Tuesday, July 21, 2009

Bernanke Says Don't Worry - You Should Worry

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Federal Reserve chair Ben Bernanke is testifying before the U.S. congress today. Expect him to paint the rosiest picture possible and the mainstream media to glom onto the 'good times are coming' scenario. In preparation for his testimony, Bernanke published an opinion piece in the Wall Street Journal today. In it he details all the policy tools the Fed has available to prevent future inflation. Indeed they COULD do all of the things mentioned. Whether they will be able to is quite another story and this is not discussed.

Although Bernanke did not state it specifically, there is one thing and one thing only that is absolutely required to stop inflation - the government has to stop printing excess money (more correctly referred to as currency). As long as this goes on, it doesn't matter what else is taking place. Governments almost without exception follow contradictory policies when inflation starts to get out of control. They will put on price and wage controls. They will try to limit capital outflow. They will try to prevent 'speculation'. They will try to lower the price of gold and silver with market manipulation. They will outlaw hoarding and black markets. They will do almost anything except printing less money and until they do, none of these other measures ever work.

More than once in his 'don't worry, the Fed has everything under control' article, Bernanke stated "economic conditions are not likely to warrant tighter monetary policy for an extended period". So the government doesn't even have the intention of printing less money. Even when it gets to the point that they know there is no other choice, they will either not do it or do it for a short time, realize it is damaging the economy, and then stop. This scenario has played out over and over again in the past. Central Banks always know that their excess money creation is causing inflation, but the economy becomes so addicted to their currency printing drug, it immediately goes into painful withdrawal when it's removed. Every central bank has the option of stopping the printing, just as Bernanke claims in his convoluted manner that the U.S. does now. But they don't do it.

As for claims that the economy is getting better, it is easy to engineer such statistics. Essentially economic activity consists of consumer spending, business spending and government spending. Increasing government spending by printing more money will improve the GDP numbers. If GDP gets better only because the government is spending more, it's highly inflationary. Better economic news is likely to be bad news. This issue wasn't discussed in the Bernanke article. Nor did he mention how he missed seeing the subprime crisis coming and how he subsequently mishandled ever aspect of it after its effects spread through the financial system. But NOW you can trust him. Yeahhhh, right.

NEXT: Dollar Watch; Bad Earnings are Good; Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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