Friday, February 11, 2011

Ben Bernanke’s Logic for Keeping the Money Spigot on, or “This isn’t your Grandfather’s Great Depression!”

2/11/2011 Portland, Oregon – Pop in your mints…
If you have been reading about Federal Reserve Chairman Ben Bernanke's recent testimony before the House Budget Committee, you are probably beginning to think what we are thinking.  The man is insane.  Even Congress appears to be catching on to the fact that inflation is about to skyrocket.  How could the man in charge of the world's reserve currency miss something so obvious?  They wonder aloud.  They ridicule him, scold him for keeping interest rates low, and call for him to cease and desist his most recent counterfeiting scheme, QE2.
Ben is being bullied.  Congress needs to show that they are somehow "in touch" with suffering of the American people so they pick on him.  The irony is that the FED is simply the enabler to the American Congress's insane policies and related spending habits.  It is like a cocaine addict blaming his drug dealer for his addiction.
At one point yesterday Ben pushed back.  While Paul Ryan (R-Wisc) was deriding him, with the benefit of hindsight, for implementing QE2, a roughly $600 Billion dollar money printing scheme, Mr. Bernanke noted that Congress was on pace to run a record deficit of $1.5 Trillion this fiscal year.  What remained unsaid was that the FED is essentially funding the US Deficit by printing money.  This is the type of activity that has caused some very unhappy endings throughout history.  Yet, like Thelma and Louise, the FED and Congress are holding hands as they run the currency off a cliff!
But Congress and the FED are two very different characters with two very different goals.  Congress is simply trying to get elected.  The FED, on the other hand, is attempting to fulfill its impossible mandate to provide price stability and full employment to the American public.  Since it cannot do both, it is currently sacrificing the former in favor of the latter.
Doesn't the FED see that the commodities index is at an all time high?  That the world is only beginning to deal with peak oil and its consequences for nearly every activity on the planet?  Of course they do!  They hear about it every day.  But the FED sees these things as temporary and expects the private sector to make the adjustments necessary to remedy the situation. 
No, in the eyes of the FED, the danger is not in doing too much monetary stimulus, but in doing too little.  Its Chairman, Ben Bernanke has built an academic and professional reputation as a student of the Great Depression.  During this crisis he has taken pains to ensure that the US does not suffer a Greater Depression on his watch at the FED.  In studying the Great Depression, Ben found an error in both fiscal and monetary policy during that time.  He believes that he has learned an important lesson.  That lesson is: Don't take the punchbowl away as the party is getting started!  This lesson guides nearly every action that he has taken during this Financial Crisis.  To understand this is to understand why interest rates will stay low for a very long time.
Specifically, Ben noticed that, in 1937, the FED and Congress eased off on their attempts to stimulate the economy for fear of inflation.  Does this sound familiar, as in what is being debated right now in the halls of Congress?  In 1937 the US Economy stopped a long recovery from the depression and entered into a recession that did not end until the US entered World War II.
Ben Bernanke & Co. Party like its 1937
You see, Ben Bernanke thinks that it is 1937 all over again.  This is his guiding light for policy decisions even in the face of stiff criticism.  He firmly believes that he must not back off on monetary and fiscal stimulus until the GDP is back where it was when the problems started, circa 2007.  According to his road map, there is still a ways to go before taking the punchbowl away.
Who knows, Ben may be right.  Despite evidence that a recovery is taking hold, we have seen a survey where 35% of small and 25% medium sized businesses believe that the economy will deteriorate over the next six months.  Much of their pessimism is due to the inability to obtain credit for their operations.
Unfortunately for Ben and the rest of us, this is NOT 1937!  In 1937, much of the world, including the US, was still on a gold standard for their currency which acted as a governor on an engine would, to cap money supply growth lest it get out of hand.  In 1937, the US was still the manufacturing center of the world.  In 1937, the Global OTC Derivatives Market had a total value of $-0-.
In 2011, there is no sovereign nation on a gold currency standard, the manufacturing center of the world has moved across the Pacific Ocean, and the Global OTC Derivatives Market represents obligations of $1.4 QUADRILLION.
Ben, I don't think we're in Kansas anymore!
Stay Fresh!
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Key Indicators for Friday, February 11th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.