Bernanke’s
monetary shenanigans are building up a host of problems, domestic and
international. In the next 8 months or so he plans to pump nearly $900
million dollars into the US economy with the intention of lowering interest
rates to the point where business borrowing and consumer spending will be
sufficiently stimulated to trigger a recovery. (If only it were that simple.)
This
policy amounts to criminal negligence. If Bernanke were a surgeon he would be
doing jail time. To get a grip on the magnitude of Bernanke’s folly let’s go
back to 2007 when the Fed’s balance sheet stood at $900 million. By 2009 it
had jumped to $2.3 trillion, an increase of 136.7 per cent. The excuse was
that a massive monetary injection was needed to prevent an economic collapse.
I for one never believed that the US was in danger of a deflation-driven
implosion. I also warned that the consequences of any rescue package would be
to slow if not prevent the necessary economic adjustments from taking place.
So what
did America get for Bernanke’s swift monetary rescue? Unemployment stuck at
9.6 per cent with the broader measure standing at 17 per cent. His response
is not to reason why but to once again step on the monetary accelerator.
Brilliant. Absolutely brilliant.
Let see
what “Helicopter” Ben’s vulgar Keynesianism might mean for Americans.
Short-term debt used to be the Fed’s main monetary instrument. Thanks to
Bernanke most of the Fed’s Treasurys are now long long-term with about half
exceeding five years. Bernanke has to know that in the current situation
holding long term securities involves great risks. At the moment the rate
stands at just over 4 per cent. You don’t have to be an expert in finance to
realise that a rise to 6 per cent would slash the value of these holdings,
wiping out several times over the capital on the Fed’s balance sheet.
But why
should this happen? Because Bernanke — the architect of this policy — has
implemented a monetary strategy that must eventually drive up interest rates
if not checked. And right now, there is nothing checking him. Flooding the
economy with dollars is bound to arouse inflationary expectations. This will
lead to rises in the yield of long-term bonds which in turn will drive down
bond prices (there is a strict inverse relationship between the yield of a
bond and its price) turning the Fed’s balance sheet into an ocean of red ink.
It has
been suggested that before inflationary expectations can take root the Fed
could soak up the “excess liquidity” by selling bonds. But this would have
the effect of raising rates by pushing down bond prices.
But the
above is only part of the Fed’s sordid tale of gross monetary incompetence.
Bernanke has two objectives: one is to raise prices at home and the other is
to devalue the dollar. Running down the dollar is bound to have severe
international ramifications and this why Bernanke’s policy provoked global
outrage with the Germans calling him “clueless” and China warning that it
might have use capital controls to protect itself. As Guido Mantega, Brazil’s
finance minister, said: “Everybody wants the US economy to recover, but it
does no good at all to just throw dollars from a helicopter.” I do not know
of a single country that has supported Bernanke’s rabid inflationism.
The
fear is not that driving down the dollar — “exchange dumping” — will inflame
world-wide inflation (this is not the ’60s when a flood of Eurodollars ramped
up European money stocks) but that it will greatly disrupt international
trade by sparking a “currency war”. If Bernanke succeeds his victory will
only be temporary. Other countries are not going do nothing while he uses
inflation to price their producers out of US the market as well as other
foreign markets, not to mention their own domestic markets. They have a
number of weapons at their disposal, none of them good for international
trade.
Everyone
knows that inflation means a depreciating currency, with dollars buying less
and less as prices continue to rise. But if rising prices put people back to
work so would cutting real wage rates. After all, one of the effects of
inflation is to widen profit margins and cut the real cost of labour,
therefore make it cheaper to hire. But like just about everything else in
economics, it’s not quite this simple. Unfortunately for Americans — and the
rest of the world — Bernanke doesn’t know that: he is still wrapped up in the
Keynesian multiplier, the Phillips curve and LM-IS analysis. No wonder he
cannot get it right.
Bernanke
does not stand alone. Olivier Jean Blanchard, the International Monetary
Fund’s chief economist, recently stated that it wouldn’t be the “end of the
world” if the Fed stimulated the rate of inflation considering the threat of
deflation. Bernanke’s printing greenbacks like crazy and this twerp warns
about deflation. As expected, Blanchard is another Keynesian.
No one
with a decent knowledge of the history of inflation denies that loose
monetary policy can create a boom. On the contrary, this is precisely why we
have booms and busts, as explained by the Austrian school. If Bernanke succeeded
in using inflation to slash unemployment and expand production, the victory
would be short lived. Accelerating inflation would see interest rates
eventually climb as the price premium increased, and the dollar would start
falling even faster than Bernanke could tolerate. Sooner or later the Fed
would once again have to slap on the monetary brakes.
Inflation
does not create real wealth and jobs — it destroys them. This is a fact that
Keynesians seem genetically incapable of grasping.
