Orwell Targets Bernanke: An Unteachable Hole in the Air (Part One of Two)

On Friday, October 15, 2010, Federal Reserve Chairman Ben S. Bernanke delivered a dishonest speech: “Monetary Policy Tools and Objectives in a Low-Inflation Environment.” What follows is not a critique of the talk, since that would be redundant. Please see one of my recent articles “Exploiting Bernanke” (September 21, 2010), which discussed the anticipated speech of October 15, 2010. Also see,  “Central Bankers are Paid to Lie – Buy Corn” (October 5, 2010), which showed how Federal Reserve Chairman Arthur Burns fibbed his way through the 1970s. Investors who either believed him or were not adept at translating signals from the real world suffered.

Bernanke’s mendacious speech confirmed my general investment advice in “Central Bankers are Paid to Lie”: “Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food.” As a guess, Bernanke’s current intention (this will change, and change often) is to add a trillion dollars to the economy. Such a wild, mad experiment has never been attempted before, outside of Argentina, Zimbabwe, and such.

The reason last Friday’s speech could be analyzed three weeks before it was delivered is Bernanke’s predictability. He will do nothing that veers from the course he found convenient for personal advancement three decades ago. He has neither said nor would dare process a thought that deviates from his doctoral thesis.

Even the title of his latest speech is a lie or stupid, as you wish – broadcasting as he did our “Low-Inflation Environment.” Inflation is practically everywhere that counts: food, insurance premiums, utility bills, tuitions. (“Where it counts” does not include the deflation of what really counts: wages, net wealth, house prices. This is why the “inflation vs. deflation” question is false.) Commodity prices keep rising, partially because there is greater demand than supply; partially because we are used to seeing oil and corn quoted in dollars. Producer and consumer prices generally lag commodity prices. The length of the lag differs. Anywhere from three months to one year captures most instances, under normal conditions. (When further depreciation of the dollar against commodities is anticipated, the lag will be compressed.) The dollar has fallen against a basket of currencies by 13% over the past 18 weeks. It is prudent to at least hedge for a contraction of this lag.

Bernanke’s speech was characteristic. He turned logic on its head and ignored the most debilitating consequences of his past actions. The Fed chairman used official government numbers to claim inflation was too low. Homage to government inflation calculations should have, alone, been enough for the media to ignore anything else he said. Of course, he was dutifully quoted and taken at his word.

It was not that long ago when an economist who claimed inflation was too low would have lost credibility. Bernanke stated “that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below.” The FOMC is the Federal Open Market Committee – the body that has absolute authority to act upon such inverted thinking as 2% inflation being good for the country.

A step back, to 1957: This was a time when academic economists were learning that theories manipulated to satisfy politicians could put themselves in positions of power. Most from this guild never dreamt anyone outside a college classroom noticed their existence. They miscalculated, as is the rule for these humbugs.

Politicians want money and credit to fulfill their constituents’ every wish. A Harvard economist told Congress that the U.S. needed a 2% rate of inflation to defeat communism. Washington loved him.

On August 13, 1957, William McChesney Martin, the Federal Reserve chairman at the time (and not an economist – he had been a Latin scholar at Yale, so understood that shortcuts destroy empires), lectured the Senate Banking Committee on the specific topic of the Federal Reserve “targeting” (Bernanke’s word – not Martin’s) a 2% rate of inflation: “Consumers are encouraged to postpone saving and instead purchase goods which they do not immediately need, and the incentive to strive for efficiency no longer governs business decisions…and speculative influences impair reliance upon business judgment.” Of utmost importance, groups struggle to insulate themselves from the loss of purchasing power, then “fundamental faith in the fairness of our institutions and our government deteriorates.”

The Bernanke Fed has stated its current policy is to chase consumers out of savings and into speculative ventures. That is exactly the recipe for the Fed to accelerate its impoverishment of the American people. Alan Greenspan, of course, was the master at jumbling a few words to distract attention from this long-running plan to prevent the Fed’s extinction. Bernanke also resorts to nonsense. From his October 15, 2010, speech: a 2% rate of inflation is to “attain… price stability” and to “bring the unemployment rate down significantly.” He is doing exactly the opposite of what he pretends.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan’s perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]