Wednesday, November 10, 2010

Bernanke Defends His Stimulus

Federal Reserve Chairman Ben Bernanke has been everywhere defending his recent $600 billion stimulus effort but the world is not buying what he is selling.

Virtually every major economic power in the world has condemned the idea of essentially printing money to finance U.S. debt obligations.  China, Japan, Russia, Brazil, India, Germany, and even Luxembourg have publicly expressed their reservations.  We can only imagine what they are saying PRIVATELY to Bernanke and, even more importantly, to each other.

As part of his charm offensive, Bernanke told students from Jacksonville University that his idea was "not inflationary" because it did not increase the total money supply.  Even his audience did not believe him.

With this decision, Mr. Bernanke has crossed the Rubicon, an economic point of no return.  He may claim that QE II, his nickname for his new scheme, is limited but we know that QE III, IV, V, and XXVIII are on the way.  Read this analysis on how our Fed is complicating the foreign policy of the United States.

It's far too easy to monetize debt.  Think if you could pay off your mortgage and credit card bills with money freshly printed in your basement.  You think China holds far too much in U.S. credit obligations?  Just make them worth less by devaluing the dollar.  Want to give people Social Security benefit and pension payment increases but not really pay for them?  Just monetize the obligation.  You just give them a dollar worth 94 cents.

Mr. Bernanke's Orwellian doublespeak makes no sense to virtually everyone, foreign and domestic.  The problem with the U.S. economy is not a lack of liquidity or high interest rates.  It's uncertainty over taxes, regulation, and the future of the country.  Jimmy Carter's state of malaise has returned.  $600 billion more is not going to drive interest rates lower or add much to national spending.  This policy only angers our allies at the very time where the world economy is fragile and everyone needs to cooperate.  Mr. Bernanke's "novel" action (as he called it) only makes people less sure about the U.S. economy.  Why throw the Hail Mary pass at this time, right now?  What does the Fed know and isn't telling?

Inflation is not a friend of real estate investors and Bernanke's plan is risking hyperinflation.  You do the math.  Inflation is great if you are a borrower but awful if you hold cash.  If anything, QE II encourages spending over investment and short-term thinking over long-term planning.  Bernanke says the Fed can withdraw liquidity at precisely the right time to prevent inflation.  HUH???  Remember this is the very same Bernanke that just days before he was nominated by President Bush to be Fed Chairman testified before Congress there was no real estate bubble and none would ever pop.

That was on October 27, 2005.  Read his comments and how ridiculously wrong he was.  Sorry, I don't trust his judgment anymore.