Bernanke the Sophist: The Deception Behind QE

Bernanke’s legacy: a deceptive case for a failed policy.

Sophistry: the use of fallacious arguments, especially with the intention of deceiving. The Federal Reserve’s core policy of quantitative easing (QE) is based on a deceptive but appealing argument voiced by former Fed Chair Ben Bernanke.

Longtime correspondent Harun I. explains the fallacy of Bernanke’s case for QE.

Most times I leave people to their flawed ideas because in most cases, it is not what you believe that is most important but that you live in congruence with your beliefs. But this came up in conversation the other day, and since this belief is affecting us all, it must be examined.

Bernanke in 2001:

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost [emphasis is mine]. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.”

I pointed out what should have been obvious: There is nothing limitless and therefore nothing can be made in unlimited quantity. And since whatever material is being used in the conversion is not unlimited, it is now subject to the scarcity laws of supply and demand. For example, if lead was successfully converted to gold, lead, which exists in limited quantities will appreciate in value. Lead would have to supply the demand for its current use and now the conversion of gold which still has many important uses. Effectively, lead becomes the new money.

I went on: Didn’t we learn this lesson from ethanol? Corn is something we consume or use as feed for livestock. The second we decided to divert that output to our gas tank, its price appreciated.

In the next paragraph of Bernanke the Sophist’s speech, I will interject some clarification (in the interest of calling a thing what it is).

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press [deficit spending, borrowing money at interest from banks it is supposed to regulate] (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars [destroy the value of labor: force the same expenditure of calories for fewer calories in return] as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation [by forcing people to work the same or harder for less], or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services [he is kind enough to state it plainly right here: reduce the value of labor (energy expended)], which is equivalent to raising the prices in dollars of those goods and services [forcing people to work the same or harder for less].

We conclude that, under a paper-money system, a determined government can always generate higher spending [force people to work the same or harder for less by deficit spending, borrowing money at interest (which becomes a perpetual debt) from banks it is supposed to regulate] and hence positive inflation.

The implied conclusion is that to increase productivity (have stable prices and full employment) we must decrease the ability to buy products. Or, to have a normal and vibrant economy we must decrease living standards. Great. We can all be chuffed to bits that he’s cleared that up. In 2001, Bernanke the Sophist explicitly laid out the blueprint for too many promises. The Bail-In was already stated as policy over a decade ago. Why is everyone so surprised about the growth the wealth gap?

Why is there so much angst directed at the wealthy? It is government policy to reduce purchasing power.

If I am hired as a fiduciary, my first duty to protect my client’s wealth, to make sure his $50 million buys as much ten years from now as it does today. He doesn’t really care about becoming more wealthy. Governments hate this because they need that purchasing power. In general, the poor and middle class have no means to escape government’s exponentially growing need for revenue, nor do they understand the subtleties with which government bleeds them of their purchasing power.

As I have stated, the effects of Bernanke’s (the Fed) (and government’s) rather specious reasoning are already causing the disintegration of this “system”. It never mattered what pill was chosen (green or red). Illusions, the red pill, are necessarily ephemeral. We can never get around the physical laws of nature that bind human activity and therefore bind human interaction.

Thank you, Harun, for this explanation of Bernanke’s legacy: a deceptive case for a failed policy.

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  • Mika Salonoja

    In my mind the whole scheme collapses right away. What happened to the cost of the raw material (lead here) as part of the cost of the newly “essentially at no cost” created gold? Even if the process of creation were costless, shouldn’t the price of the product be at least the cost of raw material added with everpresent profit? So, while the price of gold might collapse initially, would’t it rise again as the price of lead rises? Just thinking…

  • jadan

    Bernanke’s sophistry is shared by all Fed chairpersons and it is built on the lie that underpins a private banking system. That lie is the idea that the economic driver of an economy is finance. It used to be called the “money power”. Finance is the horse that pulls the cart. All financiers believe this. Therefore, the chairperson of the Fed does everything necessary to support the privately owned financial system, even at the expense of labor and the middle class, because by their reckoning, it is a hard fact of life that social stability and all enduring social values derive from the elite, the enlightened class of money makers whom the chairperson of the Fed represents. You scratch the surface of this elite and you find the hereditary aristocracy that has been divinely ordained. They are the philosopher kings of Plato’s fascist republic. They lie for the greater good.

    We in the US and the world are so thoroughly indoctrinated by the lies of our “betters” that there does not exist an organized opposition to this private financial monopoly. At one time in our history there was an organized opposition. It was called “Populism” and it was a successful third party movement in the latter days of the 19th Century called The Peoples Party. It was betrayed and destroyed by the Democratic party of those days, but the greenback financial program that was the core of the Peoples Party platform was eventually adopted by the sneaky bastards who conspired at Jekyll Island and gave us the Fed we know today. The money power the Populists wanted to restore to the people’s government in the greenback solution was taken over by the enemies of the people, the wealthy elite.

    It is not government policy to reduce purchasing power. Bernanke was just not that stupid. It is government policy to preserve and protect the elite financial monopoly and prevent the development of a public banking system, such as proposed by Dennis Kucinich in his HR 2990. These people will do whatever they have to to maintain their own social preeminence. And that DOES NOT include forcing the great mass of people into a revolutionary posture. Whatever you may say about Bernanke’s sophistry, you must admit he did his job well. He saved the system and prevented a repeat of the Great Depression. He didn’t fix the problem, of course, because he’s the problem, but the elite financial monopoly remains unchallenged.

    It’s not the “physical laws of nature” at play here. Academic economists have such swollen heads. They think supply & demand is a law of nature. Scarcity is not a law of nature. It’s a method of social control and nothing more. It’s part of the Calvinist heritage of this sicko religious country.

    So, Smith, you think the system is disintegrating? Brilliant. What have you got to replace it with? Find a minute and read HR 2990, Kucinich’s bill.

  • ClubToTheHead

    Aluminum was a precious metal and so used for the top of the Washington Monument. Now it is so cheap ladders are made of it.

    “Planetary Resources and the Keck Institute for Space Studies (KISS) have
    independently conducted feasibility studies for asteroid mining and
    retrieval (“Asteroid Mining Venture”, 2012) & (“Is Asteroid Mining
    Possible?”, 2012). Japan conducted a successful sample return mission
    to the asteroid Itokawa, an important stepping stone towards future
    sample of asteroid retrieval missions (JAXA, 2012). The Hayabusa mission
    to this asteroid was able to autonomously approach, land on, collect
    data on the surface and topography,and collect a sample of the Itokawa
    asteroid and return to earth to drop the sample containing capsule in

    “According to the KISS study, the cost for a future mission to identify
    and return a 500 ton asteroid to low earth orbit is ~$2.6 billion USD,
    ignoring the costs to develop the infrastructure necessary to process
    the materials in the asteroid (“Asteroid usage”, 2012). However,
    Planetary Resources estimates that a single 30 meter long platinum-rich
    asteroid could contain $25 to $50 billion USD worth of platinum at
    today’s prices (Klotz, 2012). Clearly, once the proper infrastructure
    is in place, there is potential for significant profit. Currently,
    research into the feasibility of human and robotic missions to asteroids
    is being conducted by both governmental organizations (JAXA, NASA) and
    private companies (Planetary Resources).”

  • ClubToTheHead

    The value of fiat money is backed by law, which is backed by state violence.

    People without a state’s fiat currency are people outside of the law, arrestable for having no visible means of support, as illegal persons.

    Fiat currency is valued for exchange because everyone needs it to avoid being beaten to death or imprisoned by the state.

    • Younis Mourabi

      Specious argument. Ever heard of barter?