Steve Forbes takes former Federal Reserve chairman Ben Bernanke to task in the latest issue of Forbes magazine. In critiquing Bernanke’s weak-dollar policies, Forbes offers a useful analogy illustrating the ineffectiveness of stimulus policies.
What Bernanke didn’t–and still doesn’t–understand is that money in and of itself is not wealth. It has no intrinsic value. It measures wealth, just as scales measure weight, clocks measure time and yardsticks measure length. Money tells us the value of countless products and services, thereby making the buying and selling of these things infinitely easier than plodding through the cumbersome process of barter. In this sense, money is similar to a claim check for a coat or umbrella at a restaurant. We’d regard any restaurateur a silly fool who created a bunch of coat checks on the theory that this would stimulate coat production, which, in turn, would increase patronage at his eatery. Even a kid would quickly get that the owner had it backward.
Bernanke, alas, is guilty of what might be called the coat-check theory of economics: Create gobs of new money, and–voila!–the economy bursts with activity. Another well-worn way of describing this is “putting the cart before the horse.”
The 1970s should have taught us what happens when you weaken the dollar–money flows into commodities. The early 2000s saw the prices of oil, copper, gold, silver, corn, wheat and soybeans soar. When commodities suddenly and violently move in one direction at the same time, something is profoundly wrong. Bernanke completely missed what the markets were telling him: There were too many dollars in the marketplace. Weak money also causes other hard assets to get an artificial boost. In this instance the most notorious of these was housing.