In light of the potential tapering of quantitative easing investors are trying to read the mind of US Federal Reserve Chairman Ben Bernanke. A good starting point is to explore his papers and speeches for clues. Regardless of whether you agree with his views, they have provided a reliable road map of the actions taken by the Fed under his leadership.
From a Jungian perspective his infamous speech on deflation (November 2002) stands out. In it Bernanke refers to himself as a “modern alchemist”:
‘. . . 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. . . . 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 (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, 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, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.’
There are two major observations to make here:
Firstly, in terms of the actors involved Bernanke is already making no distinction between the US government and his, supposedly independent, central bank. Contrast this to Bundesbank president Jens Weidmann who, by invoking another alchemical story, namely Goethe’s Faust, clearly reminded his audience of the importance of separating the two in light of our historic experiences with inflation.
Secondly, the comments ‘value of . . . paper-money’ and ‘credible threat’ highlight the psychological rather than the physical dimension involved in this process of monetary alchemy. Other economists have reflected on the psychic value of money, such as Schumpeter who considered it as ‘all that a people wants, does, endures, is’. More broadly, Carl Jung provided a detailed psychological interpretation of alchemy in Psychology and Alchemy[2]. In this groundbreaking book, Jung explained how the alchemists projected their mental states onto the substances they experimented with, in particular quicksilver (mercury). Crucially, he emphasised the importance of the action-reaction dynamics of opposites as the precondition for a healthy mind.
So, is monetary alchemy helping the market’s mind in that respect? To answer this question I first need to clarify what the opposites are. The opposites in the human psyche consist of unconscious and cognitive forces which cooperate and compete for awareness (or ‘acknowledgement’) in consciousness. In Jung’s own words (his emphasis):
‘…as alchemy shows, the unconscious . . . is not [just] complementary but compensatory. This goes to show that the unconscious does not simply act contrary to the conscious mind but modifies it more in the manner of an opponent or partner.’
Whereas cognition effectively deploys logic, the unconscious excels via intuition. Their co-existence throws off creative insights which are crucial for our survival. Specifically, these insights are experienced as internal surprises and are our mind’s way of adapting to external surprises. This three-chain reflexive loop, linking unconscious origin and cognitive formalisation to phenomenal culmination of insights, applies to both the individual and the collective level. In short, a healthy mind discovers, thereby gaining knowledge, by having both logic and intuition at work to get a sense. Similar dynamics operate in markets, which are most beneficial when competing forces are not repressed.
Many mental disorders are caused by the repression of unconscious impulses, particularly emotions, often in the name of ‘rationality’. Jung warned that ‘despite its undeniable successes the [overarching] rational attitude of present day consciousness is . . . unadapted and hostile to life.’ The overemphasis on rationality is clearly present in our field and we need to determine whether there is an attempt at reconciliation, in the sense that the unconscious is allowed to fairly compete for attention in the market’s mind. Signs that reflect an open exchange between these two mental domains include creative acts. In economic terms this varies from building up a business (creative construction) to unwinding one (creative destruction, as popularised by Schumpeter.) Unfortunately, we still seem to be in a phase where creative acts are few and far between. Specifically, bail-outs and subsidies soften the blows of creative destruction. Ultimately sensations complete the experiences of wealth accumulation, respectively annihilation, thereby enriching our understanding of economic cycles. Repression prevents this and in ‘Inside the Market’s Mind: A Zombie Market’ I wrote about what it means when sensations are numbed.
More importantly, when Jung states that ‘every act of dawning consciousness is a creative act, and it is from this psychological experience that all our . . . symbols are derived’ we can interpret his ‘creative act’ in terms of price discovery, with prices as the numerical ‘symbols’ of markets. Discoveries involve ‘the dangerous undertaking’ of ‘the conscious mind advancing into the unknown regions of the psyche . . . The purpose of the descent as universally exemplified by the myth of the hero is to show that only in the region of danger (watery abyss, cavern, forest, island, castle, etc.) can one find the ‘treasure hard to attain’’. Instead, over the past few decades the policies of central banks, particularly the Fed, have lead to the avoidance of danger, the negation of fear, and the relief of pain.[3]
I believe that central banks and their political ‘subjects’ are in their final stage of experimenting to create and sustain a make-believe world. So, what can we expect in his last act from the leading monetary alchemist? For example, many are worried about the risk to the Fed’s balance sheet of increasing interest rates and wonder how Bernanke will deal with this threat. Again, let’s revisit one of his speeches. In May 2003 he addressed an audience in Japan and shared his thoughts on Japan’s monetary policy.[4] He stated that he was ‘intrigued by a simple proposal’ by the Japanese Business Federation on how to insulate the Bank of Japan’s balance sheet against the risk of increasing yields (which would harm the value of its holdings in Japanese government bonds). The proposal involved a fixed-floating interest rate swap agreement between the Bank of Japan and the Ministry of Finance. So we should not have been surprised that the US Treasury recently announced it would (re)start issuing floating rate notes. Consequently, as part of its bond buying program, the Fed will, over time, replace its holdings of fixed into floating rate bonds, thus protecting it from interest rate risk.
Like Paracelsus, Wei Boyang, John Dee and the other alchemists of old, Bernanke is in the process of completing his Magnus Opus. As a modern alchemist he and his ‘subject’ merge into one, with the US dollar acting like quicksilver, transcending the physical real economy. However, just as heating quicksilver resulted in a poisonous residue, heating up the US dollar may also lead to a dangerous side-effect. Then again, Bernanke is on the record stating that he is ‘100%’ certain that he can control inflation.[5] He has been joined by Mario Draghi, the chief ECB alchemist, who assured us all that ECB-policies ‘will be enough’ to save the euro. The jury is still out, particularly with inflation currently remaining subdued, but such overconfidence is hardly reassuring when Jung identified good alchemists as those who show ‘visible mental struggles’ and those who do not express such modesty as ‘charlatans’.
Resources:
[1] Weidmann, Jens. 2012; ‘Money creation and responsibility’; Speech at the 18th colloquium of the Institute for Bank-Historical Research (IBF) in Frankfurt. https://www.bundesbank.de/Redaktion/EN/Reden/2012/2012_09_20_weidmann_money_creaktion_and_responsibility.html
[2] Jung, Carl; 1968 (1944); Psychology and Alchemy; The Collected Works of C. G. Jung, Volume 12; Princeton University Press.
[3] In medical terms the market is no longer allowed to make up its mind but is kept sedated. Instead of helping the patient, these policies lead to market behaviours which suggest psychopathology. For example, “risk-on/risk-off” can be viewed as a form of bipolar disorder whereby both equities and bonds act compulsively in order to provide the hallucinatory ‘wealth-effect’.
[4] Bernanke, Ben. 2003. ‘Some Thoughts on Monetary Policy’. Remarks Before the Japan Society of Monetary Economics, Tokyo, Japan. https://www.federalreserve.gov/boarddocs/speeches/2003/20030531/
[5] On the topic of inflation, including Jung’s thoughts, I refer the reader to my earlier article, “Inside the Market’s Mind: The illusion of money”.
