The Federal Reserve’s Problem
The Federal Reserve & Ben Bernanke held his first press conference yesterday. He maintained that the Federal Reserve would not be changing course yet. The Dollar continued to fall and gold and silver continued to surge. Today’s letter will take a look at the predicament the Federal Reserve finds itself in.
Which is better the rock or the hard place?
Ben Bernanke spent most of his formative years studying the Great Depression of the 1930’s. The Great Depression was the worst economic environment of this country’s history and thus he is most worried about deflation. (Interestingly, Germany’s worst economic environment was their hyperinflation of the 1920’s. Germany tends to worry mostly about that and aims to do many of the opposite things from what the US is doing.)
Ben Bernanke inherited a Federal Reserve from Alan Greenspan which had excelled at blowing bubbles. Whenever the economy would slow down a little, he would lower interest rates until a bubble began to build in the stock market or in real estate. The Federal Reserve created money out of thin air which made its way into these markets and made everyone feel rich. The problem is that wealth created out of thin air isn’t real and the bubble must pop. But each time the bubble popped, Greenspan and then Bernanke would simply blow a bigger bubble.
Unfortunately, bubbles can only grow so big before everyone figures out what is going on and refuses to be suckered into another one. This is where we are in the real estate market today. Bernanke understands that the real estate market is a massive component of the US economy and that it is in serious trouble. Because banks hold the notes on all this real estate, this other massive component of the US economy is also in dire straits. Because interest rates could not get any lower, he additionally decided to create massive amounts of money out of thin air.
This is to combat the immediate known danger of a deflationary depression. A collapse of the economy and markets. If Mr. Bernanke were wiser, he would understand that this is a better option than the alternative. However, it’s affects are immediate and known and since these are painful, he is avoiding them at all costs by hoping that the unknown will not be as bad as many fear. Because he has spent his life studying this known danger, he is less impressed with the unknown (hyperinflation) which has never existed in this country.
Although it is nowhere in the Fed’s dual mandate of full employment and a stable dollar, Bernanke has stated on multiple occasions that his goal is to boost asset prices in order to make consumers feel wealthier so that they will spend more and thus the economy will grow.
His plan is working on the stock market which continues to march higher. It is not budging the more important real estate market where values are once again falling.
Let me state clearly what is going on here: Bernanke is maliciously engineering an environment where inflation is greater than income from savings. He has stated that he wants more inflation in our economy. This is directly opposite of one of the two planks of the Fed’s dual mandate (stable prices). He wants savers to suffer because they will be losing value on their savings as the interest earned is less than the value of the principle lost as inflation cuts away. Thus, investors will be forced to spend or recklessly speculate their money in order to boost the overall numbers within the economy.
This philosophy of economics is dangerous and vile because it seeks to destroy the poor and middle class for the “overall good” of the economy. It is not good for the economy If most people are made poorer due to the machinations of a few. It’s true that the bankers will be better off because they know how to protect themselves. The wealthy are able to employ similar methodologies. But the middle class are made poor and the poor are made hungry. Just so a number on a piece of paper will “look” better to those in Washington and New York.
Bernanke’s policies are causing rampant inflation throughout the world. He refuses to admit it. But the leaders of other countries aren’t so stupid and recently the leaders of Russia, Japan, & China have all commented on the wretched consequences of what the US is doing.
As the Fed prints more money and the Treasury (because of poor leadership by the President and Congress) continues to borrow money at a pace impossible to support, money floods the world. Any decent economist understands that as more money is printed, it will take more of it to buy real goods. So money has flowed into commodities as investors look to protect their wealth. This means the cost of many things including food is rising rapidly and for many people this means they have to riot or steal to feed their family. This is what the US system is creating. Most of the world understands it, but because the US doesn’t want to see its economy immediately collapse, it has refused to admit it.
This is the first of a 3 post series. The entire document that makes up these 3 posts has been slightly modified from the original version which was the April Kingdom Calling Newsletter. You can sign up to receive newsletters like this here. If you’d like to read some prior thoughts on where our economy is headed, check out the series we did on Hyperinflation and the Dollar by following these links: Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, & Pt 10.