It’s comforting to think of the economy as a high-powered race car, zooming in and out of turns and accelerating on the straightaway. The analogy is comforting, in part, because it gives the impression that a master technician is in control of the economy. And, even better, the driver has a pit crew standing by to help.
Just like the world of Speed Racer, though, this analogy is pure fiction. Speed had a special steering wheel, giving him the ability to cut through anything in his path (button C) and to see more clearly with special headlights (button E). Unfortunately, the economy doesn’t have any of these cool buttons. In fact, it really doesn’t have a steering wheel (that’s just a Keynesian fantasy).
But that doesn’t stop the mainstream media from perpetuating the myth, and even anointing certain people as saviors of the economy. Just the other day, ahead of the Federal Reserve’s Jackson Hole Wyoming retreat, a Wall Street Journal reporter credited Fed Chief Ben Bernanke with “…steering the economy away from another Great Depression.” I guess I missed the recovery.
It’s sad, but even in the Wall Street Journal, the newspaper of the financial kingdom, the media’s ability to dumb down common sense has reached new heights. It wasn’t enough to credit Bernanke with saving the world with a few turns of his golden wheel, three days later the Journal credited him with boosting the Dow. The paper reported:
Stocks closed the week on a high note, as investors scrambling for good news found comfort in Federal Reserve Chairman Ben Bernanke’s vow to act if “unexpected developments” further threaten the shaky recovery.
Wow. Nobody in the financial markets expected the Fed to act if “unexpected developments” popped up? We’re in even more trouble than I thought.
Regardless of all the details – and there are many – all Bernanke has done over the last few years is ensure that the central bank has injected (and/or will inject) trillions of dollars of new money into the economy. The policy goal, of course, is to make sure that all that money doesn’t cause too much inflation. There’s no doubt that this little balancing act is where the steering metaphor comes from.
As long as the Fed stands ready to reverse its policies, the thinking goes, disastrous inflation can be avoided. But it’s not so simple. If we go back to 1971 (the year we officially got rid of a gold-backed dollar), we’ve averaged just under 4% inflation per year. And if we kick out the four high inflation years between 1978 and 1981, we’ve averaged a little more than 3.5% inflation per year.
These figures may not seem so bad. Perhaps these numbers suggest the Fed has, on average, done its job. But in the long run, these “low” rates of annual inflation translate into a worthless dollar. Basically, to stay just as well off as we were in 1971, we need $5 for every $1 dollar we had back then. I guess that’s success?
There’s also more to this story than just inflation. Since the end of WWII, we’ve officially had twelve recessions. Even thought the Fed has been “steering” the economy we’ve averaged 2 recessions per decade. I’m really not sure how that’s supposed to be some big triumph, and I’m amazed that people still think we can just guide the proverbial steering wheel of the economy.
If there’s anything at all to the notion that we can steer the economy in this manner, then nobody at the Fed has ever really had any clue what they’re doing. Luckily, according to the mainstream press, Bernanke knows exactly what buttons to push. In reality, Ben doesn’t even have a steering wheel, much less one with a reset button.
Please check out more from Norbert Michel at his Crimethinkerblog.