shostak on bernanke, and an apology from me

First off, I apologize for referring to Ben Bernanke as a moron in my earlier post. He clearly is not a moron, and as anybody who has been reading my posts knows, I normally try to be civil and at least somewhat polite. But I do feel that Bernanke is one of the worst choices for Fed chief, despite the views espoused on some "libertarian" sites that he's not that bad. This is because Bernanke seems to revel in the fact that the Fed can create money at will and believes that he can safely use that mechanism to monetize the debt, as can be seen in his "printing press" speech I referred to earlier.

Frank Shostak has an excellent article at Mises.org today entitled The Ascension of Bernanke Into the Clouds which exposes the fallacies of Bernanke's "great theoretical contributions to economics". He goes into much detail about Bernanke's philosophy of setting an "inflationary target", which I won't go into here, and he also touches upon Bernake's illogical fear of deflation:

What are the other problems with Bernanke's thinking? The man has a pathological fear of deflation, which he defines as fall in the price level. A fall in prices is regarded as dreadful news since it causes consumers to postpone their buying of goods and services. If people hold on to their money during deflation, he believes, its purchasing power will increase and this will enable them to buy more goods some time in the future. It is for this reason, so it is held, that people choose to spend less once prices are falling. Since consumer spending is almost 70% of GDP this means a cut in consumer spending would slow down the economy.

Consequently Bernanke holds that too steep a fall in the rate of growth of the price index could lead to a serious economic slump. This is another justification for having an inflationary target. To avoid falling into a deflationary "black hole" Bernanke believes that the Fed should try to preserve a buffer zone for the inflation rate...

...In short, it seems that the Fed is likely to act aggressively on any sign of emerging price deflation.

Despite the almost unanimous agreement that deflation is bad news for an economy's health, this is not at all the case. Deflation comes in response to previous inflation. This amounts to the disappearance of money that was previously generated out "of thin air." This type of money gives rise to various non-productive activities by diverting real funding from productive real wealth generating activities.

There's also an excellent graphic for this article, which I am reproducing below. As for my coblogger's argument that no self-respecting Austrian would accept the post of Fed chief, he may be right, but you can read my comments on his post.