Bernanke's CYA Speech

In a recent speech, Fed Chairman Ben Bernanke warned that Congress's continued profligate spending was unsustainable.  Congress, Bernanke said, should not rely on the Fed to bail it out by printing money.  Dr. Gary North wrote an article about this speech titled "Bernanke's Declaration of Independence."  North argues that since the Fed's real mission is to protect the banking system, not its dual mandate of maintaining stable prices and full employment (which are opposing forces in the Keynesian paradigm), Bernanke is essentially telling Congress that the Fed will not take the fall when the great default comes—it will not hyperinflate.

While I hold North's opinion in high regard, I have a different take.  Already the Fed is talking about trying to raise inflationary expectations to get people to spend more now .  Of course, this policy simply steals economic activity from the future.  Think Cash For Clunkers which just caused people to make car purchases when the program was in effect and not wait until the next year when it wasn't.  The result was a bump in present car sales.  The cost was future car sales lower than they would have otherwise been.  Neither do the authors of the Bloomberg article tackle the fact that inflation punishes savers by destroying the purchasing power of their savings.  Nor does it discuss the fact that increasing the money supply causes distortions in the market's ability to correctly allocate resources by sending entrepreneurs faulty price signals; what the Austrian economists call "malinvestment."  Finally, it fails to address the fact that rising prices hurt those living on the margins—the poor and the middle class—the worst.

Since they are Keynesians, Bernanke and company don't worry about such things.  But not only is Bernanke an economist, he is also a politician.  When push comes to shove, he will do whatever is necessary to keep his power.  Faced with an economic collapse or sacrificing the dollar, I believe that he will choose the course which delays the inevitable as much as possible.  He will try to prop up the economy by inflating the money supply as the Fed is already doing.  Ultimately, the only thing driving economic activity will be monetary injections.  To keep things going, these injections must be more and more massive.  This will lead to much higher price inflation.  If the populous catches on and looses faith in the dollar (which is already happening with foreign holders of U.S. debt), we will see a currency crisis.

If that comes to pass, Bernanke will point to his speech of October 4 and say, "don't blame me."  And, if things get really bad, he might be saying that from a nation that has no extradition treaty with the U.S.  Stumbleupon  Technorati  Digg 


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  • 10/18/2010 5:27 PM mark rudis wrote:
    Thanks for the update X, I beleive its even worse than that. A couple of years ago you pointed out that the fed was secretly monitizing debt, I beleive they have now come out in the open with it! Bernancke is trying to save his image and yes his job, Like you said; he is a politician and will do about anything to maintain power. This sounds like an admission of bad things to come. We all know that he wouldnt block DCs agenda unless he knew the dollar was going down. Prediction; pain!
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  • 10/19/2010 7:21 PM June wrote:
    "And, if things get really bad, he might be saying that from a nation that has no extradition treaty with the U.S."

    Absolutely agree with your points about this being an inappropriate way to prop up the economy in the long term, but this last line made me laugh. Let's hope it proves to be untrue though!
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