Great interview on Bloomberg with Jim Grant, a longtime vocal critic of Ben Bernanke and quantitave easing. He explains in very clear terms how the Federal Reserve has become America’s de-facto central planner by telling us “what assets to buy at what prices and what level of nominal GDP we should all need”.
Posts Tagged ‘Ben Bernanke’
“… The impossible takes a little longer.” This motto has been used by many organisations, the original being the US Army Service Forces in WWII. Actually, it is a perfect motto for Ben Bernanke and will hopefully stand in future as an epitaph of the Fed and every other central bank.
The “difficult” part of what the Fed and every other central bank does is not actually very difficult at all for them, but it most certainly would be for you and me. Today, one of the accepted and primary roles of governments everywhere is to “run” the economy. It is true that they spend all their time passing new rules and regulations into law in order to do the “running”, but their primary means has been and remains their total control over the money in the nation they govern. The institution which justifies and facilitates this is the central bank. It actually produces the money, both physically and as computer entries.
The “impossible” part is the one which Ben Bernanke is just starting to suspect now. For almost forty years, the Fed has maintained the facade that a purely paper fiat money can function in a market economy just as well as an objective REAL money can. Central to this task is their contention that they can control the economy and prices by manipulating the amount of “money” they issue. This is the impossible. It has never been successfully done in the entire history of paper fiat money.
When the Fed talks about “stable prices”, it is not actually serious, it just wants to be taken seriously. The last thing in the world which the Fed or any other central bank wants is stable prices for the paper assets which form the ultimate “collateral” for the paper money they emit in such vast torrents. Any lowering of these prices puts the Fed’s “mandate” of economic growth into danger. From there it is a short step to the collapse of the money itself which has absolutely NOTHING else behind it. To forestall that step being taken, Mr Bernanke is now poised to defy the impossible on a scale never before attempted.
Jettisoning “Stable Prices”:
Ben Bernanke started warning us all about the perils of what he called “deflation” long before he became Fed Chairman in 2006. He gave what is probably still his best known speech way back in November 2001. His title was: “Deflation – Making Sure “It” Doesn’t Happen Here”. He proceeded into the meat of his speech in the following manner: “So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small.”
Almost nine years and some hair raising experiences – most of which had to do with very “significant deflation” in the paper asset markets later – Mr Bernanke has changed his tune. Not only has he decided that “deflation” (falling prices in his jargon) is a significant threat, he has decided that it is an imminent threat. Sadly, the direct means at the disposal of the Fed with which to deal with this threat have already been deployed to their fullest extent. Official US interest rates have been non existent for almost two years. The Fed’s balance sheet – paper “assets” which still retain a “value” only because the Fed owns them – exceeds $US 2 TRILLION. The Fed spent most of 2009 monetising Treasury debt with no benefit to either the real US economy or to the still uncomfortably high official US unemployment rate.
So now, the whole world awaits the Fed’s announcement of a second attempt to pump up the US economy by means of creating US Dollars and using them to buy US government (Treasury) debt. As the “decision date” of November 3 draws closer, the focus of global markets discards almost all other considerations. But what is it, precisely, that the Fed hopes to accomplish?
Encouraging Inflationary Expectations:
When, not if, the Fed and Mr Bernanke do announce their second program of US government debt monetisation, they will have admitted in public that the first (March to October 2009) program has failed them. Further, they will have confirmed for a second time in about a year and a half that the ultimate job of all central banks is to act as a “lender of last resort” to the governments which control them. Third, they will have demonstrated for all that have eyes to see that the “full faith and credit” of government which is the only underpinning for modern fiat money is an illusion. It is no more credible in the light of FACTS than contentions that the earth is flat, that the universe is fixed in place or that “creation” took place well over a million years after the first recognised human beings walked the earth.
Modern governments and their central banks cling to the tenets of orthodoxy in the economic and financial realm with fanatical zeal. They have no choice, their power depends upon them. The situation has now reached a level where the US political and financial establishment have decided that to retain power they have no choice but to risk losing it altogether. The surest evidence of this is Mr Bernanke’s stated intention to encourage “inflationary expectations” amongst the American people.
The Eye Of The Tiger:
Like most organisations whose main aim is to accumulate power in the hands of the government, the Fed has always relied on what Elihu Root (see the quote earlier in this section) described as “optimism”. Another word for this is ignorance. Ignorance is not a pejorative term, it simply means a lack of knowledge in a given field of human endeavour. No human being has ever lived who is not totally ignorant about many vitally important areas of knowledge. But no VALID field of human knowledge has ever relied upon ignorance as its prime justification. This is what the Fed now proposes to do.
The fact is that inflation – an increase in the total stock of money – is the modus operandi of every central bank which has ever existed. Central banks still exist only because the vast majority of the people they rule do not equate what they do with inflation. Mr Bernanke now proposes to change that. In doing this, he is placing the biggest bet in history on economic and financial ignorance. All such bets lose.
Read the whole article HERE