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It is a sad
situation when everything the man in charge of our central bank professes to
understand about inflation is wrong. Mr. Bernanke does not know what causes
inflation, how to accurately measure inflation or the real damage inflation
does to an economy. He, like most central bankers around the globe, persists
in conflating inflation with growth. The sad truth is that our Federal
Reserve believes growth can be engendered from creating more inflation.
However, in
reality economic growth comes from productivity enhancements and a growing
labor force. Those two factors are the only way an economy can expand its
output. Historically speaking, the total of labor force and productivity
growth has averaged about a 3% increase per annum in the U.S. Therefore, any
increase in money supply growth that is greater than 3% leads to rising aggregate
prices.
That's why
money supply growth should never be greater than the sum of labor force
growth + productivity growth. Any increase greater than that only serves to
limit labor force growth and productivity. Since Bernanke doesn't understand
that simply economic maxim, he persists in his quest to destroy the value of
the dollar. Perhaps that's why the Fed Head has decided to keep interest
rates at zero percent for at least six years, despite the fact that the
growth in the money supply is already north of 10%.
Maybe
Bernanke believes that a replay of the entire productivity gains from the
industrial and technology revolutions will both simultaneously occur in 2012.
Or perhaps he feels that the millions of unemployed individuals laid off after the collapse of the credit bubble will all
be re-hired this year. What he also fails to understand is that consumers are
in a deleveraging mode because their debt as a percentage of income is,
historically speaking, extremely high. So regardless of how much money
Bernanke counterfeits into existence, it won't lead to more job growth or
capital creation...just more inflation.
There is
little doubt that global economic growth is faltering. Most of the developed
world is mired in an incipient recession. Japanese GDP fell at an annual rate
of 2.3% in Q4. Eurozone GDP dropped 0.3% last quarter and Greece is in a
depression--GDP falling 7% as of their latest measurement. U.S. GDP is still
a mildly positive 2.8%, according to the Bureau of Economic Analysis. But that's
because they measured inflation in the fourth quarter at a .4% annualized
rate. If inflation was reported more accurately by our government, the U.S.
would also produce an extremely weak GDP figure.
But this is
the age of a very dangerous global phenomenon; where central bankers view the
market forces of deflation as public enemy number one and inflation as the
panacea for anemic growth.
To that end,
the Bank of Japan just added 10 trillion Yen last week to their 20 trillion
bond buying program and adopted a minimum inflation target, much like that of
the U.S. Federal Reserve. The European Central Bank is deploying their Long
Term Refinancing Operation (LTRO) parts one and two. This counterfeiting
scheme offers banks unlimited funds for at least three years to go out and
monetized Eurozone debt. The first iteration of the LTRO dumped nearly 500
billion Euros into the economy. The second attack on the Euro currency will
be launched on February 29th. And, of course, our Fed has printed $2 trillion
dollars of new credit for banks to purchase U.S. Treasuries.
There is an all out assault on the part of global central banks to
destroy their currencies in an effort to allow their respective governments
to continue the practice of running humongous deficits. In fact, the
developed world's central bankers are faced with the choice of either
massively monetizing Sovereign debt or to sit back and watch a deflationary
depression crush global growth. Since they have so blatantly chosen to ignite
inflation, it would be wise to own the correct hedges against your burning
paper currencies.
Michael Pento
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