Economic Recovery: The View From Bernanke's Helicopter

This week, the world caught a glimpse of what Henry Hazlitt might have called the “seen” – the primary, most conspicuous consequence of a preposterous economic policy. Of course, it is the “unseen,” what comes next, that we ought to be worried about.

We are referring here to the dawning of the QE2 era. In the shadow of the midterm elections, Federal Reserve Chairman Ben “full steam ahead” Bernanke announced the second round of quantitative easing, or, for us non econo-scholars, “money printing.”

In a nutshell, Bernanke committed the Fed to purchase $600 billion in Treasuries over the next 8 months. In addition, those nasty mortgage securities the Fed gobbled up during operation QE1 will continue to be rolled over into Treasuries. All in, the total price tag comes to $875 billion brand spankin’ new dollars…with the option to open the spigots further should inflation (the CPI version) come in under what the Fed deems as “healthy.”

Markets rejoiced over the news, sending the major indexes up 2…3…4%. Gold rallied to within $3 of the $1,400 per ounce mark yesterday. Silver leapt out of the gates too…as did just about everything else priced in dollars. Oil made a charge towards $90 per barrel and the “ags,” already on a blistering run this year, continued to soar.

Behind the scenes, the dollar took it firmly on the chin. Our mates over at The 5 provided the following chart, showing the once-mighty greenback’s response to Bernanke’s systematic currency debasement:

Quantitative Easing

The dollar is now more or less at parity with the Canadian loonie (CAD), the Aussie dollar (AUD) and the Swiss franc (CHF).

But not everyone was pleased with the Fed’s magic monetary potion.

Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the US economy is creating “risks for everyone.” The Chinese, who hold an uncomfortably large quantity of ever-depreciating dollars, were equally miffed. Vice Foreign Minister Cui Tiankai said, “many countries are worried about the impact of the policy on their economies.” Tiankai went on to say that the US “owes us some explanation on their decision on quantitative easing.”

Bernanke defended his position to a group of college students in Jacksonville, Florida, on Friday. “Our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States,” he said. “A strong US economy, a recovering economy, is critical not just for Americans but it’s also critical for the global recovery.”

Has Bernanke stumbled upon the ultimate formula for wealth everlasting? Has the man who once said he would drop money from helicopters if the need arose cracked the code to eternal, effortless prosperity? Just print money and be happy?

“If this were true,” ventured Bill Bonner earlier this week in his essay “Plumbers Crack”, “it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants.  And give every voter a quart of whiskey on Election Day.”

Readers may feel a healthy welling of skepticism here. To be sure, a strong economy, a recovering economy, is important…but debasing the nation’s currency won’t get you there. If a country could grow rich and prosperous by simply allocating printed money to troubled sectors of its economy, Zimbabwe would be the jewel of the African continent and there would be a statue of Gideon Gono, her former central banker, in Harare’s town square. If the Weimar Republic had been able to make WWI reparations in 50 billion mark notes, the world may have avoided the unmitigated catastrophe of WWII. And, to belabor the point, if the Romans were allowed to finance their foreign escapades by simply handing out I.O.U.s, Edward Gibbon’s classic, The Decline and Fall of the Roman Empire, might seem a little odd on the bookshelf of history.

For the moment, the markets have awarded Bernanke’s stimulus plans a vote of confidence. That is the immediate, seen, effect. Like an athlete on steroids, they are looking to break records, to rewrite their own history books. The Fed has them off to a flying start, but pretty soon the effect of the drug will wear off. Reality will kick in. It is then that the “unseen” effects of trying to cheat the system will come into plane view. The global economy, built on the back of a strong, stable world currency, will once again come to realize that history makes no excuses and does no man any favors.


Joel Bowman
for The Daily Reckoning

The Daily Reckoning