Blogging on Latin America at times feels like a cyclical process where you get old stories retold with only a change of names. Now the Fed’s chairman, Ben Bernake, is giving us a sense of deja vu by implementing one of the most failed policies of the 1970s: Rekindling inflation.
You’re probably saying, “you’re kidding me, are you? In less than two years the Fed’s pumped more into the economy than in the previous forty years. The article itself says,
The Fed’s balance sheet has nearly tripled, to about $2.3 trillion, since the financial crisis of 2008
Isn’t that inherently inflationary?”
Not if you’re Ben:
Bernanke Signals Intent to Further Spur Economy
The Federal Reserve chairman, Ben S. Bernanke, sent a clear signal on Friday that the central bank was poised to take additional steps to try to fight persistently low inflation and high unemployment.
Mr. Bernanke noted that “unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” But he suggested that the Fed was prepared to manage the risks associated with the most powerful tool remaining in the Fed’s arsenal of weapons to stimulate the economy: vast new purchases of government debt to lower long-term interest rates.
As if the problem was high interest rates. Stephen Green has more on that:
The problem with this economy isn’t low interest rates. (Actually, it is a problem — but not in the way the Fed thinks it’s a problem.) The problem with this economy is the fundamental uncertainty created by the endless tax and regulatory schemes foisted on top of it by this viciously anti-free market Administration, and by this Congress, which wouldn’t recognize the Law of Unintended Consequences if it stole Nancy Pelosi’s gavel and banged them all about the head and shoulders with it.
So what’s the problem with low interest rates? Well — rates are so low that it no longer really costs anything to borrow money. And when something’s free, people get stupid. Because prices, as they teach in Econ 101, are information. Prices are signals as to what something is worth. So when the Fed tells everyone that the dollar is essentially worthless — people will behave accordingly.
Borrow money for free? Great — so why risk it in a business venture, when you can stick it into commodities? Because commodities, usually valued in dollars, will go up, up, up, as the Fed continues to print those dollars it then lets you borrow for free. Heck, people could just borrow some of that free money and just convert it into euros for instant profit. Oh, wait — people have been doing just that.
Let’s add something else to the mix. Yes, our economy is frozen in place, thanks to Obamacare, Obamataxhikes, and the undead threat of Cap & Obama. And now the Fed is promising inflation! It’s coming! Here’s yet another fundamental uncertainty — about the very value of the dollars you work and take risk for! — being added on top of everything else.
Stephen also points out that
Every new dollar printed either leaves the country or leaves the productive economy — and reduces the value of every existing dollar.
Too bad Ben couldn’t get a Chinese official to stand next to him while he was giving his speech.
What if the Fed overshoots its target? Fret not, says Ben:
“With these tools in hand, I am confident that the F.O.M.C. [Federal Open Market Committee, which sets monetary policy] will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time,” Mr. Bernanke said.
Ben doesn’t remember the magic word of the 1970s decade: stagflation.
You can read Bernake’s whole Federal Reserve Bank speech here.