Bernanke's Folly

Bernanke's Folly

By Jack Kelly - November 21, 2010

He's a soft-spoken, mild-mannered academic who means well (I think). But he could be the most dangerous man in America.

He is Ben Bernanke, formerly of Princeton, now chairman of the Federal Reserve Board, and he is making most of us poorer. The Fed has the power to manipulate the money supply, which is a fearsome power for government to have.

"Government," said the economist Ludwig von Mises, "is the only agency which can take a useful commodity like paper, slap some ink on it, and make it totally worthless."

Mr. Bernanke's plans for "quantitative easing" (creating money out of thin air) won't make our dollars worthless. But it will make them worth less -- up to 20 percent less, thinks Bill Gross, manager of the world's largest mutual fund, if the Federal Reserve continues unconventional monetary easing.

When more dollars chase fewer goods, prices go up, especially for commodities we have to buy, such as food and gasoline.

By devaluing the dollar in relation to other currencies, supporters of quantitative easing hope to make U.S. manufactured goods cheaper for foreigners to buy. (One reason why we have such a huge trade deficit with China is because the Chinese keep their currency -- the renmimbi -- artificially low.)

But devaluation might spur a competitive race to the bottom that ends badly, and jeopardizing the dollar's role as the world's reserve currency could have ominous consequences.

"Overseas -- as a consequence of a more expansive U.S. monetary policy and other distortions in the international monetary system -- we see an increasing tendency by policy makers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls and resort to protectionist policies," said Kevin Warsh, a member of the Fed's governing board, in a recent speech.

Supporters of quantitative easing also hope to create a "wealth illusion" by keeping stock prices artificially high. (Colin Barr of Fortune noted on Nov. 9 that stocks are trading around 21 times cyclically adjusted earnings. The long run average is 16.) The theory is that stockholders will think they're wealthier than they actually are, and spend more, thus boosting the economy.

"Increased spending will lead to higher income and profits that, in a virtuous circle, will further support economic expansion," Mr. Bernanke said.

But cheap money creates stock market bubbles, like the housing bubble whose bursting is chiefly responsible for our economic troubles today.

Another problem, noted Richard Fisher, president of the Federal Reserve Bank of Dallas, is that many investors take Mr. Bernanke's cheap money and then "invest it abroad where taxes are lower and governments are more eager to please."

But the fundamental problem, says John Tamny, is "the wealth effect [that Mr. Bernanke] naively believes to exist is nonexistent."

"If shareholders exchange shares of increasing value for dollars in order to consume, the seller's dollar bonanza is naturally matched by the buyer's reduced cash position," said Mr. Tamny, editor of RealClear Markets. "These things even out, with no increase in consumption."

Even if there were such a thing as a wealth effect, it would benefit chiefly the wealthy, because only they own enough stock to feel it. The top 20 percent own 93 percent of America's wealth (stocks, bonds, real estate), according to William Domhoff, author of "Wealth, Income and Power."

The destruction of purchasing power by quantitative easing will clobber the 80 percent of Americans at the bottom of the pyramid. Financial writer Charles Hugh Smith estimates it will cost American households $4.6 trillion.

Mr. Smith may exaggerate. But quantitative easing has never worked. The Japanese tried it in the 1980s. Their economy is still mired in slow growth. Mr. Bernanke tried it two years ago. Our economy is still so sickly he's trying it again.

Mr. Bernanke is trying to solve with a reckless monetary policy a problem caused by feckless fiscal policy. Banks have money to lend. Corporations have money to spend. But they aren't lending or spending because of the uncertainty caused and the harm done by the Obama administration's tax, spending and regulatory policies, which have created one of the most hostile environments for business in our history.

Foreign leaders are as appalled by the policies of Mr. Obama and Mr. Bernanke as the Chamber of Commerce is. "Obama's Economic View is Rejected on the World Stage," headlined the story in The New York Times on the G-20 summit in Seoul.

Let's pray those policies are changed before catastrophe ensues.


Jack Kelly is a columnist for the Pittsburgh Post-Gazette and The Blade of Toledo, Ohio.

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