Bernanke: I'm Going Nuclear By Robert Wenzel
| Friday, October 15, 2010
Federal Reserve Chairman Ben Bernanke, at his speech this
morning before the Boston Federal Reserve, made it extremely
clear that the Fed is about to embark on a major money printing
scheme. His justification is the current high unemployment:
Although output growth should be somewhat stronger in
2011 than it has been recently, growth next year seems
unlikely to be much above its longer-term trend. If so,
then net job creation may not exceed by much the increase
in the size of the labor force, implying that the unemployment
rate will decline only slowly. That prospect is of central
concern to economic policymakers, because high rates of
unemployment--especially longer-term unemployment--impose
a very heavy burden on the unemployed and their families.
More broadly, prolonged high unemployment would pose a
risk to consumer spending and hence to the sustainability
of the recovery...
...we see little evidence that the reallocation of workers
across industries and regions is particularly pronounced
relative to other periods of recession, suggesting that
the pace of structural change is not greater than normal.
Moreover, previous post-World-War-II recessions do not
seem to have resulted in higher structural unemployment,
which many economists attribute to the relative flexibility
of the U.S. labor market. Overall, my assessment is that
the bulk of the increase in unemployment since the recession
began is attributable to the sharp contraction in economic
activity that occurred in the wake of the financial crisis
and the continuing shortfall of aggregate demand since
then, rather than to structural factors
Bernanke showed no concern for the inflationary consequences
of Fed money printing. Indeed, he chose to completely ignore
the current soaring commodity prices and falling dollar.
He took the stance that a little inflation is a good thing:
Let me turn now to the outlook for inflation. Generally
speaking, measures of underlying inflation have been trending
downward. For example, so-called core PCE price inflation
(which is based on the broad-based price index for personal
consumption expenditures and excludes the volatile food
and energy components of the overall index) has declined
from approximately 2.5 percent at an annual rate in the
early stages of the recession to an annual rate of about
1.1 percent over the first eight months of this year.
The overall PCE price inflation rate, which includes food
and energy prices, has been highly volatile in the past
few years, in large part because of sharp fluctuations
in oil prices. However, so far this year the overall inflation
rate has been about the same as the core inflation rate...the
FOMC has found it useful to frame our dual mandate in
terms of the longer-run sustainable rate of unemployment
and the mandate-consistent inflation rate.... the mandate-consistent
inflation rate--the inflation rate that best promotes
our dual objectives in the long run--is not necessarily
zero; indeed, Committee participants have generally judged
that a modestly positive inflation rate over the longer
run is most consistent with the dual mandate.
This is the most stunning speech that I
am aware of that a central banker has ever given.
He is blaming the current high employment rate almost entirely
on the Keynesian notion of a lack of aggregate demand. Which,
by the way, ignores the conclusion of the recent Nobel winners,
who in a convoluted manner, reached the obvious conclusion
that the more you pay people not to work, the longer they
don't work. Further, he ignores completely the Robert Higgs
observation that regime uncertainty plays a role in high
unemployment, i.e., firms don't hire when they don't understand
the regulatory and tax structure ahead.
On the inflation front, he is ignoring the best indication
of inflation, real prices. He is ignoring record high prices
for gold, corn. cotton. etc.. etc. Instead, he is looking
at questionable indexes assembled by employees of the regime.
It is, of course, important to monitor how much actual
printing is going to be done, but all indications are that
Bernanke is going all in. He is going nuclear.
The longest-serving chairman of the Federal Reserve Board,
William McChesney Martin, famously said that the function
of the Fed is to “take away the punch bowl”
when the party gets too exuberant. Bernanke is doing the
opposite, he is calling ahead to the party and announcing
his car is loaded up with gin, vodka, whiskey and tequila.
This in itself is bizarre, since by so loudly broadcasting
QE2 in advance, he is building in huge anticipation of QE2.
To keep the momentum of this mad program, he will have to
print more than the expectations that he has built to high
heaven, otherwise QE2 will crash out of the gate. Given
Bernanke's speech today, it is clear that Bernanke is fully
ready to exceed expectations.
What does all this mean, if Bernanke does indeed follow
through on his money printing scheme? A very quick turn
upward, in a manipulated way, for the economy. Inflation
will explode at a rate far in excess of what most expect.
Remember, we are for the most part in a period where the
desire to hold cash balances is still very high. This will
reverse itself at the same time as Bernanke's money printing.
Bernanke wants an increase in "aggregate demand",
he is going to get it in the form of huge inflation.
Borrowers should lock in long term rates now. Although,
Bernanke may start buying long term bonds, and temporarily
push down rates, eventually inflation concerns will overtake
Bernanke's bond buying.
We are truly headed into uncharted territory. If Bernanke
follows through on the statements in his speech today, I
fully expect inflation in the United States greater than
what was experienced in the 1970's. It will be devastating
to any one on a fixed income and it will destroy savers.
It will benefit debtors at all levels, including, not coincidentally,
federal, state and local governments that are in hawk across
the board.
I repeat: It appears we are heading into a period of major
inflation. All assets (aside from bonds) will soar in price,
especially gold and silver. The billionaire hedge fund manager
David Tepper had it right when he said a few weeks ago,
"Buy assets, any assets."