Bernanke's Cowardice
Has Sealed Our Fate
By Monty Pelerin
AmericanThinker.com
The day after the election, the Federal
Reserve launched QE2, the second round of
Quantitative Easing. This public relations
euphemism attempts to hide the fact that the
Fed is "printing money" (the Fed actually
does it electronically these days).
"Cheating, debasing, and inflating," as in
stealing from the public, is a more accurate
description.
Bernanke indicated that from 600 to 850
billion additional dollars would be created.
To put this in perspective, the TARP package
was in this range. The total Federal Reserve
balance sheet was $829 billion at the end of
2004 and only $869 billion in August 2007.
At the end of 2009, it had ballooned to over
$2,200 billion. This announcement means it
is headed to $3,000 billion (3 trillion).
Ben Bernanke weakly defended his action with
the following justifications:
-
Further support to the economy is needed.
-
Easier financial conditions will promote
economic growth.
-
Higher stock prices will boost consumer
wealth and help increase confidence, which
can also spur spending.
The first two statements are true as stated,
but unlikely to be affected by additional
QE. The third is partially true, although it
is unclear that Bernanke's action will raise
stock prices. Furthermore, empirical data is
not supportive of the alleged relationship
between stock prices and spending (see the
Kass reference below).
Many economists and analysts believe that
the Fed actions will not help. Several
believe they will actually make conditions
worse (two examples are
Doug Kass
and Pimco's
El Erian).
The Real Reason for QE2
Mr. Bernanke's justification for committing
nearly another trillion dollars does not
meet the "smell" test. In prior life,
Professor Bernanke would flunk an Econ 101
student for such weak justification (of
course, we know no one really gets an F at
Princeton, no matter how deserved).
Mr. Bernanke's performance was a charade
meant to hide the fact
that the government is now illiquid!
Mr. Bernanke instituted QE2 because the
Federal Government has reached the point
where it cannot pay its bills.
If the Fed does not buy government bonds
(print money), checks will stop for programs
like Social Security, Medicare and Medicaid
reimbursements, military pay, etc.
The Madoff Model of government just
ended. There are no longer enough bond
buyers or taxpayers to pay for the
profligate spending of the US
government.
For more than a decade, responsible
economists and analysts warned how this
situation had to end. That point has
apparently just been reached as a result of
some of these reasons:
-
We are increasingly viewed overseas as a
profligate, fiscally irresponsible country
with no willingness to change.
-
Our debt levels have become dangerously
high, raising the probability of sovereign
default.
-
Our annual deficit is three to four times
larger than ever before, and it looks like
there is no political will to address it.
Interest rates are too low to compensate for
the perceived risk.
-
Foreign countries that supported us are now
either unwilling or unable to purchase our
debt.
Solving Insolvency
The root cause of the liquidity problem is
insolvency. Insolvency
is a condition where eventually,
obligations cannot be met.
Illiquidity then
results. QE2 provides liquidity but does
nothing to solve the insolvency issue.
Unless the insolvency problem is solved,
illiquidity will continue. From a
mathematical standpoint, it is possible to
solve the insolvency problem. From a
practical or political standpoint, it is
likely impossible.
Our funded federal debt is almost 100% of
GDP. Our unfunded social obligations are
about another $100 trillion. The total net
worth of the country is about $55 trillion.
Government has promised benefits twice what
everything in the country is worth. To
understand the math, see "Spiraling
to Bankruptcy."
Laurence Kotlikoff
referred to a recent International Monetary
Fund assessment of the U.S. financial
condition:
... the IMF has effectively pronounced
the U.S. bankrupt. Section 6 of the July
2010 Selected
Issues Paper says:
"The U.S. fiscal gap associated with
today's federal fiscal policy is huge
for plausible discount rates." It adds
that "closing the fiscal gap requires a
permanent annual fiscal adjustment equal
to about 14 percent of U.S. GDP."
The government would have to double every
tax it collects (including payroll taxes) to
run 5% surpluses for decades in order to
bring government obligations into manageable
range. Such tax increases would plunge the
U.S. and probably the world into an economic
Dark Age.
Alternatively, current government spending
could be cut by about 50%. Managing spending
forward so that a 5% surplus is maintained
would also work.
Bernanke's Morton's Fork
Mr. Bernanke was faced with two choices,
neither of which were good. He could have
refused to initiate another round of QE,
which would have forced the government to
make tough decisions. Such action might have
put the economy into another Great
Depression. He likely would have lost his
job and been blamed for any economic
difficulties that followed.
He chose the other option -- provide the
needed funds. As such, he chose to be the
Enabler-in-Chief, reinforcing the
out-of-control government fiscal policies.
This choice likely enabled him to keep his
job (for the time being) and made him appear
to be the White Knight responsive to
economic needs.
Unfortunately for the country, his choice
makes matters worse -- much worse.
The Road Ahead
With QE2, the government will be able to pay
its bills. If the shortfall were temporary,
Bernanke's actions might be considered
prudent. Of course, if the shortfall were
temporary, the government would be able to
borrow in the marketplace.
Without a solution to spending excesses and
social commitments that cannot be met, there
is no end to our shortfalls. Welcome to QE2,
soon to be followed by QE3, QE4...and
hyperinflation.
QE2 is just another step toward "banana
republic" status. We are on the same road
traveled by Argentina, Brazil, Zimbabwe,
Weimar Germany, and many others who
destroyed their currencies.
These countries did not intend for that
result to happen. Each step was justified
based on the expediency of keeping the
government going. As Hayek pointed out, "I
do not think it is an exaggeration to say
history is largely a history of inflation,
usually inflations engineered by governments
for the gain of governments."
In every case, including our own, the
government had already failed. Its attempt
to survive made matters much worse for its
citizens.
QE2 may only represent the first step, but
its effects alone are apt to be profound.
Pimco's
Bill Gross
anticipates it will produce a 20% decline in
the value of the dollar. If you were China
or Japan, would you want to buy Treasury
Bonds? Would you continue to hold
dollar-denominated assets? These types of
considerations trigger currency runs.
Mr. Bernanke has deferred the day of
reckoning. His action will not prevent
government collapse -- it will ensure it,
along with collapses in the currency,
economy, and likely society itself. This
little man, unelected and accountable to no
one, has just sentenced the country to an
Economic Apocalypse.
Milton Friedman's concern seems especially
appropriate:
The power to determine the quantity of
money ... is too important, too
pervasive, to be exercised by a few
people, however public-spirited, if
there is any feasible alternative. There
is no need for such arbitrary power ...
Any system which gives so much power and
so much discretion to a few men, [so]
that mistakes - excusable or not - can
have such far reaching effects, is a bad
system. It is a bad system to believers
in freedom just because it gives a few
men such power without any effective
check by the body politic - this is the
key political argument against an
independent central bank.
How Will This End?
There is no pleasant ending. Political
activity over the past fifty years
guaranteed that. As Ludwig von Mises
observed, "Credit expansion can bring about
a temporary boom. But such a fictitious
prosperity must end in a general depression
of trade, a slump."
The best solution is for Mr. Bernanke to
cease and desist his QE policy. That would
require the political class to face its
problems. It would require a massive
rollback of the welfare state and
government. It would require resizing
government to a level that productive
citizens would support. Transitional
hardships would occur, including civil
unrest and possibly a depression.
The worst solution is the one that Mr.
Bernanke has selected. If he stays on this
course, fiat money will become worthless. So
will Social Security checks, because they
will have no purchasing power. All fixed
income and savings will be wiped out. The
middle class will be financially destroyed.
Markets will cease to function except on a
barter system. Food and other necessities
will be in short supply, possibly to the
extent of health risks developing.
Unimaginable civil unrest is likely.
A Greater Depression is assured. Unlike the
first Great Depression, citizens would be
without any financial wherewithal. Their
savings and fixed income will have been
stolen from them via hyperinflation. In
short, it would be the worst economic hell
imaginable.
Mr. Bernanke was unwilling to tell you what
is happening. His action has moved us into
the eye of a massive storm. Do not be lulled
into complacency, for as von Mises stated,
"A fiat-money inflation can be carried on
only as long as the masses do not become
aware of the fact that the government is
committed to such a policy."
Now you know, and others will pick up on
this quickly. Make like the political elite
and protect yourselves from the Category Six
economic hurricane that Mr. Bernanke is
stoking.
The history of
government management of money has,
except for a few short happy periods,
been one of incessant fraud and
deception.
- Friedrich Hayek