Bernanke's 2 Big Lies in Just 60 Minutes
This past Sunday on the CBS program "60 Minutes", Americans received two massive doses of mendacity from our Fed Chairman, which should cause any confidence remaining in Mr. Bernanke's leadership to evaporate faster than the value of our dollar.
Lie number one is that the Fed isn't printing money. Here is his lie in quotes, "The amount of currency in circulation is not changing," he said. "The money supply is not changing in any significant way. What we're doing is lowering interest rates by buying Treasury securities." Well, I guess part of his statement is technically correct in that the Federal Reserve doesn't actually print paper money; instead that is the employment of the Treasury Department's Bureau of Engraving and Printing. However...who cares, that misses the entire point. Bernanke is buying bank assets with Fed credit.
According to gentle Ben, anything purchased by using credit isn't considered money and has no affect on asset prices. But if that's true, why is he concentrating his buying in the middle of the Treasury yield curve? His stated purpose is to boost bond prices and lower yields in order to stimulate borrowing and aggregate demand. So Bernanke contradicts himself when saying he isn't creating inflation, and then says inflation is too low and that the Fed must target their buying in particular assets to boost those asset prices. And by the way, the Fed is causing money supply to increase significantly. The compounded annual growth rate of M2 is over 7% in the last quarter. Apparently in the eyes of the Chairman a 7% annualized increase in the broad money supply isn't considered significant.
If the central bank creates credit or issues a Federal Reserve check to purchase a bank asset they are creating inflation by attenuating the confidence of the dollar and by sending those targeted asset prices higher. The Fed does not have to create paper dollars to dilute their value! They create high-powered, base-money, which lowers the purchasing power of U.S based currency in all forms.
Lie number two was that the Bernanke is "100 % confident" that, when necessary, the central bank can control inflation and reverse its accommodative monetary policy. He stated, "We've been very, very clear that we will not allow inflation to rise above 2 percent. We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time, he said." The reason why this is a lie isn't because the Fed doesn't have the tools to drain money from the system but because they have repeatedly demonstrated their unwillingness to take the appropriate actions when necessary. In claiming he is 100% confident in his ability to control inflation, Mr. Bernanke is ignoring the Fed's own history during his tenure.
In June of 2006, Bernanke culminated his inflation fighting efforts by raising the Fed Funds target rate to 5.25%, after CPI inflation reached 4.2%. But that interest rate was enough to burst the housing bubble and engendered an international credit crisis. The reason--which has gone unrecognized by the Fed--is that the U.S. has become completely addicted to artificially-produced low interest rates and inflation.
Shortly after the collapse of the real estate market and the ensuing truncated deflationary-depression, Bernanke took interest rates to near zero percent. But if the Fed was ever really serious about unwinding the excesses accrued during the era of massive money creation, asset bubbles and debt accumulation...; it was then. So now the U.S. economy has become more addicted to free money than at any other time in our history. Commodity prices are soaring once again and the real estate market; banking sector and overall economy clings precariously on the arm of government induced bailouts and low interest rates. Even worse, our government has massively increased its level of debt, which now stands at just below $14 trillion. Therefore, once the rate of inflation eclipses the Fed's 2% target rate, will then be a good time to increase the cost of home ownership? And most importantly, when will Mr. Bernanke find it politically tenable to dramatically increase debt service payments for the federal government? The answer of course is never because it is never a convenient time to have a severe recession or a depression.
The one thing he said in the interview that was true was that the economy is barely expanding at a sustainable pace. Of course, his prescription was the same as it always is; print more money in the misguided belief that inflation will lead to growth. In that same interview he indicated that it's possible the Fed may actually expand bond purchases beyond the $600 billion announced last month. Remember that the $600 billion comes after the $1.7 trillion that has already been printed, which failed to produce anything much beyond a weaker dollar. Therefore, the country can look forward to yet more inflation, continued anemic GDP growth, a poorer citizenry and a vastly lower standard of living.
