Dead Wrong

New evidence was revealed last week further confirming that not only is President Obama a doomsayer…he’s a liar too.  The first of the President’s deceits was amusing hyperbole.  The second was pure humbug.  Still, they were nothing compared to some other remarks out of Washington…

For while the President was busy prophesizing the apocalypse and Bob Woodward was busy calling him a liar, down the way, over on Capitol Hill, Federal Reserve Chairman Ben Bernanke let out what must be the biggest whopper we’ve heard since the President uttered, “If you’ve got a business—you didn’t build that.”

While responding to questions from Senator Bob Corker, Bernanke said “my inflation record is the best of any Federal Reserve chairman in the postwar period.”  We’re not kidding.  He really said this…take a look yourself.

Bernanke must think we’re all fools.  How else can one explain such a remark?  He either doesn’t know what he’s talking about or he’s two-faced.  Quite frankly, we think it’s the later.

There’s no way, in spite of all his academic training, that Bernanke doesn’t know what inflation is.  Obviously, it’s convenient for Bernanke to consider inflation to be rising consumer prices, as measured by the consumer price index.  But that’s not what inflation is at all…

Obfuscating Monetary Malfeasance

Inflation, in its truest form, is the inflation – or expansion – of the money supply.  By this classification, Bernanke’s the most inflationary Federal Reserve chairman ever.  He’s run up the Fed balance sheet to over $3.07 trillion dollars…from $814 billion when he took over in February 2006.

As Federal Reserve chairman, Bernanke’s expanded the Feds balance sheet by over $2.2 trillion dollars.  The combined balance sheet expansion of all Fed chairman before him – from 1913 to 2006 – was just $814 trillion.  In other words, Bernanke’s inflated the money supply 3.78 times more in seven years than the combined 93 years prior.

Currently, Bernanke’s expanding the money base by $85 billion per month – or $1.02 trillion per year.  There’s no question about it.  Bernanke’s inflation record is abysmal.

Using the consumer price index as a standard of inflation helps Bernanke obfuscate his monetary malfeasants.  The consumer price index is based on prices of consumer goods.  But, for whatever reason, the consumer price index excludes food and energy from its calculation of price changes.

Many consumer goods in the United States are imported from countries that also inflate their currencies.  So the rise in price is masked by the cheapening of foreign labor and production costs.  Nonetheless, just because you can get a good quality laptop for $500 that’s manufactured in China, or a $6 T-shirt made in Honduras, it doesn’t mean inflation isn’t occurring.

Dead Wrong

To the contrary of what Bernanke says…inflation’s completely out of control.  There’s no other way to describe $85 billion a month of new money creation.  But, to Bernanke’s delight, the effects of his inflation aren’t showing up in consumer prices.

Still, Bernanke’s inflation record, when measured in something else besides gizmos and gewgaws, is a disaster…

For instance, the day Bernanke started his job as Fed chairman, February 1, 2006, gold, the quintessential inflation hedge, closed the day at $569 per ounce.  Yesterday it closed at 1,572.  So even with gold’s recent pullback, its price is up over 176 percent with Bernanke as the dollar’s steward.

Similarly, on the week ending February 3, 2006, crude oil closed at $65.37 per barrel.  Yesterday oil closed at $90.38 per barrel…up 38 percent since Bernanke took office.  Food prices, as based on the Commodity Food Price Index, are up over 70 percent since February 2006.

Note, too, the price changes mentioned above do not show the wild asset price swings that Bernanke’s funny money has caused.  Gold and oil prices have had dramatic price increases and pull backs since 2006.  Other asset prices, like housing and the stock market, have also spiked up, crashed, and have puffed back up.  Housing prices are just now starting to inflate after the destructive bubble and bust of recent years.

These destructive asset price distortions are consequences of Bernanke’s policies of mass inflation.  When it comes down to it, Bernanke’s monetary policy serves to blow asset bubbles.  Plus, if the economy ever recovers, consumer prices will rapidly increase.  Until then, the banks will continue to borrow money from the Federal Reserve for practically free and loan it to the Treasury.

But when the economy begins to grow, and the banks start loaning out money to businesses in earnest, things could quickly get out of hand.  Considering the money multiplier effect and the “magic” of fractional reserve banking, at some point, each $1 trillion added to the Fed’s balance sheet could translate into $5 trillion – or more – of money flowing into the economy.

No doubt, Bernanke’s words will come back to haunt him.  They have before…

“We’ve never had a decline in house prices on a nationwide basis,” said Bernanke in July 2005.  “So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit.  I don’t think it’s going to drive the economy too far from its full employment path, though.”

Bernanke, of course, was dead wrong…housing declined on a nationwide basis and employment has never recovered.

Sincerely,

MN Gordon
for Economic Prism

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