Ben: Need a Rethink on that Texas Trip

August 16th, 2011 at 9:23 am

Just when you thought our politics couldn’t get any weirder, I think Gov Rick Perry just threatened to beat up Ben Bernanke for suggesting another round of quantitative easing.

“Responding to a question about the Federal Reserve at a campaign event in Cedar Rapids, Perry said: “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”

I wish I was making this stuff up, folks…I really do…but I’m not.

(Does this mean the Fed research team needs to add a new variable into their impact models?…i.e., the estimate of the impact of monetary easing on long-term rates, conditional on the Chairman getting a fat lip.)

Perhaps Gov Perry is just looking over his shoulder at Ron Paul, who’s always bashing the Fed (and was a close second to Rep Bachmann in the Iowa poll), but let’s take a look at the economics in play here.

Quantitative easing (QE) is when the Fed “prints money”—really just bytes in Fed and Treasury electronic bank accounts—to buy longer term bonds, either Treasuries or mortgage bonds with the goal of lowering interest rates and stimulating more economic activity.  They’ve done two rounds so far and estimates suggest they lowered long term interest rates by somewhere between 60 basis points (0.60 of a percentage point) to more than 1%.  (Scholars of intermediate macro: they’re pushing out the LM curve!)

Perry went on to complain about “devaluing the dollar in your pocket” based on the notion that if you’re printing money, you’re creating inflation.  And as I and others—most notably Ken Rogoff—have argued recently, that would help right now.

First off, faster inflation lowers the real interest rate—that’s the nominal rate minus inflation.  So if a business is thinking of building a new factory, and the interest rate on the loan it needs is 4% and inflation is 3%, then the real rate faced by the borrower is 1%.  That’s especially germane right now with corporations sitting on fat cash reserves.  A little more inflation in the system could nudge them off of the sidelines.

More inflation also speeds up the ongoing deleveraging cycle by eroding the real value of households’ debt burdens.

That said, a commenter the other day raised a good question about this: how can I, as someone who actively worries about real wage losses, advocate higher inflation, which all else equal, means lower real wages?

It’s the “all else equal” part—lower real rates and more deleveraging means faster growth and lower unemployment, which itself should help boost job and wage growth.

Here’s the punchline of all this—and be clear that I’m not talking about very high inflation, which hurts everyone.

I have no idea if this is where Gov Perry is coming from, but what’s really behind conservatives view on this issue is that the wealthy get hurt a lot more by inflation than by unemployment, and visa-versa for the middle class.  (Remember, I’m talking 2-4% inflation here, nothing higher.)

For those living off of capital (versus labor) income, inflation erodes their assets, their wealth, their capital.  So lower real interest rates, faster growth, lower unemployment ain’t what gets them out of bed in the morning.  That’s also why the editorial page of the WSJ, for example, permanently campaigns against anything that would “weaken” the dollar.

Why just last night, I was on the Kudlow show arguing against someone who wanted us back on a the gold standard (!!), the natural conclusion of sentiments like Gov Perry’s, and a fine way to cut the Fed off at the knees and ensure deflation at a time like this.

And, of course, the other “punch”line: Ben, you might want to let things settle down a bit before you mosey on down to Texas.

Print Friendly, PDF & Email

26 comments in reply to "Ben: Need a Rethink on that Texas Trip"

  1. Brenda says:

    Why is it surprising that fascists would make violent threats?

    I don’t use the word facist lightly in this context. Gov. Perry’s rally “The Response” featured Dominionist Christian leaders. The Dominionists’ stated goals include a theocratic dictatorship and returning slavery to the US.

    Why are people constantly surprised when far right extremists do what they say they will do?

    • Geoffrey Freedman says:

      Because they do not understand how sinister and dark the far right really is. It has at its root, class warfare, cultural warfare and racial warfare. Make no mistake about it.

  2. roseonpolitics says:

    I think there’s going to be a real problem explaining another possible quantitative easing strategy if the Fed decides to do it. Most people don’t understand what it is and obviously haven’t felt the impact of it.

    I do think you’re reaching a bit arguing higher interest rates hurt the rich more. They will be fine because they get interest on the money they have in the banks and of course the stock market where they have more investments in than your average joe.

  3. Andrew says:

    To second Brenda, Mr. Bernstein, I think it’s inappropriate for you to treat Perry vicious thuggery lightly and swiftly segue to the merits of his policy position, if you care to credit his demagoguery with having anything to do with policy. This is a man who’s openly questioning the patriotism of the President and now ‘jokingly’ threatening the Fed chair to punctuate a jingoistic critique of monetary policy. Fine to debunk his irrational recommendations, but first the viciousness should be called out.

  4. Andrew says:

    p.s. Andrew Sullivan has I think the appropriate response to the Perry pronouncement discussed here:

    What Perry is now shown to have said has a plain meaning. He’d support lynching the Fed Chairman. And he believes that Bernanke’s attempts to prevent a Second Great Depression are partisan politics, and an attempt to rig the election. He seems to think, in other words, that the man who was the head of George W. Bush’s Council of Economic Advisers and was appointed to Fed Chairman by George W. Bush is somehow a Democratic party operative trying to win the election for Obama. It’s a staggering assault on the integrity of a civil servant grappling with some of the most serious economic problems this country has faced in our lifetime.

    Take it seriously. The man is running for the presidency.

  5. foosion says:

    Perry’s next line is interesting ” Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”

    How is it playing politics? The best explanation I can think of is that he believes it would help the economy and therefore Obama and that would be treacherous or treasonous.

    What other political outcome would he complain about? Something that hurts the economy and therefore Obama?

    I’d think those living off capital would prefer faster real growth, even if accompanied by moderate inflation and even if temporarily lower real yields are needed to get there, because that’s better for equities and better for bonds in the long run (short run principal decline offset by increased yield). A weaker dollar is good for exports, which helps corporate profits. The 10 year return on the S&P 500 barely covers inflation, which is not what the portfolio crowd wants. Negative real yields on the 10 year treasury is not what the portfolio crowed wants.

    I realize I’m in the minority with this view.

  6. bakho says:

    Actually, the amount of SS that goes to high income earners is already tweaked. High income earners pay taxes on the SS benefits and those taxes are returned to the SSTF.

    Taxing benefits of high income earners is a good way to proceed. If a high income earner suffers an income hit (medical catastrophe for example), then the taxes on their SS would immediately be lowered and they would get the full benefit. If their high income is steady, then they don’t need the SS and can afford to pay the taxes. Then SS would function even more like “insurance”.

  7. bloodnok says:

    what’s really disgusting about the good guv’s comment is the notion that printing money is “treasonous”. what perry apparently means is it’s treason to try to save the american people from a depression if that interferes with the good guv’s attempt to become prez.

    i’ll avoid invoking godwin’s law at this point …..

  8. Misaki says:

    People with money already have plenty. When the government gives away money, inflation works because those people are willing to pay higher prices; in this particular case, the government would be giving money to entities that already had it, like corporations. And like Mr Warren Buffett pointed out a few days ago in the New York Times, rich people already have plenty of money.

    So it’s unlikely you’ll be able to convince people that “devaluing the dollar in your pocket” is a good thing.

    As usual, an economist makes an argument based on “making the numbers go up” while ignoring people and situations that would be hurt when their own numbers do not go up, like people on fixed incomes.

    • jo6pac says:

      Thank you for pointing out there are humans that end up getting hurt by others that only see numbers.

      like people on fixed incomes.

      And everyone that still has a job because no matter how well corp. Amerika is doing they will not pass down any of the $$$$ that the worker make for them. To much Greed.

  9. Tom Cantlon says:

    This and your piece today on SS are both very clear explanations. The kind of thing I will send along to friends who ask, “do you understand….?”.

  10. Martha Retallick says:

    What the Fed needs is a chairman with the body build of Paul Volcker. Think the Rickster would try to diss Tall Paul? I didn’t think so.

    Or think back a little further in history, to another tough, tall Texan. I’m talkin’ Lyndon Johnson, people. He was pretty good at using his size and presence to overwhelm others. I can’t help but think that Rick Perry would be on his very best behavior around President Johnson.

  11. Dan Furlano says:


    Paul Krugman had another piece on MMT this week. I was wondering what your thoughts are about MMT?

    I am sure you have heard about MMT but I thought I would add a few links as a point of reference.



  12. Deborah says:

    Frankly, I’m horrified that you’re advocating inflationary policies. Not all middle class and lower middle class Americans live beyond their means. Some of us bought modest houses and paid them off. We didn’t play the stock market, although our employer mandated retirement fund did, and lost most of our contributions. The little that we’ve been able to save is in T bills, with interest rates with a lower return than inflation. So now you’re suggesting that my work, translated into money, is worth less because I did it last year, and ought to be worth even less each succeeding year. Wrong. We’re going to be facing retirement with low savings, thanks to low salaries, thanks to offshoring of our work. (We have seven college degrees between us, including a Ph.D.) Our state retirement will be no more than a pittance, even if the fund (built from employee contributions) is not raided, which seems increasingly likely. Medicare and Social Security will have a completely different benefit structure by the time we reach retirement age…in fact, we’d better keep our health, because we’re not going to be able to remain solvent otherwise. So why do you want to diminish what little capital we have been able to accumulate? You seem to be completely out of touch with the “real” world.

  13. Robert says:


    Quantitative Easing may have been successful in reducing interest rates as you say, but it had no substantive impact on the economy, which is still grappling with a private sector balance sheet recession. Basically QE2 was an asset swap — non-interest bearing currency for interest-bearing notes. There was negligible impact on the net financial assets and money supply of the private sector. In fact, the interest income of those notes was removed from the private sector. The stimulus impact was non-existent, and the inflation effects were transitory (largely caused by distorted investor sentiment and voracious appetite for risk assets – equities and commodities). All that happened was a market price bubble, but with prices now collapsing, all of QE2’s gains are evaporating before our eyes.

  14. Steve Bruesewitz says:

    Isn’t quantitative easing basically what Milton Freidman claimed was needed to during the great depression? A more expansive monetary policy by the feds?

    I keep hearing how politicians have moved further from the center both right and left. I have seen no evidence of any movement to the left. What the right used to claim as it’s own are now far to the left of what is even deemed in the realm of polite discussion.

  15. Misaki says:

    Also I think this is funny and appropriate given economists’ obsession with “low consumer demand”. Because the people of the US seem to be in agreement, given so many of the goods in certain categories (like clothing, furniture, electronics) are made in China, that what the US needs most right now is for people to buy less. 🙂

    (I will mention that this is actually a reasonable goal, with the very important condition that people also need to be prepared to spend less time working as well so lower consumption does not prevent people from getting jobs:

  16. Jeff H says:

    Since no one has commented this yet:

    What is treason:

    a) The Fed managing monetary policy to help bring the US out of the recession.

    b) A governor threatening to secede from the union.

    hint: the answer is b

  17. Charles says:

    Oh, stuff it! The poor and middle class are hurt by the booms and busts caused by inflating money supply. Investors rush to non-cash assets. Commodities rise and product prices rise. Whole industries are propped up that people rush to. The rich get in early and liquidate before the bust, the poor ride their life investment into default. Inflation hurts seniors on fixed incomes and the rising poor who invest in safe, liquid savings accounts. Don’t tell us Neo-Permanent-Keynesian economics gives a flying pot about the poor. Stop with the PR games. Economic instability and uncertainty hurts all. The Fed has long ago been co-opted by politics to serve short-term interests. The Fed has all but ignored their purpose of stabilizing our economy for long-run growth. They can’t see any farther than the next election cycle.

  18. Anon says:

    In truth, a short-term and significant inflationary spike is exactly what the doctor ordered.

    At the level of the Federal government, the debt problems are largely in the future (health care costs), but at the municipal, household, and small business level, it’s all about debt overhang. An inflationary jolt that destroys the real value of these claims on future income/revenues – a massive helicopter drop if you will – would resolve the overhang and allow those sectors of the economy to move forward. Federal government would still need to get a handle on health care costs.

    One further point – this idea that somehow inflation “destroys wealth” or is at some level “bad for everyone” really isn’t true. Deflation is what destroys wealth: job skills, idle plants and equipment, unsellable inventory, abandoned houses and commercial buildings, etc. Inflation destroys a very specific type of financial wealth, i.e. claims on future revenue and income, aka debt. And while the woman above has put all of her savings in T-bills (diversify a bit, eh, lady), it is only the very, very wealthiest that own the vast majority of assets whose value is hurt by inflation – and most of them are plenty well hedged.

    So, inflate away. It won’t hurt nearly as much as we’ve been led to believe.

  19. Deborah says:


    Are you going to increase my salary to cover the losses inflation will inflict on my savings? Or expand the social safety net when I’m a senior?

    I didn’t think so.

    • Anon says:

      “Are you going to increase my salary to cover the losses inflation will inflict on my savings? Or expand the social safety net when I’m a senior?”

      Me personally? No.

      Inflation? Yes.

      Also, too, if you hedge your exposure, inflation need not impose losses on your overall savings. But talk to a financial adviser about that.

  20. Dan Furlano says:

    Someone want to explain why inflation in the UK is crippling the economy?

    SO far England followed the austerity and lowering the debt path and just barely missed a double dip recession and now with added inflation the unemployment rate is starting to climb. Any lessons here?

    Ironic part is all this has been predicted fairly well but no one is listening.

  21. Wilkins says:


    I don’t know if Mr. Bernanke reads your blog, but if he does, or you speak with him, please let him know that not everyone in Texas shares the sentiments of our Governor.

    Should Mr. Bernanke (or you, for that matter) ever have an occasion to visit Texas, I promise you that you will receive a hospitable welcome here. If you are ever in or near Austin, drop me a note; you and Chairman Bernanke have a standing dinner invitation at my house. We probably can’t talk economics, though, but the drought is all anyone down here is talking about, anyway.

  22. Michael says:

    You have to understand where Governor Goodhair is coming from. Traditionally, the Fed has cranked up interest rates a year or so before any Democrat has come up for reelection. That’s why the 3 Fed governors dissented from keeping rates low now; they’re traditionalists.

    So Goodhair feels betrayed. Here’s a Republican Fed Chair refusing to do his job on behalf of Party and Country. Since Goodhair is Texan, he’s threatening violence. That’s what Texans do when they feel betrayed.