I have been forecasting with near certainty that QE2
would not be the end of the Fed's money-printing program. My suspicions were
confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke's
semi-annual testimony to Congress yesterday. The former laid out the
conditions upon which a new round of inflation would be launched, and the
latter re-emphasized - in case anyone still doubted - that Mr. Bernanke has
no regard for the principles of a sound currency.
Tuesday's release of the Fed minutes contained the
first indication that a third round of quantitative easing (QE3) is being
considered. The notes described unanimous agreement that QE2 should be
completed, along with the following comment: "depending on how economic
conditions evolve, the Committee might have to consider providing additional
monetary policy stimulus, especially if economic growth remained too slow to
meaningfully reduce the unemployment rate in the medium run." Since the
unemployment situation is deteriorating, and by all accounts will continue to
do so, the Fed is essentially pledging to keep the spigot turned on. The
committee also decided to look only at current "overall inflation"
in making their judgments, as opposed to "inflation trends." Since
new dollars take awhile to circulate around the
economy and raise prices, this means the Fed is sure to be too late in
tightening once inflation starts to run away, causing more dislocations in
the American economy.
If anyone had lingering faith that Mr. Bernanke
actually has a plan to end the US government's addiction to cheap money, the
Chairman's semi-annual testimony to Congress should have washed it away. In
addition to claiming that his money-printing has helped the US economy,
Bernanke told Congress that gold is not money, people buying gold are not
concerned about inflation, and the external value of the dollar has no
influence on its domestic purchasing power. He even took a moment to stump
for President Obama's plan to raise the debt ceiling.
By claiming that gold is not money, the Chairman
demonstrates his ignorance of much of monetary history. He told Congressman
Ron Paul that he had no idea why central banks hold gold, before speculating
that it might have something to do with tradition. Yes, traditionally gold is
money, which is precisely why central banks hold it. And gold is money
because central bankers like Mr. Bernanke cannot be trusted with a paper
substitute.
Bernanke further disputes the facts by claiming that
the only reason people are buying gold is to hedge against uncertainty, or
"tail risks" as he calls them. My advice to the Chairman is to ask
the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying
has nothing to do with "uncertainty." In fact, it's just the
opposite. I am buying gold because of what is certain, not what is uncertain.
I am certain that Mr. Bernanke's incompetence will destroy the value of the
dollar and unleash runaway inflation.
If it were true that people bought gold to protect
themselves from market uncertainty, as the Chairman claims, then the metal
should have spiked in the midst of the '08 credit crunch. Instead, it fell
along with most other assets. People instinctively fled into US dollars and
Treasuries because of their long record of stability. What Bernanke doesn't
understand is that his irresponsible monetary policy is undermining that
faith in US assets, built up over generations. That is what's
driving gold: easy money, negative interest rates, and quantitative
easing.
Finally, by claiming that the dollar's exchange rate
has no effect on domestic prices, Mr. Bernanke demonstrates that he probably
lacks the competence to be a bank teller, let alone Chairman of the Federal
Reserve. A weaker dollar means Americans have to pay more for imported goods.
But it also means domestic producers have to pay more for raw materials and
imported components, which raises domestic production costs as well. It also
means that more domestically produced goods are exported, reducing the supply
and raising the price of what is left for Americans to consume. This is Econ
101.
Given the Chairman's confusion on the basics of
economics, perhaps it's no surprise that he's put quantitative easing right
back on the table, where, despite prior rhetoric, it has been all along. The
Fed has always known that QE3 is coming; it's just looking for an excuse to
launch it.
The problem is that fighting a recession with QE is
like fighting a fire with gasoline. As the flames of recession reignite, more
QE, while dousing it momentarily, will only produce an even larger economic
inferno.
At one point, Bernanke said, "The right analogy
for not raising the debt ceiling is going out and having a spending spree on
your credit card and then refusing to pay the bill." He's got the
analogy right, but his conclusions are completely wrong. Yes, Congress has
gone on a spending spree and it's time to pay up. But raising the debt
ceiling is like taking out a Mastercard to pay the
Visa... it just makes the problem worse. If you or I go out one night, get
drunk, and run up a huge credit card bill, we know that the way to fix it is
to buckle down and pay it back. We might postpone vacation plans or put off
buying a new car, we might cancel our cable TV subscription or gym
membership. The point is that we would have to reduce current consumption to
make up for the overspending in the past.
Obama claims that raising the debt ceiling is about
getting a hold of the federal debt. Have you ever heard of anyone getting out
of debt by taking on more debt? Has anyone ever reduced their debt without
reducing current consumption? How can the Fed Chairman endorse such a
preposterous idea?
Bernanke actually went a step further and warned against
reducing current federal spending too sharply, claiming that such a move
might impede the "recovery." He apparently believes that it is the
role of the Congress to go on spending sprees, and his role to pay the
mounting bills with freshly printed dollars. The fact that this formula has
produced larger and larger economic crises does not seem to bother him. I
guess ignorance is bliss.
Subscribe to Euro Pacific's Weekly Digest: Receive all
commentaries by Peter Schiff, John Browne, and
Michael Pento delivered to your inbox every
Monday.
Click here for free access to
Euro Pacific's latest special report: What's Ahead
for Canadian Energy Trusts?
For a great primer
on economics, be sure to pick up a copy of Peter Schiff's hit economic
parable, How an Economy Grows and Why It
Crashes.
Peter Schiff
|