Benny and the Monetary Jets

“My inflation record is the best of any Federal Reserve chairman in the postwar period,” said the great bearded one, a bit annoyed, responding to a question by Sen. Bob Corker. “We are not engaged in a currency war.”

Ben Bernanke told lawmakers to forget that helicopter stuff they’ve been hearing about him, he’s the greatest inflation hawk the Fed has had at the helm of America’s central bank in modern times.

OK, so maybe there is something to all this chatter from Fed officials that quantitative easing (QE) is DOA. Quantitative easing, as you may recall, is when the Federal Reserve prints paper money that previously never existed and then buys financial assets from commercial banks.

The bristling, hard-money Bernanke certainly will want to protect his low inflation bona fides and err on the side of restraint, right?

No, gold bugs can quit worrying. Bernanke told the Senate Banking Committee that QE and his other monetary shenanigans are working great, and that if it ain’t broke, don’t fix it.

“To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke told the senators.

Always and everywhere, the risk Bernanke sees is in deflation (i.e., lower prices). The idea that monetary aggregates might shrink and prices might fall forces the Fed chairman to keep a bottle of Rolaids on his desk.

During questioning, the good money doctor was asked if he thought the nation’s debt was the biggest threat we face. Bernanke demurred. And while he didn’t blurt out, “Hey, it’s no big deal,” he danced around the question, saying that there are many measures of the national debt.

He’s a student of the Great Depression who misinterpreted the lesson. The 1930s Fed did all it could, but the monetary gurus’ attempt to inflate was stymied by the people’s desire for cash and safety. Bernanke thinks it was all the central bank’s fault. It screwed up and shut off the money spigot. Not hardly.

2013 Agora Financial Symposium invitee Jim Rickards makes the point to Kitco’s Daniela Cambone that the Fed isn’t trying to force the dollar lower so that Boeing can sell more planes. The plane builder might sell a few more if the dollar were lower, but what Bernanke is after is to import inflation from abroad.

Of course, that sounds absurd. After all, we’ve been told the Fed was put in place to stop inflation. Why, fully half of the central bank’s dual mandate is maintaining a sound currency. If a currency is sound, the other side of the trade, goods and services, remains steady in price.

But what the author of Currency Wars is saying is that Bernanke speaks with forked tongue. A lower dollar value means higher prices for imports. And the U.S. imports way more goods than it exports. So creating dollars out of thin air and lowering their value is an excellent way to raise the prices of goods. Creating dollars also prevents the thing that keeps Bernanke up at night — deflation — from rearing its ugly head.

Of course, deflation (lower prices) is actually a good thing. If that were to take place, the dollars in our pockets would be worth more, and that would enhance our individual prosperity. We could buy more stuff with the money we have.

But what Rickards says — and I’ve never heard it articulated this way before — is the government is scared to death of deflation because the increased wealth that we all would enjoy could not be taxed. Inflation is easier to tax, he says. I would add that, in fact, inflation itself is a tax.

The other thing deflation does, according to Rickards, is increase the real value of debt. This would create a burden for the deeply indebted (like, say, the U.S. government), and especially the banks. We should always remember that the primary reason the Fed exists is not so that you have gainful employment, but to keep the banks in business and keep bankers employed.

Rickards echoes Bernanke, telling Ms. Cambone that the Fed will keep printing, as will the other nations fighting the currency war: China, Japan and the U.K.

Will there be any winners? Nope. Everyone who plays loses, says Rickards. However, not everyone is playing. Europe, led by Germany, and Singapore and Canada, is staying out of it and will come out better in the long run.

So while the Fed tries its best to slay the deflation dragon, is there a danger of asset bubbles developing, Mr. Bernanke? Bond prices have been bid up to where interest rates are almost nonexistent. Remember, bond prices and interest rates are inversely related. Record amounts of money have rushed into the stock market and junk bond funds, pushing bond prices up and yields down. But the head of the Fed sees nothing to be worried about. “I don’t see much evidence of an equity bubble,” he testified.

Take Mr. Bernanke’s comments with a grain of salt. After all, in 2005, when asked about the potential for a housing bubble, Bernanke said, “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow… I don’t think it’s going to drive the economy too far from its full employment path, though.”

To sum up, Bernanke doesn’t see an equity bubble, he claims to have a great record on inflation, and he says there is no currency war.

Our suggestion is to consider the source. Rickards says those that trust government will be the casualties in a currency war.

What’s a reasonable person to do?

Borrowing from Jimmy Buffett, Rickards says, “Gold is always going up somewhere.” If Bernanke continues to have his way, “somewhere” will be here in no time.

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