Bernanke oblivious to dangers of inflation - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 February 2011
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Los Perros, Nicaragua

No time for much reckoning today.

Dow up 20. Gold up $20.

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Associated Press reports:

NEW YORK (AP) - Stocks posted small gains Thursday after Federal Reserve chairman Ben Bernanke said the central bank will stick to its efforts to spur the economy.

In a speech at the National Press Club, Bernanke said that the Fed expects the economy to improve this year and inflation to remain low despite the jump in commodity prices.

"Chairman Bernanke basically indicated in his speech that he considers unemployment to be the bigger problem than inflation and that the Fed will continue to focus on that," said Doug Roberts, chief market strategist at Channel Capital Research.

The Federal Reserve has a plan to buy $600 billion in bonds, a tactic known as quantitative easing, aimed at spurring lending and making stock ownership more attractive. Some economists had worried that the Fed could end its bond purchases earlier than anticipated.

Stocks had fallen for the most of the day as concerns over violent protests in Egypt weighed against better-than-expected economic news in the U.S.
Meanwhile, inflation in primary, international auction priced goods is beginning to work its way into consumer prices everywhere. Bloomberg has that story:
India's food inflation accelerated to a one-month high and services growth quickened, bolstering the case for more interest-rate increases.

An index measuring wholesale prices of agricultural products rose 17.05 percent in the week ended Jan. 22, the commerce ministry said in a statement in New Delhi today. The Purchasing Managers' Index rose to 58.1 in January from 57.7 in December, according to HSBC Holdings Plc and Markit Economics. A reading above 50 indicates an expansion.

Asian economies from South Korea to China and India are facing inflation pressures, prompting the International Monetary Fund Managing Director Dominique Strauss-Kahn to say this week that central banks in the region need to raise borrowing costs further. The Reserve Bank of India on Jan. 25 boosted rates for the seventh time in a year and signaled more increases.
Ben Bernanke is talking nonsense. Well...nonsense of a particular sort. He wants to inflate the economy. His line of talk explains why...

Bloomberg:
Federal Reserve Chairman Ben S. Bernanke said the U.S. needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.

"With output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level," Bernanke said today in a speech at the National Press Club in Washington. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

Bernanke said economic growth will pick up this year and the Fed's purchases of $600 billion in Treasuries are "providing significant support to job creation and the economy." At the same time, his emphasis on labor-market weakness means the central bank is likely to leave stimulus in place for a while, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

"The Fed is still in a very growth-supportive policy stance," said Feroli, a former Fed researcher. "I don't think they make any premature feints toward heading to the exit."
Bernanke still regards the threat of deflation as greater than the threat of inflation. Or, he says he does.

We judge them about equal and figure they'll both hit us. Hard.

*** Did we say we had more thoughts? We don't have time for more thoughts. Not today. The thoughts will have to wait until next week.

***

Governments struggle to stand still

Facebook didn't even exist until 2004. Maybe it's just a fad. But it is a fad that the financial markets value at $50 billion. Mark Zuckerberg is now one of the richest men in the world. If he stole the idea, he is one of the most successful thieves in history. Google is another parvenu. It was created in 1998. Now it is worth $197 billion. Yahoo, founded in the middle of the Clinton years, is worth $20 billion. Ebay, which set up shop about the same time, has a market value of $40 billion.

Capitalism is a process of 'creative destruction,' said Joseph Schumpeter. New wealth is created. Old wealth is destroyed. Unless the feds can make time stop, these great successes of today will be the great failures of tomorrow.

The 'crisis in capitalism' is now in its 5th year. But where's the crisis? Capitalism responds to demands that haven't even been invented yet. We didn't know we needed a Facebook, for example, and there it is. Whole new industries are growing up, worth trillions of dollars, with hundreds of thousands of well-paid employees, high margins and rapid growth rates. Capitalists are taking trillions of dollars from old businesses and re-allocating it to new ones. Emerging markets have grown 85% in the last 5 years, while mature markets have been flat. According to a McKinsey study, global investment is expected to jump from $11 trillion this year to $24 trillion in 2030 - with most of the money going to market economies that didn't even exist 30 years ago.

Capitalism is destroying fortunes too. In the US household sector alone, some $7 trillion has been taken off housing values since 2006. And in the corporate sector, in terms of gold, US stocks have lost 80% of their worth over the last 10 years. The world's erstwhile biggest automaker, GM, would have gone broke if it had been allowed to do so. Many of the planet's biggest and most prestigious financial institutions would have been demolished too. We will never know for sure. Because just as capitalism was getting out its wrecking bars and sledge hammers, it was called off the job.

The financial crisis that began in 2007 was widely, and intentionally, misunderstood. People who were paid not to see it coming earned even more pretending to see it go away. Bankers, for example, made billions in fees for promiscuously mongering debt during the bubble years. Then, when the itching and soreness began, they profited from the quack cures. It was a 'liquidity' problem, they said; 'give us more money and the economy will recover!'

Politicians were happily bamboozled. They mislabeled the problem a 'failure of capitalism.' Very convenient for the leveraged speculators capitalism was about to destroy. And very convenient too for the central planners who wanted to bring it under control. In 2009, Foreign Policy magazine, for example, named Ben Bernanke its #1 Top Global Thinker, for his role in staving off another Great Depression. Without Bernanke's decisive rescue, bankers who lent imprudently would have lost their jobs, failed economists would be parking cars, reckless investors and fund managers would have gone broke. Trillions in unpayable debt would have been written off. But thanks to Bernanke it's still there! Thanks a lot.

First, the US Fed bought in the banks' bad mortgaged-backed securities -- about $1.5 trillion of them from all over the world. Fiscal policies worldwide contributed $2.3 trillion more to the bailout. Altogether, the bill came to more than $7 trillion -- not including the trillions in free money that came from central banks' lending below the inflation rates - only to the big banks, of course.

The fix is in. And who knows how long it might go on? The Irish bail out their banks. The Europeans bail out the Irish. The Chinese bail out the Europeans. The Chinese bail out the Americans too, who also bail out the European banks. It doesn't matter how broke you are. You can still be bailee or bailor. There seems to be no end to it. Why else would investors lend to the US government for 10 years at only 3.41%? Or to the Japanese government - with debt to GDP of 200% -- at just 1.23%? As long as the money keeps flowing, insolvency has no meaning.

Government hates change. When a stranger comes to town, it calls the cops. That is its role, to protect the elites who control it. But adjustments need to be made. The US government alone faces a financing gap of more than $200 trillion. Every day the sun still rises. By the time it sets, another $4 billion has been added to America's debt. But only phony 'reforms' are put forward; Barack Obama's proposed budget cuts would only reduce the US deficit by 3%.

The feds resist change. But change happens anyway. Were it not so, the Hohenzollerns would still be in power in Prussia, the Ottomans in Istanbul, Pharaohs would still rule the Nile and the Moguls would still sit on the peacock throne in India. And what happened to the Romanoffs, the Habsburgs, the Bourbons, the First Republic, the Second Republic, the Third Republic, the Forth Republic...the First Reich, the Second Reich, the Third Reich? Like dodos and dinosaurs, they did not adapt. They went extinct.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Bernanke oblivious to dangers of inflation"

Sreedhar.M.K

Feb 5, 2011



This article by Bill Bonner is a very forthright and incisive analysis of the anatomy of the State of global economy and a realistic appraisal of the efficacy of the treatment being given by the US government Treasury lead by Mr Bernanke to nurse it back to its feet. We wish that the course correction is made appropriately so that world is not fooled again like in 2008.

SREEDHAR M KRISHNA MURTHY

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