“Iacta alea est.” – Suetonius to Julius Caesar, upon crossing the Rubicon, January 10, 49 BC
Yielding to Political Will
Yesterday brought forth new evidence that man, despite his better judgment, will nearly always yield to political will. Several months ago Senator Chuck Schumer told Federal Reserve Chairman Ben Bernanke to “get to work.” Yesterday’s FOMC statement offered Bernanke’s acquiescence…
“….The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.”
And here’s the kicker…
“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Following the FOMC statement stock prices soared. The DOW jumped over 200 points closing at 13,539. Gold also jumped $50 per ounce.
Welcome to the world of open ended QE3. It’s a world without limits…that’s quickly cascading out of orbit. Like Jim Rogers, we believe “We are all going to pay a horrible price for this in a year or two or three.”
Evermore Issuances of Paper Money
Early this week we remarked that although Federal Reserve Chairman Ben Bernanke may be a madman…he’s not an idiot. Based on Bernanke’s past record, and the elevated price of practically every asset class, we thought he’d wait until prices broke before flooding the markets with more funny money.
Unfortunately, we were wrong. Bernanke opted for QE3 at a time of record high stock prices. Nonetheless, we still don’t think Bernanke’s an idiot. The more we thought about it the more we realized he’s only human. He’s just doing what most people do…they give people what they want – even if it kills them.
People want more money. They think more money, somehow, equals more wealth. Of course, it’s Bernanke’s job to give it to them. So that’s what he must do.
Several hundred years ago – plus a little more – there was a similar fellow. His name was Mirabeau and he was an avid statesman and a patriot beyond question. He was among the strongest and shrewdest men that Europe had ever seen.
But, Mirabeau, like Bernanke, yielded to the political pressure to create money. Moreover, by giving the good people of France exactly what they wanted, he helped them ruin themselves.
“In spite of all the paper issues, commercial activity grew more and more spasmodic,” explained Andrew Dixon White in his classic work, Fiat Money Inflation In France. “Enterprise was chilled and business became more and more stagnant.
“The plenty of currency had at first stimulated production and created a great activity in manufacturers, but soon the markets were glutted and the demand was diminished.”
Each downturn in France’s economy was countered with evermore issuances of paper money, until the populace lost all confidence in the currency. Between 1790 and 1795 the price of flour increased 11,250 percent…and all other prices increased by a comparable amount. By 1797 France’s currency was worthless and its economy in shambles.
Helping the World Ruin Itself
Here we’ll pause, for fun and for free, to review the Bernanke doctrine, as outlined in his November 21, 2002 speech: “Deflation: Making Sure “It” Doesn’t Happen Here.” Then, as Federal Reserve Governor (now Chairman), Bernanke laid down the rules for combating a depression…
“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”
Later in this same speech, Bernanke made reference to a “helicopter drop”, alluding to a central banker hovering in a helicopter – dropping suitcases full of money to individuals. This little oration earned him the name ‘Helicopter Ben’.
At the time of Bernanke’s speech his ideas were largely academic. Sure governments had printed paper money before to inflate away debts and pay for wars. Governments have been doing this for thousands of years, always with disastrous results. But not since Mirabeau had anyone of such immaculate standing professed these to be credible policies.
Perhaps Bernanke never imagined he’d have the occasion to test his theories. Perhaps if he was still perched up in the Ivory Tower he’d rethink some of the conclusions he reached. At this point, however, it’s too late. The die is cast. He has a job to do and he must do it…
He must help the world ruin itself.
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