Monday, May 30, 2011

Tradewinds - David Iben’s May 2011 Commentary: Weird Science



Just as the boys were inspired by the movie Frankenstein, one cannot help but imagine a younger Bernanke, back in 1985, watching Weird Science and hatching a plan to use a few computer models, some creative nomenclature, some green pieces of paper and maybe a little lightening, to create beauty and wealth. Maybe using “molecular manipulation” he could turn paper into gold!

Creatively, he decided that calling this experiment “Quantitative Easing (QE)” made it somehow more palatable than using a more forthright—“Dollar Debasement.” There is even a stated goal for debasement—2% every year. They call this “Inflation Targeting.” Keynes, the author of many theories that have been embraced by inflation apologists to defend spurious government policy, had a more honest appraisal of inflationary policy. Quoting Vladimir Lenin of all people, Keynes stated, “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.” He added, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they cannot only confiscate but they confiscate arbitrarily.” Even the father of the communist Soviet Union understood some economic principles that Bernanke does not seem to. The following quotes suggest that he isn’t especially prescient.

“At this juncture… the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained,”

- Ben Bernanke, March 2008

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

- Ben Bernanke, February 2006

“The Federal Reserve is not currently forecasting a recession.”

- Ben Bernanke, January 2008

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

- Ben Bernanke, June 2008

“I expect there will be some failures [referring to smaller regional banks]. Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”

- Ben Bernanke, February 2008

(As to how and why inflation results in a highly regressive “tax” on the poorer segments of society, it is too lengthy a discussion to include here, but is explained well in the readings highlighted earlier.)

Uttering perhaps the most scary quote ever made by a Fed Chairman, in a December interview on 60 Minutes, Mr. Bernanke claimed that he was “100% certain” that he could contain inflation.