually a rather Marxist outlook, in the sense that technology, demographic changes, etc. mean there is only one path to take and inequality is an historic inevitability. TINA is much more descriptive of a centralized command economy than a dynamic capitalist one. Fischer and Cowen would of course have heart attacks if you said this to them

  10. cnchal

    Gerald Epstein describes the two factors that have put us into an economic trap, which boil down to maldistribution of income and low wages, which is really just one factor, as these two are mirror images of each other.

    At the 5 minute mark of the interview Mr Epstein portrays Stanley Fischer’s position as this:

    “look, if it’s a long run technical problem, there is really not much to do about it, we might as well close up our tents and go home”

    Mr Epstein then says:

    “but if you look at it as a result of austerity by the government, movement abroad by multi national corporations, refusal to raise wages and pay taxes, then you see what really we need is much more policies by the unions, by the government to raise wages, infrastructure investment, to increase demand to get the economy going.”

    “This is a long debate going back to the 1930’s. That’s precisely what John Meynard Keynes said, look in the 1930’s “”we are going to have secular stagnation unless the government comes in, builds infrastructure, much more public investment, unless we raise wages, unless we completely restructure the casino financial system, this is what we need to do”” and Stanley Fischer isn’t about to propose these kinds of more radical structural changes”

    I would like to propose my own “radical structural changes”. Fire every economist at every Federal Reserve bank. The payment clerks and the people required to run the bank stay, just the fire the economists.

    Make them live in the real world for a change. They might even learn something about economics, and that having no money means you can’t buy anything, and the chain of misery that extends from there.

    When Fed and mainstream economists have a cartoon view of the economy, we are in trouble.

    1. Whine Country

      Were Shakespeare alive today he would undoubtedly change his famous quote to: ” The first thing we do is kill all the economists”

      1. cnchal

        Economists have sat at the policy table for so long, the varnish is gone where they rest their elbows.

        Policy influence by them has resulted in a planet that may cook it’s inhabitants, never mind the pollution and radiation.

        Or, perhaps these “folks” really, truly do understand. What if they are just misleading everyone into believing that austerity is prosperity, and are trying to save mother earth by wrecking the economy?

  11. Christopher Dale Rogers

    Its been apparent since 2009 that central bankers have reached the limits of macroeconomics as far as stimulating an economy goes, we have witnessed the utter failure of QE and ZIRP, with the exception being, the policy was never meant to achieve full employment, it was always meant to stave off deflation, blow bubbles and significant inflate property prices – which had they fallen significantly would have resulted in all the TBTFs collapsing into insolvency, which technically is what they remain without massive state subsidies.

    As for inflation, well we all know this is rigged, as are any mandates that exist for full-employment, as you can never have full employment if the inflation rate has to be capped at 2%, and the reason for this is simple, if its policy to contain inflation at 2% and this can only be achieved by making sure that an unemployment rate of 7% exists, for as economists tell us, an unemployment level lower than 7% means you get wage inflation by the plebs – obviously wage inflation, or lets call it what it really is: THEFT, for the ruling elites and by the ruling elite does not exist, indeed, quite the reverse said wage/earnings inflation must be encouraged as the elite and wealthy are the actual wealth creators, and without wealth creators there can be no economic activity so far.

    Now I hope you are all with me on this, this is what the theologians tell us, it must be true, same as the World is the centre of the universe and the earth is flat, it must be so because they say it is so, to say otherwise means you are a heretic and if you are a heretic you get hung out to dry or worse.

    In a nutshell, only the US Legislative and US Treasury can dig us all out of the hole we are in, but its all captured by the elite and the elite likes things as they are. The rest is just bullshit, so either our central bankers tell the truth, which means abandoning neoclassical economics, or they continue the lie. The money and wealth exists to get the USA and the world moving, but all governments are opposed to taxing wealth and taxing corporations, they are also opposed to taking imports or applying tariffs, hence, its like counting how many angels fit on a pin head, which according to the Church is well over a million, give or take a few.

  12. YankeeFrank

    What I don’t get is how corporations are supposedly earning “record” profits if the economy is so crap. Are their profits mainly due to financial speculation/quantitative easing or what? And how long can their profits continue this way with such global stagnation?

    1. cnchal

      Part of the answer.

      ‘but if you look at it as a result of austerity by the government, movement abroad by multi national corporations, refusal to raise wages and pay taxes”

      And how long can their profits continue this way with such global stagnation?

      Recognition of the impossible by the majority, means not much longer

    2. John Yard

      Record profits are from 1) low/no interest rates : low debt payments , low cost of inventory 2) repressed workforce : low wage, high fear environment 3) low capital investment .

    1. MaroonBulldog

      “Where did the economy go wrong?” conflates two fallacies: the logical fallacy of misplaced concreteness, or reification, which mistakes an abstract idea, concept, or measurement (“the economy”) for something that has real existence in natures; and the fallacy of teleology, which believes that something in nature tends toward some desired end (equilibrium, full employment) etc.

  13. mossmoon

    Gasoline prices in the US have averaged $3.50 at this level of demand. Where do you think they will be if wages spike? Much higher, which will then spike growth downward again. Obviously the problem is not too little demand.

    The only “answer” here is a complete restructuring of sovereign debt. And that’s coming through the SDRM mechanism of the IMF. And Americans are not going to like it.

    1. MRW


      Gasoline prices in the US have averaged $3.50 at this level of demand.

      More bullshit (not from you, mossmoon, from the world). We are awash in oil. The futures traders in the City of London corralled this market and is foisting it on us. This has been documented up the ying-yang. I don’t have time to go through the links I have somewhere on this computer recording this. Gas was down to $1.50/gal in the 4th Q of 2008. This has nothing to do with supply and demand. It’s out-and-out manipulation. And greed.

Comments are closed.