–Dr. Bernanke: “I’m puzzled. I keep drawing blood from the patient, but he hardly improves at all.”

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

O.K., that’s not a real quote from Mr. Bernanke, but it should be. He keeps doing exactly the opposite of what is needed to grow the economy, and when the economy doesn’t grow much, he does the same thing, even more so.

Let’s keep it in language simple enough even for politicians:

1. Adding money to the economy stimulates it; taking money from the economy slows it.

2. High interest rates force the federal government to pay more interest on its bonds, notes and bills. Low interest rates allow the federal government to pay less interest.

3. Government interest payments go into the economy (except for foreign payments). This enriches and stimulates the economy. Low interest rates provide less money, so enrich and stimulate less than do high rates.

And this is why, contrary to popular myth, low interest rates do not, can not and never will grow the economy. If you own any T-securities, you understand that the government pays you less when rates are low, which gives you less money to spend. (As my grandson would say, “Well, duhhh!”)

Fed says no rate hikes until at least late 2014
Reuters, By Pedro Nicolaci da Costa

WASHINGTON (Reuters) – The U.S. Federal Reserve on Wednesday said it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery. Without making major shifts to its outlook for the economy, the central bank described the unemployment rate as still elevated and said it expects inflation to remain at levels consistent with stable prices.

It depicted business investment as having slowed, dowgrading its assessment from the December meeting. Economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the central bank said in a statement.

If the Fed can convince financial markets it will be on hold longer than they had anticipated, long-term interest rates could drop as investors price in the new information. There is also the possibility that officials will announce an explicit inflation target, perhaps a hard marker of 2 percent or a range of 2 percent or a bit below.
Fed officials appear likely to bide their time in determining whether more monetary stimulus is needed. Many economists expect they will eventually decide on another spurt of Fed bond buying – probably one focused on mortgage debt.

In response to the deepest recession in generations, the Fed slashed the overnight federal funds rate to near zero in December 2008. It has also more than tripled the size of its balance sheet to around $2.9 trillion through two separate bond purchase programs. The policy is credited with having prevented an even more devastating downturn, but it has been insufficient to bring unemployment down to levels considered normal during good economic times.

In December, the U.S. jobless rate stood at 8.5 percent, and some 13 million Americans were still actively looking for work but could not find it.

In short, the Fed’s low-rate policy reduces the federal deficit, which in turn, reduces economic growth.

One might ask how the Fed could not understand this basic truth. While I try to answer many questions about our economy, that is one question for which I have no answer.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


16 thoughts on “–Dr. Bernanke: “I’m puzzled. I keep drawing blood from the patient, but he hardly improves at all.”

  1. I think “demand” is a dirty word to the powers that be. Instead they keep trying to unleash the Confidence Fairy to go out and tickle the investors. Gold and stocks jump a bit and settle back down when the investors figure out that nothing really happened. I read it somewhere this week, “apply, lather, rinse, repeat”.


  2. What’s strange is Warren Mosler says that he knows that everyone at the FED knows how our monetary system operates. I was watching one of his recent talks where he is explain why he is running for office, etc..

    He says that he asked them “why don’t you explain it to our elected representatives” (or something similar to that question)..

    and they respond… “that’s not really what we do” (or something similar to that response).

    What??? That’s not what they do?? What kind of answer is that?

    This just feeds into the ‘there’s an international banking “conspiracy” to loot the the people of the world’

    Why else would they not go out of their way to explain how the monetary system works to elected representatives? (assuming the central bankers do understand).


  3. If you believe that higher interest rates stimulate demand why do you think they are also useful to fight inflation – your main point of disagreement with MMT?

    Seems to me that higher demand should translate into a higher risk of inflation. Yet at the same time I also find persuasive the argument you put up in another post – that there seems to be a correlation between the Fed pushing up interest rates and a subsequent lowering of inflation.

    I’m curious to know your view on how this contradiction can be solved: that more demand via higher rates also paves the way for lower inflation later on.


      1. Ok, so the transmission mechanism would be higher interest rates stimulating demand and leading to higher output, while the dollar will appreciate causing a drop in import prices.

        But what would you say to neoclassical economists who sell the story of the recession of the early 80s, supposedly by Volcker’s tight money policy that sent interest rates to stratospheric levels, dampened demand and killed inflation?


        1. I would say, “Recessionsrepeatedly result from reduced federal deficits. The Fed raises interest rates when it sees inflation coming. Volker increased interest rates to fight inflation by increasing the value of the dollar. The Fed lowers rates when inflation abates.”


  4. You inadvertently put your finger on the problem I have with both Modern Monetary Theory and Monetary Sovereignty. Both talk about “The Economy” as though it were an undifferentiated mass instead of what it really is — a huge number of people with little money and a small number of people with a lot of money. Giving money to (or taking it from) the former has an enormous effect. On the latter it has little effect. I know many MMTers and MSers are uncomfortable with the issue of wealth/income distribution, but both theories are very incomplete unless they address it.


  5. Roger,

    Do higher interest rates help the mortgage market, or consumer credit purchases, which I think is a large part of the economy?


      1. If people are deleveraging, 0% financing won’t even get them to buy more stuff.
        And now Ford, Boeing and other large companies with many retirees on their books now have to infuse billions of dollars into their respective pension funds to meet their obligations.


  6. Other reasons why interest rate adjustments are useless:

    1. There is no relationship between bank base rates and the rate charged by credit card operators.
    2. Those planning investments look at LONG TERM rates, not short term rates. And long term rates are not much influenced by short term rates.
    3. Radcliffe Report on monetary policy in the U.K. published in 1960 concluded that ‘there can be no reliance on interest rate policy as a major short-term stabiliser of demand’.
    4. Using interest rates to regulate demand is DISTORTIONARY. Interest rate changes work mainly via households or firms which are significantly reliant on variable rate loans. I.e. those reliant on FIXED rate loans plus those who do not borrow at all are not affected by an interest rate change.

    Re your idea that low interest rates are deflationary, Rodger, doesn’t that depend on how those interest payments are funded? E.g. I imagine there are countries where those payments are automatically funded by tax, in which case the stimulatory / deflationary effect you refer to would be non-existent.

    But I’m not an expert on what arrangements different countries have.


  7. Tyler,

    Krugman is more enthralled with his hypotheses, than with actual, historical fact. Higher rates are associated with GDP growth:

    Monetary Sovereignty

    The probable reason: High rates cause the federal government to pay more interest into the economy.

    Rodger Malcolm Mitchell


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