Wednesday, 01 Sep 2010 09:44 AM
By: Robert Wiedemer
Although not much that is newsworthy usually happens at the
annual Federal Reserve conference in Jackson Hole, Wyo.,
something did come out of the recent summit that is worth
contemplating.
Federal Reserve Chairman Ben Bernanke essentially said that he
will do whatever it takes to keep the economy from declining.
Since the main power Mr. Bernanke has is to print money, most
people read his comments to mean that he will print money as
necessary to keep down unemployment and encourage higher
economic growth.
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One observer commented that he was using quantitative easing, or
QE, for social policy. It’s an uncomfortably correct
description. QE is the Fed’s feel-good term for buying Treasury,
Freddie and Fannie bonds with printed money.
The ease with which he is speaking about printing massive
amounts of money as if it were just another stimulus package is
certainly disconcerting since, in the long run it is the most
financially costly stimulus you can have. Of course, in the
short run, it is also the least politically and financially
costly, which makes it so attractive since no vote in Congress
has to be taken or money borrowed.
Despite his talk, I am not sure the Fed is ready to use the
nuclear option just to combat unemployment right now.
However, if the stock market takes a big dip of a couple
thousand points and looks ready to fall further, I would truly
be shocked if the Fed didn’t again start buying bonds in
whatever quantities it takes — $1 trillion,$2 trillion or $3
trillion — to move the market, and the economy, back up.
And, his talk sets the stage for using QE to further stabilize
the economy after such a decline in the stock market when the
unemployment and growth picture would be more precarious than it
is today. If it took another $1 trillion worth of printed money
to do that, the discussions at Jackson Hole tell me the Fed
attitude would be, “So be it.”
Of course, at that point, if we have already spent $2 trillion
saving the stock market and then we spend another $1 trillion on
stabilization, we would have printed about $5 trillion since the
financial crisis of spring 2009.
Given that our monetary base before that time was about $800
billion, that would equate to a more than 500 percent increase
in the money supply.
It would be hard not to get inflation from such an action. As I
have often said, it’s not so much the money that we have already
printed that will cause inflation, as it is the money we are
likely to print that will cause so much inflation.
The people at the Federal Reserve are not entirely unaware of
this situation. Even Mr. Bernanke said he is concerned
that if QE is used too much, people would get concerned over the
Fed’s exit plan. Of course, in reality, there isn’t a very good
exit plan from the printing we have already done, much less more
printing in the future.
However that concern tells me that Ben will only press the
button if a major economic problem occurs, such as a big decline
in the stock market that looks like it will not stop without Fed
intervention.
At the same time, Ben’s ease with which he speaks of QE and the
fact that little has been said by the Fed to dispel rumors that
they may print as much as $5 trillion to boost the economy, tell
me that they simply aren’t as concerned about printing money as
they are about a massive popping of the stock-market,
real-estate and consumer-spending bubbles.
I don’t think it’s just a bad economy that bothers the Fed. They
seem to know that there is now more at stake than there was in
the early 1980s with stock and real estate prices so much higher
today. But in printing money to save the economy and the bubbles
in short term, they fuel the fire of their long term destruction
through inflation.
As my co-author, Dr. David Wiedemer, recently said to me: "It
seems like they want to pack the entire house full of
explosives.”
So, looking ahead to the next conference at Jackson Hole, I
would wish that when the Federal Reserve officials stand on the
beautiful Jackson Lake Lodge veranda and look to the
spectacularly soaring Grand Teton mountains across Jackson Lake,
that they would see mountains of soaring inflation coming from
their discussions.
Then, maybe something of value would actually occur at their
annual conference.
Until then, we will have Federal Reserve policy that is being
made in the clouds above those beautiful mountains.
About the Author:
Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a
macroeconomic forecasting firm that customizes its forecasts for
specific businesses and investment funds. He is a regular
contributor to Financial Intelligence Report, the flagship
investment newsletter of Newsmax Media.
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