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This past
Friday, as Fed Chairman Ben Bernanke delivered his annual address from
Jackson Hole - the State of the Dollar, if you will - I couldn't help but
hear it as an incumbent's campaign speech. While Wall Street was hoping for
some concrete announcement, what we got was a mushy appraisal of the Fed's
handling of the financial crisis so far and a suggestion that more 'help' is
on the way.
It is
important to remember that it's not just President Obama's job on the line in
this election; in two years time, the next
President will have the opportunity to either reappoint Bernanke or choose
someone else. So we must understand what platform Bernanke is running on, as
his office has an even greater effect on global markets than the President's.
Bernanke has been the perfect tag-team partner for George W. Bush and
then Barack Obama as they have pursued an economic policy of deficits,
bailouts, and stimulus. Without the Fed providing artificial support to
housing and US debt, Washington would have already been shut out of foreign
credit markets. In other words, they would have faced a debt ceiling that no
amount of bipartisan support could raise. Fortunately for the politicians,
Helicopter Ben was there to monetize the debts.
As far back
as his time as an academic, Bernanke made clear that when the going got
tough, he wouldn't hesitate to fire up the printing presses. He specialized
in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little
money printing. He went on to propose several ways the central bank could
create inflation even when interest rates had been dropped to zero
through large-scale asset purchases (LSAPs). Sure enough, the credit crunch
of 2008 gave the Fed Chairman an opportunity to test his theory.
All told, the
Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in
mortgage-backed securities, $900 billion in Treasury debt, and $200 billion
of other debt from federal agencies. That means the Fed printed the
equivalent of 15% of US GDP in a couple of years. That's a lot of new dollars
for the real economy to absorb, and a tremendous subsidy to the phony
economy.
This has
bought time for President Obama to enact an $800 billion stimulus program, an
auto industry bailout, socialized medicine, and other economically damaging
measures. In short, because of the Fed's interventions, Obama got the time
and money needed to push the US further down the road to a centrally planned
economy. It is also now much more unlikely that Washington will be able to
manage a controlled descent to lower standards of living. Instead, we're
going to head right off a fiscal cliff.
The Fed
Chairman even admitted to this reality in his statement. Here are two choice
quotes:
"As I
noted, the Federal Reserve is limited by law mainly to the purchase of
Treasury and agency securities. ... Conceivably, if the Federal Reserve
became too dominant a buyer in certain segments of these markets, trading
among private agents could dry up, degrading liquidity and price
discovery." [emphasis added]
"...expansions
of the balance sheet could reduce public confidence in the Fed's ability to
exit smoothly from its accommodative policies at the appropriate time. ... such a reduction in confidence might increase the risk of
a costly unanchoring of inflation expectations,
leading in turn to financial and economic instability." [emphasis
added]
So we all
agree that the prospect of inflationary depression was made worse by the
Fed's actions - but at least Ben Bernanke has pleased his boss. As a
guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is
re-elected.
Meanwhile,
Mitt Romney has pledged to fire Bernanke if elected. While I am not confident
that Mr. Romney has the economic understanding to appoint a competent
replacement - let alone pursue a policy of restoring the gold standard or
legalizing competing currencies - he may well be seen as a threat not only to
the Fed Chairman's self-interest, but also to his inflationary agenda.
Given this background,
let's look at Bernanke's quotes that have been the focus of media speculation
for the past week: the US economy is "far from satisfactory,"
unemployment is a "grave concern," and the Fed "will provide
additional policy accommodation as needed." These comments seem designed
to reassure markets (and Washington) that there will be no major shift toward
austerity in the near future. The party can go on. But they also hint that
Bernanke might be planning to double down again. I have long written that
another round of quantitative easing is all but inevitable. It now seems to
be imminent.
In reality,
when the money drops may have more to do with politics than economics. The
Fed may not want to appear to be directly interfering in the election by
stimulating the economy this fall, but there are strong incentives for
Bernanke to try to perk up the phony recovery before November and deliver the
election to Obama. However, if Romney wins, Bernanke can at least fall back
on his appeal as a team player as he lobbies for another term.
For gold and
silver buyers, either scenario is likely to continue to stoke our market in
the short- and medium-term. As the past week's rally indicates, there is no
longer a fear that the Fed has had enough of money-printing - in fact, it
looks prepared for much more.
Peter Schiff is CEO of Euro Pacific
Precious Metals, a gold and silver dealer selling
reputable, well-known bullion coins and bars at competitive prices.
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