Bernanke’s problem
Ben Bernanke in a recent
interview on CBS said the following:
“Well, this fear of inflation,
I think is way overstated. We’ve looked at it very,
very carefully. We’ve analyzed it every which way.
One myth that’s out there is that what we’re doing
is printing money. We’re not printing money. The
amount of currency in circulation is not changing.
The money supply is not changing in any significant
way. What we’re doing is lowering interest rates by
buying treasury securities. And by lowering interest
rates, we hope to stimulate the economy to grow
faster. So, the trick is to find the appropriate
moment when to begin to unwind this policy. And
that’s what we’re going to do.”
This statement will probably go
down in history as a greater folly than Gordon Brown’s
justification for the disposal of half of Britain’s gold
reserves right at the bottom of the market. Bernanke is
printing massive quantities of money, which he here
denies, and expects us to believe that the inflationary
consequences are “way overstated”. If this is true, why
ever bother to unwind the policy?
I cannot find one statement, even
one phrase in Bernanke’s quote above which is true or
likely to be justified even with the benefit of
hindsight. It is pure delusion, but Bernanke is no
fool, he must realise there are inflation risks so there
have to be greater priorities, or undeclared reasons for
printing money in such unprecedented quantities.
The two that spring to mind are the
parlous state of government finances and the potential
for a second banking crisis. These problems are on a
collision course, with the US economy and its tax base
stalling on the edge of an economic abyss, and the banks
trapped between rising domestic insolvencies and the
consequences of the approaching Euroland banking
implosion. The Fed is nervously watching broad money,
which has been contracting for about two years in spite
of zero interest rates. Bernanke confuses money with
credit: he is expanding money supply to counteract the
contraction of credit and hopes we will not understand
the difference. So we can conclude that Bernanke is more
frightened by systemic problems today than by inflation
tomorrow.
If so, he has a point. The
American public is in no mood to support a second rescue
of the banks, so such a failure cannot be allowed to
happen. So to do its job The Fed needs for itself and
the financial system to have as low a public profile as
possible: like a swan, serene on the surface while
paddling furiously below. However, the Fed has come
under public scrutiny, having been recently forced to
disclose to whom it leant money to resolve the first
banking crisis. The yet-to-be-confirmed appointment of
Ron Paul[i]
to the chairmanship of the Financial Services
Sub-committee, which oversees the Fed, can be expected
to force more disclosures and make Bernanke’s life more
difficult, more high-profile.
Cynics might observe that Ron Paul
will be brought to heel, because with the financial
system on the verge of collapse he will not want to be
associated with bringing it down. There is nothing like
giving a critic responsibility to shut him up. But
whatever policy position Ron Paul takes as chairman of
the Financial Services Sub-committee, we are faced with
a money-printing Fed that has inflation low in its
priorities.
Inflation is already picking up
rapidly, with energy and agricultural commodities
rocketing in value. Food manufacturers in particular
will have bought their raw materials by forward
contracts to match production schedules, but these
transactions are rarely more than six months forward,
perhaps ensuring supplies to next spring at the latest.
Given the scale of these wholesale price rises there are
significant retail price rises in the pipeline for next
year. Increasing food and energy prices will be wrongly
dismissed by the Fed, since they are not regarded as
core components of the CPI figures, due to their
volatility.
Anything more core to human
existence than food and energy it is hard to imagine,
but central bankers and politicians spin non-facts into
facts with surprising felicity, so much so that they
themselves become muddled between reality and fantasy.
Ergo, “trust me, there are more important things
to worry about than inflation but I shall not tell you
what they are”. It is this approach to the job that will
ensure that Bernanke will preside over accelerating
inflation, obtaining a Brownite reputation in the
process. It is the nature of inflation that the more it
progresses the harder it is to bring to an end. If it
was too hard to raise interest rates on the last credit
cycle when there was less debt around, it is virtually
impossible today. Forget Bernanke’s threat to “unwind
the policy” at the appropriate moment: it will never
happen.
The truth is that inflation is
already out of control, and the Fed is on the run. It
cannot stop the US economy from sliding into the second
dip, because zero interest rates do not generate the
real savings required for economic regeneration. The
Fed cannot stop the banks going bust, because enough of
them are bust already to bring down the others; but it
can delay recognition of the fact by pressing the button
marked “Print”, and keeping it pressed for as long as it
takes. And that is what will surely happen.
8 December 2010
[i] Ron
Paul is a Republican Congressman who promotes
sound money policies.
