Thursday, February 16, 2006

Central Banker Credibility

To be or to seem to be
That is the question

Sometimes I get a bit too clever with my choice of words to the point where even I lose track of the meaning. The desire to make something sound brilliant gets in the way of actually being so, if such is possible for a hacker like myself. When I read
What have we learned since October 1979 by Fed Chairman Bernanke, I chuckled a bit, remembering times I had confused myself. Perhaps I'm still confused but discussions of Central Banker credibility as something distinct from their actual record seems silly to me.

Here's an excerpt:

Central bankers have long recognized at some level that the credibility of their pronouncements matters. I think it is fair to say, however, that in the late 1960s and 1970s, as the U.S. inflation crisis was building, economists and policymakers did not fully understand or appreciate the determinants of credibility and its link to policy outcomes. Specifically, Kydland and Prescott demonstrated why, in many situations, economic outcomes will be better if policymakers are able to make credible commitments, or promises, about certain aspects of the policies they will follow in the future. "Credible" in this context means that the public believes that the policymakers will keep their promises, even if they face incentives to renege.

Note that credible doesn't mean that they actually stuck to their promise but that the public believes they will. It seems to me inflation didn't fall in the early 80s because the public believed Volcker would follow through on his promise to tighten but because be actually tightened, substantially. It also seems to me that inflation rose in the late 60s and early 70s not because Martin or Burns
did not fully understand or appreciate the determinants of credibility but because they provided too much monetary accommodation, as they both admit.

Bernanke goes on:

If the policymakers' statements are believed (that is, if they are credible), then the public will expect inflation to be low, and demands for wage and price increases should accordingly be moderate. In a virtuous circle, this cooperative behavior by the public makes the central bank's commitment to low inflation easier to fulfill. In contrast, if the public is skeptical of the central bank's commitment to low inflation (for example, if it believes that the central bank may give in to the temptation to overstimulate the economy for the sake of short-term employment gains), then the public's inflation expectations will be higher than they otherwise would be.

Is he arguing that economics or monetary policy is all a con game?

To me the study of credibility distinct from the sense derived from true fulfillment of obligation is a study in the art of deception. Let me use small words so I don't get confused. They want to know how long lies last.



Long Things, Short Fiction said...


Your public display of intellectual honesty in your first paragraph deserves recognition. It is not a common characteristic amongst modern man, in my experience.

I’ve been reading your writings since the Chaos days. I am “stranded” in Asia, so I look forward to reading your blog everyday. I have to admit though, part of my interest in your writing is derived from my curiosity regarding the moment when a person bumps into the limitations of language (probably best illustrated by Wittgenstein, IMO).

My intermittent friend, who like you also graduated with a philosophy degree, often speaks with your level of certainty/conviction. In long discussions, we often find that the source of our disagreement is our unwillingness to clearly define the language that we are using and stick to the agreed definitions. And when we try to be more precise, the amorphous nature of a word’s meaning usually leads us to end with an agreement of where the “realness” of a word falls on a multi-dimensional spectrum. In other words, nothing seems to be separate from the time/context/environment in which it exists.

One aspect of your monologue is a bit like that aforementioned search for the exact meaning of a crucial word or abstraction. When you catch yourself up, due to an elevated concern for “form” vs. function, I find it impressive that you raise your hand and admit to it.

In a future blog, if it interests you, perhaps you could consider writing about your own certainty, as evidenced in your language, basic assumptions and syllogisms. The reason I suggest this topic is that, in my experience, deconstructing others and the world that they make is more straight forward; looking at one’s self and recognizing the bars of the self-imposed prison in which we individually choose to live is more difficult (though worth the effort). For example, what motive(s) or impulse(s) led you to allow your Self to become more concerned with the form/diction of your writing instead of focusing on its function/precision?

Anyway, I enjoy your writing for various reasons. I hope you continue.

Take care.

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Dude said...


When you write of bumping into the limitations of language, do you mean in the abstract or as used by man? In my view, language, in the abstract, has no limitations. I do think man's relationship with language varies from man to man and is never perfect which seems to me to be the cause of the problems. In other words, I try not to blame the hammer and chisel when I can't replicate Michelangelo's David.

As to what impulse drove me there were many, getting married and having a child stand out as 2 significant factors. I wrote something a few years back trying to capture my state of mind during the transition. It's a poor word sketch but that is not a defect of the language but rather my use thereof.

You can find it here.

Long Things, Short Fiction said...


Sorry for the belated reply. I had to move (only for 3 months) from Japan to Malaysia, with only 3 days notice, so my life has been a bit hectic.

My quick response led me to be inexact/unclear. The irony made me chuckle.

To answer your question, I need to start from scratch. This will sound a bit basic to begin with, so whilst reading, please believe that I actually have a point (though I may manage to drift off of it). I need to first describe an aspect of the multi-dimensional spectrum that I mentioned.

The easiest example: an object exists outside our mind. It has quantifiable, or at least has measurable qualities, which a pool of similar thinking people could agree on. For example, “temperature”, as understood by scientists.

As we move towards the more abstract on the spectrum, again assume an object still resides outside our mind, perhaps “tree”. You might agree that unless we were all trained botanists, agreeing on a specific definition of “tree”, you could walk through a forest with a group of people and there may be 1% of the tree like objects where there would be disagreement in what they consider to be a tree. The abstractness of the word (signifier) –object (signified) relationship is now being felt more.

Moving further along the spectrum, you get more abstract concepts like “freedom”, “love”, etc. It is these memes, that we all use in our daily speech, which we have a strong sense of understanding, yet are very difficult to pin down to a lasting definition that most would agree on. I suppose it is this subset of language that you are thinking of when you said that “language, in the abstract, has no limitations”. Whilst I agree that language is ever changing and the senses of a given word may change over time, I would suggest that as long as we sit in rooms looking at computer screens, i.e. not test our language for its inherent limitations, we might end up forgetting that there is a material or economic world that follows certain simple rules. I would guess you would agree. Alice in Wonderland locales (or states of mind for an individual) can exist for a period of time - for example the Soviet Union might be a good example of an effort to disregard the realness of words/concepts such as a “market determined price” and how it needs to exist to properly allocate scarce resources, or to use an example that you refer to from time to time, the establishment’s disregard of gold’s price as a monetary signal – but in the end, such artistic license with language will eventually be tested by the real world (an argument that you have made time and again, hence I am sure that I have misunderstood or read too much into your comment “language, in the abstract, has no limitations”. )

I think broadly speaking, you and I agree on a number of items related to language. However, my suggestion to you was given from personal experience. I read your daily comments and I try to divine where you are on your path, with respect to the limits of linguistics. I wonder how many foreign languages you have learned or still practice – I liken the awareness of that process, when it is happening, to seeing the confines of our linguistic prison(s). I believe that one of the reasons that drive you to seek the catharsis that you probably gain from writing your blog may be rooted in your heavy reliance on language and the use of deduction and induction. I wanted to suggest a path that I have used to reduce the intensity and periodicity of my own self-inflected wounds.

Reading my words above, I doubt that I have made my thinking any more clear…If nothing else, you know a bit better why I made my suggestion.

For your future ruminations, I thought I would pass along the following ideas (and their genesis below), as they might interest you: is the Federal Reserve an immoral institution, as judged by any modern culture’s understanding of morality? Also, when Peak Oil becomes a reality, how will this manifest itself in the US and the world?


A letter to Richard Russell from a subscriber:

you keep stating the fed is a fraud etc but you never tell people what the effects on their lives is, and the society as a whole.

bankers earn by lending at interest and from the influence such lending gives them for other business opportunities and profits=power= profits=power, ad infinitum.

a central bank can create deposits, ie money out of air--and it's owners will earn interest on all it lends--the more it lends the more it earns.

it uses some of that 'created' money to 'buy' the lawmakers of our country so that they will use their legislative power to borrow from that PRIVATELY OWNED central bank "for" the American public--for wars, social programs, space etc--so much that the principal can never be repaid and interest payments will continue forever--that is then indentured slavery--50% a year in taxes, our children to be sent to war without choice when its profitable --if slavery has another meaning I'd like to hear it.

what would you do or feel if you discovered that '70%' of the taxes you pay are for JUST the interest on debts that I HAD THE LEGAL RIGHT to put on YOUR credit card, without asking you-- and that the money was borrowed from my brother-in laws bank--and that this had been going on your whole life---and that your children and even grandchildren would need to work all of their lives to just pay my brother in law--and that in order to have a house and cars and schooling they would have to go privately in debt to my brother in laws associates, the private banks.

Henry Ford said that if the American public ever came to understand their banking, financial system there would be a revolution overnight--what do you think he meant by that?

I’ve run across a free audio file which I believe you should listen to. The file is here:

and it is the second hour file for February 18 called:

2nd Hour Guest Expert
Energy Roundtable, with Richard Heinberg, author of Powerdown, and James Howard Kunstler, author of The Long Emergency
Select an Audio Format
RealPlayer | WinAmp | Windows Media l mp3

You might consider researching this topic a bit, if the audio file sounds too implausible.

Dude said...


I think I see your meaning. People's use of language can lead them to become prisoners of rhetoric. I agree. However, I don't think that is a defect of language but of each individual man's use thereof.

For myself, as you note, writing is cathartic. I purge myself when I write. Indeed, I write far more than I publish. I choose the posts that make it to the screen in hope that my thoughts might help others. I'd like to think that some achieve their purpose.

As to your question on my experience with multiple languages, I fell in love with language with the help of Tolkein at age 10. To me, language is liberating- my way out of Plato's cave. I can also see how it is the tool which keeps one inside that same cave. As the Clapton song goes, it's in the way that you use it.

Thanks for commenting.

Dude said...


To answer your question specifically, we speak english and mandarin at home as my wife is Chinese. I also speak French with some proficiency, read Latin and Greek, and can get a beer and find the bathroom in more than a dozen languages. Asia is a wonderful place to learn about the interaction of language and culture, is it not.

As you are in Malayisa, selamat jalan.