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April 28, 2011

Bernanke: What, me worry?

Steve McCann
While everyone's attention was focused on the release of Obama's birth certificate, another historic event took place Wednesday in Washington D.C.  The Federal Reserve held its first open press conference in nearly 97 years.  Ben Bernanke stood before the assembled press corps and answered, in his usual monotone and obfuscating fashion, questions concerning monetary policy, the Federal Reserve's future plans as well as the state of the economy.

In essence Bernanke stated that the current quantitative easing program (QE2) would end in June but the Fed would continue to maintain stimulus by reinvesting maturing securities rather than liquidating them.  They will likely not initiate any monetary tightening in order to fight inflation as he believes the impact of higher oil prices on inflation are transitory and due to extraneous factors and that other inflated commodities are equally transitory.  The Fed would have to be convinced that the inflation pressure is here for the medium or long term before they would get concerned.  He further emphasized that getting the economic recovery to be sustainable with new job creation was still their primary concern, not inflation.

Bernanke also managed to give the world the impression that he is very relaxed about the weakness of the dollar, stating that it is merely the ebb and flow of the markets. 

In other words this press conference can be summed up in the old Alfred E. Newman phrase from Mad Magazine: "What me worry" or an I-will-believe-it-only-when-I-see-it mindset.

The Financial Times said the following concerning Mr. Bernanke:

The Fed-in-control version suits Mr. Bernanke, but the plot has some big holes.  US consumer prices have increased at a 4.7% annual rate over the past six months, largely because easy money has found its way into commodity markets.  Mr. Bernanke's repeated mentions of employment fit the Fed's mandate, but not reality: monetary policy can do little to address the structural mismatches in the American job market.  And he can do little about US politicians' gross fiscal irresponsibility.


The alternative, anti-Fed narrative is more persuasive.  It features a monetary reversal: anti-deflation policies, which are working, will ultimately prove strongly pro-inflation.  Also an economic fallacy: rising inflation will not stop the Fed using cheap money to fight for jobs.  And a cultural strand: Americans are eroding the global confidence they desperately need, and the Fed's isolationist enthusiasm for a weak dollar contributes to this.  The US is a debtor nation with a spending problem, but it does not act accordingly.

With the announcement that the GDP only grew by 1.8% in the first quarter of 2011 ( a number certain to be revised downward), it is clear that the economy shows no sign of any sustained turnaround despite the loose money policy of the Fed and a Niagara Falls of government spending over the past two years.  Based on the tone of the Bernanke press conference, there is a legitimate concern that the Fed will again revert to even more money creation down the road in yet another quixotic attempt to jump start the economy.  Meanwhile the inflationary pressure on food and energy will continue to exacerbate due primarily to the decline of the dollar.

How did the currency market react to the Bernanke pronouncements?  The dollar hit a record low against the Swiss franc, off 34% since 2007; the dollar is now at the lowest point versus the Australian dollar in 30 years; and has hit an all time low against the Canadian dollar.  The euro, which has been beset with the ongoing debt problems of Greece, Portugal, Ireland and Spain, has managed to hit an eighteen month year high against the US dollar.  Further, according to the Commodities Futures Trading commission there are at present substantial short futures positions in the market (bets that the US dollar will move even lower).

This can only mean that exports of goods to the United States will be considerably (20%+) more expensive than they were just last June of 2010, exacerbating rising fiscal pressure, raising commodity prices and already high borrowing rates.   As all raw materials, such as food staples and oil are priced in US dollars, there is little hope for any consumer price relief any time soon.

Ben Bernanke and the Fed have placed themselves in a whirlwind by working so closely with the Obama administration to underwrite a profligate fiscal policy by in essence printing money in order to (in theory) stimulate the economy and create jobs.  It is now painfully obvious to all, particularly the international financial markets, that this program did not work.  It will not be easy to extract themselves and the American people from the now very real and potentially devastating stagflation over the horizon.




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