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This past Sunday on the CBS program "60 Minutes",
Americans received a massive dose of mendacity from our Fed Chairman. Mr.
Bernanke's shaky delivery, and even shakier logic may cause faith in
America's economic leadership to evaporate faster than the value of our
dollar. In particular, Bernanke delivered two massive distortions:
Lie #1 - The Fed isn't printing money. Bernanke stated:
"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." Given that it is the
Treasury Department's Bureau of Engraving and Printing, not the Fed, that
actually prints paper money, his statement is technically correct while
substantively false. However, Bernanke is buying bank assets with Fed credit.
With such an arrangement, printing becomes unnecessary.
According to gentle Ben, credit created to buy something should
not be 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 pushing up bond prices is an
act of inflation. Bernanke similarly contradicts himself by saying that he
isn't creating inflation, while at the same time claiming that his easing
campaign is designed to boost asset prices to combat the phantom of
deflation.
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.
Lie #2- Bernanke is "100 % confident" that, when
necessary, the Fed 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 failed to mention that the Fed doesn't have
the will to drain money from the system, without which all
tools are useless. The Fed has consistently demonstrated its unwillingness to
take the appropriate actions when necessary. In claiming he is 100% confident
in his ability to control inflation, Mr. Bernanke ignores the record that
during his tenure he has misdiagnosed the economy.
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 help burst the housing
bubble and to spark an international credit crisis. Bernanke was completely
unaware that the Fed actions had created an economy that had 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 excessive leverage, the time had clearly arrived. Instead, 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 the overall economy cling 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. Once the rate of inflation eclipses the Fed's 2%
target rate, which appears likely, how then will the Fed raise rates to
contain it? Could the economy then withstand an increase in the cost of home
ownership? Most importantly, when will Mr. Bernanke find it politically
tenable to dramatically increase debt service payments for the Federal
government? In truth, there is never a convenient time to have a severe
recession or a depression. Unfortunately, reality can be extremely
inconvenient.
Bernanke was accurate in saying that the economy is not
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. As such, he indicated that it's possible that 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.
On the bright side, the next segment on 60 Minutes outlined some
of the new social networking capabilities being created by Mark Zuckerberg
and Facebook. In other words, although our economic misery will likely
increase, it should become much easier to share the bad news with friends.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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