All Eyes On the Fed: Awaiting Bernanke's Decision

The world waits…

Stocks barely budged this week. Gold bobbed around like an anchorless sailboat, adrift in a vast ocean of guesses, speculation and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is widely expected to announce his next round of systematic dollar debasement a few days from now – a strategy otherwise known as “quantitative easing,” or “QE” for short. Trepid investors, unsure of what the value of the world’s reserve currency will be a week from now, sit on the sidelines, awaiting their cue from the man with the magic chopper.

Fellow Reckoners will recall Bernanke’s statement that, should it become “necessary,” he could cure what ails the financial world by dropping money from helicopters. He’s not quite there yet. Readers are invited to have a little patience…

Of course, the battle between central bank-created fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have been tussling with the precious metal since the coin clipping days of the Romans. You’d think the bozos would have learned their lesson by now. But, as Bill likes to say, what one generation learns, the next is quick to forget.

“Gold vs. the Fed: the Record is Clear,” reads a headline from The Wall Street Journal this week. The article goes on to highlight a few of the dollar’s lowlights during its ongoing battle with the Midas Metal.

“From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility,” the story begins, “unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable – the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

“What’s happened since 1971,” the article wonders aloud, “when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience.”

And that’s not all.

“For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.”

And to think the Journal is referring only to official statistics! The real story, when adjusting for the number torture going on in the government’s chamber of statistics – what Orwell might call the Ministry for Truth – is far, far worse. But readers get the point. The evidence is in. The facts have been observed. The arguments made. The case against a fiat money system would seem as open and shut as they come.

So why continue down the path leading to the very same cliff every other fiat money leapt from? Ahh… As every liar worth his salt well knows, a mistruth must beget a fraud, which, in turn, must give rise to another lie.

The world is brimming with stories of people who blindly cling to crackpot ideas in the face of any and all rational argument to the contrary. In fact, research shows that, far from inspiring a level-headed change of opinion, a well constructed argument dismantling this or that hocus pocus theory often has the opposite effect, emboldening the purveyors of such falsehoods. Leon Festinger introduced the theory, known as “cognitive dissonance” in his well-known book When Prophecy Fails, co-written with Henry Riecken, and Stanley Schachter.

In it, Festinger and his colleagues infiltrate a cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots that an apocalyptic flood is going to ravage the earth and that their only hope rests with a group of strangely benevolent aliens who would swoop down at the hour of reckoning to save the believing souls form certain death. One might reasonably expect that, when the fated day came and went without a drop of rain (or alien appearance), the group, no doubt embarrassed but otherwise none the worse for wear, would simply disband and go home. Not so.

Ed Yong, an award-winning British science writer who addressed the subject in a recent article for Discover magazine, describes what happened next. “In a reversal of their earlier distaste for publicity, [the group] started to actively proselytize for their beliefs. Far from shattering their faith, the absent UFOs had turned them into zealous evangelists.”

What corners we humans allow our theories to paint us into!

Perhaps it is the same psychological disposition, a cerebral partitioning of sorts, giving rise to the popular belief that a man can grow prosperous by spending more than he earns. Or that problems caused by too much debt can be cured…with more debt. Or that leaving a central banker in charge of the value of money can end in anything other than currency destruction and eventual financial ruin.

So, what does a central banker do when one round of money printing doesn’t bring about the desired effect? Does he revisit first principles and reexamine the evidence? Or does he double down on his bets, defending his actions with increasingly zealous evangelism? Bernanke gives the world his answer on Wednesday.

Joel Bowman
for The Daily Reckoning