By Tyler Durden and Geoffrey Batt
These days catching the Fed chairman telling the truth as opposed to a b(a)ld faced lie is in itself a six sigma event. Sadly this post will continue with hugging the median. Some observations on the most recent fabrications by the chief money printer himself, which go to show just how willing Bernanke is willing to bend reality and/or his perception of it as the occasion suits.
A week ago Zimbabwe Ben wrote an op-ed in Washington Post last week in which he said:
“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.”
Recovery without inflation is another way of articulating the Fed’s quixotic dual mandate. Of course, everyone knows the Fed does not care about inflation, or, it seems, the economy, unless of course Goldman Sachs recently changed its name to Inflation Economy, Inc. But what’s striking about this sentence (the last sentence, no less, of a decidedly political op-ed), is that it directly contradicts what he says about QE in two papers in 2004.
In the May 2004 edition of The American Economic Review, Bernanke and Reinhart published “Conducting Monetary Policy at Very Low Short-Term Interest Rates.” ZH cited this paper before as evidence that Bernanke considered monetizing equities viable in a debt deflation. This time, however, it’s useful because he claims aggressive QE may “have expansionary fiscal effects.”
“So long as market participants expect a positive short-term interest rate at some date in the future, the existence of government debt implies a current or future tax liability for the public. In expanding its balance sheet by open-market purchases, the central bank replaces public holdings of interest-bearing government debt with non-interest-bearing currency or reserves. If the increase in the monetary base is expected to persist, then the expected interest costs of the government and, hence, the public’s expected tax burden decline. (Effectively, this process replaces a direct tax, say on labor, with the inflation tax.)”
Then in the Fed Minutes from Nov 4th we get:
“Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year, but that any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”
An odd remark considering what Bernanke et al said in Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment Author(s): Ben S. Bernanke, Vincent R. Reinhart, Brian P. Sack Source: Brookings Papers on Economic Activity, Vol. 2004, No. 2 (2004), pp. 1-78. More specifically:
…quantitative easing may work through a signaling channel if its implementation marks a general willingness of the central bank to break from the cautious and conventional policies of the past. A historical episode that may illustrate this channel at work (although the policymaker in question was the executive rather than the central bank) was the period following Franklin D. Roosevelt’s inauguration as U.S. president in 1933. During 1933 and 1934 the extreme deflation seen earlier in the decade suddenly reversed, stock prices jumped, and the economy grew rapidly.Christina Romer has argued persuasively that this surprisingly sharp recovery was closely associated with the rapid growth in the money supply that arose from Roosevelt’s devaluation of the dollar, capital inflows from an increasingly unstable Europe, and other factors. Because short-term interest rates remained near zero throughout the period, the episode is reasonably characterized as a successful application of quantitative easing.
It appears despite Bernanke (and Geithner’s) repeated appearances, admonitions and Fed Minute posturings to the contrary, Bernanke is fully aware of what his actions will do to both inflation and the dollar, and that the devaluation of the greenback is critical to the success of his campaign of bailing out CREs laden bank balance sheets. Yet in the meantime on every TV and congressional appearance the Chairman will eagerly lie and prevaricate, hoping his listeners have short memories, and have not bought a Kindle yet (difficult to imagine judging by Amazon’s 1,000,000,000,000,000 (non)inflation adjusted P/E) to have read his own scribblings on the matter of impending dollar devaluation. America deserves all it gets if it allows its Senators to reconfirm this human being for the most important post in the world.