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Traditional Catholic Faith => The Greater Depression - Chapter I => Topic started by: Matthew on March 21, 2007, 09:06:09 PM
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Bronx Cheers For Ben
Steve Forbes 03.21.07, 10:13 AM ET
On the occasion of his first anniversary as Federal Reserve Chairman in February, Ben Bernanke was saluted by Wall Street and most of the business media for controlling inflation. The celebration, alas, was painfully premature. The inflation set off by Alan Greenspan's mistaken monetary extravagance in 2004 has not been fixed by his successor. The Fed's excess money creation is still roiling and distorting economies and financial markets around the world. The destructive political repercussions are unfolding.
The most notorious symptom of the Greenspan-Bernanke blunder is the still high price of oil. But, of course, the monetary extravagance fired up commodities across the board--all the major ones are significantly higher than they were three years ago.
Commodities are the first to feel monetary mistakes. The best barometer of these, historically, has been the price of gold. In 2004 its rolling ten-year average was under $350 an ounce. Today it's up more than 80% from that level, hovering between $625 and $700 an ounce.
Remember that famous quote by John Maynard Keynes: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
The latest debauching of the currency is indeed being misdiagnosed by almost everyone. Higher oil and gasoline prices are blamed on greedy oil companies and the voracious consumption of India and China. These two countries are also blamed for sending other commodities into the stratosphere. The Fed's culpability has been ignored. Anyway, observers say, increases in the cost of living are still small and therefore not anything to worry about.
But inflation indexes are seriously flawed. The faulty methodologies in the way they're put together, such as underplaying improvements in products and services and the crazy way in which we measure housing, have long been noted. The indexes are rearview-mirror measures. If the Fed messes up, it takes a year or two for the mistake to become apparent in the broader economy. Moreover, given the extraordinary increases in productivity, the general price level, if anything, should be going down.
Nor are the various money supply numbers all that helpful. A dollar created by the Fed can, in effect, be multiplied several hundredfold around the world, thanks to a bewildering array of financial instruments that permit mind-boggling layers of leveraging.
Before becoming Fed head, Ben Bernanke wrote papers about "excess" savings worldwide: People aren't spending and investing enough, and that's why global financial systems are awash in cash. Alas, those excess savings are a euphemism for excess money creation by central banks, particularly the Federal Reserve.
The Greenspan-Bernanke mistake has already increased short-term interest rates nearly fivefold since 2004. It overheated the housing market, now undergoing a painful correction. It induced lenders to extend credit overeagerly, overgenerously to "subprime" borrowers. It fanned the hothouse growth of hedge and equity funds. It shattered GM (nyse: GM - news - people ), Ford (nyse: F - news - people ) and DaimlerChrysler (nyse: DCX - news - people ) by shooting up gas prices, which cratered sales of their high-margin SUVs. The artificial oil boom has given the criminal regimes of Iran and Venezuela lethally large cash windfalls to stoke terrorism. It has also loosed a gusher of government subsidies for "alternative energies"--most of which will be unviable.
Before year's end the Fed will probably raise short-term interest rates again. But, as the 1970s and early 1980s agonizingly demonstrated, increasing the nominal cost of money does not necessarily undo the debauching of the dollar. Mopping up excess greenies, which the Fed could do by selling some of the government bonds it holds in its portfolio, will cure the disease--quickly, too. Otherwise, major defaults from excess debts may destructively extinguish some of the excess money.