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Of all the memorable moments in last night’s 60 Minutes
interview with Fed Chief Ben Bernanke, two have remained with me over the
last 12 hours – his claim that what the central bank is doing is not printing money and his
100 percent confidence that, should whatever it is they’re doing lead
to sharply rising prices, they will be able to nip it in the bud, that bud
being right at about two percent.
For the full interview, refer to this YouTube clip posted here
last night (and you can avoid the minute-long commercial that the CBS website
makes you suffer to view it there) and skip directly to about the six minute
mark.
There, you’ll hear host Scott Pelley
ask about the recently announced plan to buy an additional $600 billion in
Treasuries in addition to $1.5 trillion in other assets they’ve
purchased over the last year or so, these measures aimed at giving both the economy
and the stock market a boost.
Q: Many people believe that could be highly
inflationary. That it’s dangerous to try.
A: Well, this fear of inflation, I think is way
overstated. We’ve looked at it very, very carefully. We’ve
analyzed it every which way.
One myth that’s out there is that what we’re doing is printing
money. We’re not printing money. 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. And by lowering interest rates, we hope to stimulate the economy
to grow faster. So, the trick is to find the appropriate moment when to begin
to unwind this policy. And that’s what we’re going to do.
Naturally, this money printing denial is mostly a semantics issue, but
the nature in which it was answered speaks volumes about how Bernanke views
the world and that view is clearly at odds with the vast majority of the
general public.
New York Fed Chief (and former managing director at Goldman Sachs)
William Dudley offered this same defense against the money printing charge in
a CNBC interview not long ago, fleshing out a few of the details
that Bernanke quickly skipped over as he moved the conversation directly to
the Fed’s ability to undo whatever it does without causing any harm.
Dudley said:
What we’re doing is, when we buy Treasury securities, we are increasing the amount of
reserves in the banking system. For those reserves to actually create money,
the banks actually have to lend those reserves out.
Now, while it might help central bank officials to sleep better at
night by viewing “money” as currency in circulation that is far,
far removed from the hundreds of billions of dollars of “bank
reserves” they are creating, just as the word “printing” is
used quite loosely, when most people hear the word “money” that
word too has a rather broad definition.
The fact is that the Fed is buying something quite tangible –
Treasury securities – with something that they create with the simple
press of a key and, while this may not have been such a big deal over the
many decades that it took to buy the first $800 billion in U.S. debt, the
thought of continuing to do this to raise their total holdings to over $3
trillion in a stretch of a little over two years is what really has people
freaked out.
No, this won’t cause high rates of inflation unless it gets out
into the economy, but it could, and that brings us to the second reason why
this tends to make people uneasy – the way the Fed measures inflation.
Central bank economists tend to ignore important consumer items like food and
energy, focusing instead on what they call “core” inflation where
falling home prices that account for upwards of 40 percent of this index will
insure that we won’t see much “inflation” there for some
time.
So, we could have gasoline prices back at $4 a gallon and food prices
rising rapidly, but we could still have “core” inflation rounding
to 2 percent.
That’s what it was during the summer of 2008!
And that brings me to the second disturbing aspect of the interview,
the cock-sureness that, should inflation become a problem, the Fed has both
the tools and the gumption to take action.
Q: Can you act quickly enough to prevent inflation
from getting out of control?
A: 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. Now, that
time is not now.
Q: You have what degree of confidence in your ability
to control this?
A: One
hundred percent.
This strikes me as a massive “pulling the wool over
America’s eyes” sort of promise where, particularly with the
economy still weak and employment still high, there is huge leeway for the
Fed to claim they are still meeting their inflation mandate (or are close
enough to it), while most Americans will have a completely different perception
about consumer prices.
I think Ben Bernanke just pulled a fast one on the American public
Tim IaconoIacono Research.com
Tim
Iacono is the founder of Iacono Research which provides market commentary and
investment advisory services specializing in macroeconomic analysis and
commodity based investing. He also writes the popular blog The Mess That Greenspan Made.
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