Posted on 02/10/2007 10:13:44 AM PST by frithguild
HAPPY ANNIVERSARY TO Ben Bernanke! At least it's an anniversary — it's now been a year since he took the helm of the Federal Reserve. But how happy it's been is a judgment that history isn't ready to make yet.
The stock market is certainly happy about Bernanke's first year. The S&P 500 turned in a 14.5% total return over the year (well above the long term average of only 10.5%, according to data from Ibbotson Associates). And the Dow Jones Industrial Average is at all-time highs.
But when I was asked on a television program this week to grade Bernanke's first year as Fed chairman — "A" through "F" — I found I couldn't do it. I had to give him an "incomplete."
A Fed chairman's first duty is to keep inflation at bay. According to the most sensitive forward-looking indicators of inflation, Bernanke hasn't been very good at that. During his first year as chairman, gold has risen 15% and the U.S. dollar has lost 5% of its foreign-exchange value.
The core consumer price index has risen 2.6% on an annual basis since Bernanke took over from Alan Greenspan. That's actually lower than the 3% average that Greenspan delivered during his 18 1/2 years as Fed chair.
But 2.6% isn't good enough. If Bernanke serves for 18 1/2 years, and that rate of inflation turns out to be his average, then the overall price level will have risen by 61.7% cumulatively. That's simply not an acceptable level of erosion of purchasing power.
Bernanke admits that's not acceptable, and so does every Fed official who speaks on the subject. Today's level of inflation is simply too high, and unless it comes down the Fed is going to have to do something about it.
And therein lies the reason why Bernanke's grade is "incomplete." He dared to stop the Fed's rate-hiking cycle last August when inflation was still rising. If inflation now comes down, he'll look like a genius — and he'll deserve an "A."
In fact he'll deserve an "A+." The reason the Fed paused in August was to keep the decline in the housing industry from deepening, and potentially dragging the whole economy down with it. Right now it looks like housing is stabilizing, or at least its problems aren't accelerating. And the fourth-quarter GDP report last week proved beyond a shadow of a doubt that, whatever housing is doing, it isn't holding back the rest of the economy in the slightest.
That, by the way, is exactly what I predicted before the GDP report came out. So give me an "A."
But should we really be giving Bernanke and the Fed any credit for any of that? How do we really know that halting the rate hikes last August had anything to do with it? Just because a rooster crows in the morning, that doesn't mean he makes the sun come up.
Maybe the risk to the economy from the housing bust wasn't as bad as most people thought. Or maybe it was bad, but it wasn't the Fed who kept it from turning into a disaster. Maybe the fact that long-term bond yields fell so much last year did the trick, by keeping credit in the mortgage market plentiful. If the Fed had raised rates in August instead of halting, those yields may have fallen anyway.
And, truth be told, we can't even say for sure that the worst is over for housing. Maybe today's seeming stabilization is just a pause before another big leg down.
But let's be generous, and assume that housing is okay, and assume that the Fed should get some credit for that.
That just leaves the matter of inflation. Fed spokespeople keep saying inflation is too high, but they always add that they expect it to come down. What if it doesn't?
I think it won't. And I think in his heart of hearts Ben Bernanke doesn't really think it will come down either. He should know — because it's his inflation. He caused it.
It all started in late 2002, when the Fed started worrying about the opposite of inflation — deflation. At that time there had indeed been a period of serious deflation, but by then it was over. Nevertheless, the Fed moved to combat the then-nonexistent deflation.
Remember the speech that Ben Bernanke gave in November 2002, about the Fed's "printing press" and "helicopter drops of money?" With those words he made himself the intellectual architect of the era of ultra-low interest rates, and the flooding of the world with U.S. dollars.
And inflation.
In 2002, he feared the risk of deflation, so he inflated. In 2006, he feared the risk of a housing collapse, so he left rising inflation unchecked.
Soon it will be time to take care of unfinished business. The economy isn't slowing down. Last week's fourth-quarter GDP report ended any doubt on that score. So, if Bernanke was hoping that a slowing economy would take care of his inflation problem, he has just been very disappointed.
I suspect he's starting to worry. You can sense it in the latest public statement from the Fed's Open Market Committee, released just hours after the GDP report.
It was the briefest statement of any issued under Bernanke's leadership. It felt to me as though the Fed didn't want to say much at this point, because it really doesn't have much confidence about what's going on. It's hoping a red-hot economy will cool off. It's hoping that inflation will come down.
But hope is not a strategy. In fact, the terse FOMC statement could have been even shorter. It could have been reduced to a single utterance: "uh-oh."
Uh-oh, indeed. The next move for the Fed is going to be to hike rates. I don't know when it's going to happen, but I'm getting increasingly worried that it could be sooner than I'd previously thought.
I continue to be bullish on stocks, and bullish on inflation plays like oil and metals. But when the markets get the idea that the Fed is coming off pause, you're going to want to be short, short, short.
If you don't trust your ability to time events closely, take something off the table now and put it in cash. I'm going to try to hang in there till the last possible moment. I still think there will be a better moment to sell.
So, 3% was great, but 2.6% is bad? I don't get it. 2.6% inflation is historically very low. Give the guy a break.
How is any inflation good? How about simple price stability like you would get on a gold standard?
Don't be fooled by government statistics on inflation. They're a fraud.
Would a gold standard really do that? How could going to a gold standard fix all costs? There would still be ups and downs in the cost of energy, changes in productivity and other fluctuations in the cost of producing goods. Companies would still have to compete for the best labor by offering higher salaries to lure new employees. Prices would still rise. I don't see how it is possible to have 0 inflation over time.
All the gold standard would do is tie the dollar to the price of gold, which has its own ups and downs according to what the market it doing. If the dollar went gold, I imagine the price of gold would go up, and so would the dollar. Then everybody would yell about the "trade deficit!"
Germany was on the gold standard during their hyperinflation of the 1920's.
If central bankers ever admit that inflation is caused by the government, not economic growth or low unemployment, then 0% inflation would be possible, along with a rapidly increasing standard of living.
All by itself, no. Policy errors may lead to inflation even on a gold standard.
How could going to a gold standard fix all costs?
When I say price stability I mean that prices are not effected by the price of money, i.e. through the monetary phenomena of inflation and deflation.
There would still be ups and downs in the cost of energy, changes in productivity and other fluctuations in the cost of producing goods.
Of course. But these price fluctuations should not be the result of monetary policy. The price of money should be constant over time.
Companies would still have to compete for the best labor by offering higher salaries to lure new employees. Prices would still rise. I don't see how it is possible to have 0 inflation over time.
It should not be difficult to immagine at all. Fluctuations in price due to increased productivity or thechnical innovation should be happening al the time. However, the means of exchangine goods and services should remain constant. An ounce of gold should cost the same in 1975 and in 2007.
The supply of gold is far more transparent than fiat money. Traders will know the amount of reserves and the potential of any mining operation or any other source of increased supply. These are constants. Historically, nothing has kept it's value like gold.
Gold is traded no because governments change the value of their currencies to devalue their debts. It is stealing from those who have accumulated capital - nothing less. Using a gold standard puts a check on this power of government as an issuer of currency.
Pass a law that says the amount of gold a dollar will buy will not change from today's price.
>>Don't be fooled by government statistics on inflation. They're a fraud.<<
When housing expenses are not factored in, they are worse than a fraud. And what about the massive inflation in taxes over the last decade?
In a few years time the motto "Got milk?" will be replaced with "Got gold?". :-)
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