Friday, February 4, 2011

Two Views on The Bernank

This morning, there are two radically different views on a speech Federal Reserve chairman Ben Bernanke gave on Thursday—the view from the mainstream media in the United States, and the view of the mainstream media in the rest of the world.

Ride ‘em, Cowboy.
Chairman Ben Bernanke.
Both are referring to the same speech The Bernank gave at a luncheon at the National Press Club in Washington—but the American media is focussing on an obvious political nonstarter: The idea that the budget ceiling will not be raised.

The foreign media, on the other hand, is focussing on something that really matters: How the U.S. is exporting inflation, especially food price inflation, which is leading to social unrest.

Bernanke’s vehement denial of the obvious is what the media in the rest of the world is talking about.


The New York Times reports in the lead of its story,
The Federal Reserve chairman, Ben S. Bernanke, warned Congressional Republicans on Thursday not to “play around with” a coming vote to raise the government’s legal borrowing limit or use it as a bargaining chip for spending cuts.
In remarks after a luncheon speech here, Mr. Bernanke sided with the Obama administration in the fight over the debt ceiling, which the government is on course to hit in April or May, saying it should be raised without conditions. Some Republicans have insisted on immediate spending cuts in exchange for raising the limit.
It was the first time that Mr. Bernanke, who in contrast to his predecessors has avoided taking sides in partisan debates on fiscal matters, had spoken out on the debt ceiling issue. His willingness to do so suggested a desire by the central bank to prevent Washington lawmakers from toying with bond markets that have been volatile since the European debt crisis last year.
Contrast those lead paragraphs with these from the UK’s Telegraph (not exactly a bastion of Lefty thinking):
Ben Bernanke, the chairman of the US Federal Reserve, has dismissed the idea that the central bank’s policies are to blame for the rise in global food prices to a record high that helped trigger political unrest in Egypt.
Mr Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed’s decision to embark on a second, $600bn (£371bn) round of printing money. “Clearly what’s happening is not a dollar effect, it’s a growth effect,” Mr Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday.
The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further.
The Times and the rest of the American mainstream media is focussed on a non-issue—while the rest of the world is focussing on something that matters: Food price rises, and the perception that America is exporting inflation.

The American financial media’s thing about the Federal government debt ceiling is sort of silly—everyone knows that the debt ceiling will be raised. 

The last time either party brought issues of government finances to a head—back in 1995, with the two Federal government shutdowns—the political cost was catastrophic for the party that pulled the trigger, in that case Newt Gingrich’s Republicans. 

So for all their posturing, everyone knows the history. When it gets to crunch time, the Republicans won’t make the same mistake twice: They’ll fold, and sign off on raising the Federal government debt ceiling. 

The debt ceiling is a non-issue: It’s political theater. Perhaps the U.S. mainstream media is focussing on it precisely because it is theater, and not substantive. 

But food price inflation is real. The riots in Egypt are real—and they have nothing to do with “muslim extremists”, or even Mubarek’s dictatorship: They’re about food prices, plain and simple, which have been steadily rising ever since the Federal Reserve’s loose money policies and various versions of QE have driven commodity prices to the moon. 

American media is concentrating on political theater—fiddling while Rome burns, as it were—while foreign media is focussed—rightly—on what matters: The cause of mass unrest. 

The Hourly G fully expects severe, high inflation to kick the American economy in the short term. Because the mainstream media is playing down fears of inflation, and (as in the case above) ignoring altogether the likely culprit for food price inflation, which is causing civil disturbances around the globe, expect the American people to be vastly surprised when inflation boils over.

This inflation shock that’s coming might well prove to be worse than the inflation shock of ‘79. 



  1. Gonzalo,
    Could you explain the mechanics of how the Fed is exporting inflation? I understand it has to do with the Dollar being the world's reserve currency but I don't understand exactly how the pieces fit together to cause inflation in other countries. Thanks

  2. Anonymous, trillions of dollars currently reside outside US borders so when the fed prints more the inflation is "exported" because the value of all dollars declines including the foreign holdings.

  3. I'm with Anonymous and would request a 10 PM lesson on how QE(x) result in exported inflation. MrC, your explanation seems a little to pat to really explain it.
    The argument that global demand in developing nations combined with decreased supply due to floods/droughts/etc seems to make sense from my very basic understanding of economic theory (high demand + low supply = higher price).
    Conversely, I'm not saying that QE actions are not to blame, I just need a better explanation of how QE "exports inflation". Thanks.

  4. Yes, this would be a much-appreciated 10PM lesson topic, indeed! I'm guessing GL might also nudge us towards the big debate promo ad at the top of this page to learn more about the pending inflation crisis :)
    So, my very basic understanding of this topic - there is "money supply inflation" & product/service "price inflation". I think we're all really concerned about "price inflation" ... and interested to see how you connect the dots back to QE1/QE2/QEn and how this will impact "price inflation" OVER & ABOVE or SEPARATE FROM the effects due to supply-demand constraints (6+ billion mouths & counting ...).
    I don't have a clue as to what "trigger" will actually monetize the trillions on the Fed balance sheet ... it hasn't happened yet, so what would cause "the Bernank" to finally ejaculate his US dollar wad onto the rest of us? I guess it would have to be unleashed through the big banks ... so maybe more like a Wall St gangbang jerkoff circle event?!?
    Everyone ... run for cover!!!!!!!!!

  5. Basically the Fed prints tons of money credit, its purchased by the primary dealers, sold to the banks, who turn around and use it to buy 'real' stuff like commodities. Its the bidding up of commodities thats raising the raw and finished food prices world wide.

    Summary...commodity bubble caused by Fed printing to inject $ to cover bank losses.

  6. Doug,
    If there are only 5 known Old Judge Ewing Tobacco Baseball Cards and each one is worth $25,000, and somebody finds thousands of them in his great grandfather's attic and takes them to a sports memorabilia show, the value of the 5 thought to be in existence will plummet. It doesn't matter if they are owned inside US borders or offshore. Their value drops. Their value is independent of physical location.

    No matter where your dollars are, if $600 billion are put into circulation, the value of those already in circulation drops.

    The Fed and others want all of us to think it is more complicated than that. It is not. Why do you think they call it "quantitative easing?" Calling it "creating money out of thin air" would raise lots of eyebrows.

    "War is peace.
    Freedom is slavery.
    Ignorance is strength."
    George Orwell

    "Overall, inflation remains quite low.
    We are not monetizing debt.
    We can stop inflation in 15 minutes."
    Ben Bernanke


  7. John Hussman is critical of QE.

    His recent market commentary on October 18, 2010 - The Recklessness of Quantitative Easing did an EXCELLENT job of explaining why QE causes commodity prices to rise.

    -Dave in MO

  8. Greetings to KS at 8:26. This is Kansas again with another question. BTW, I like what Doug has been contributing with his comments.

    GL, please explain if the "debt ceiling" topic is something to really fear or not. I suspect something with more thunder is apt to take place to help divert attention from debt ceiling related fireworks. Is the Debt Ceiling issue becoming a real threat, or just a threat against the people?

    Thanks as always,

  9. "Due to its shortsighted mercantilist trade policy, China's government chooses to purchase large quantities of US dollars using newly-created Yuan. The resultant rapid growth in the Yuan supply inevitably leads to rapid price rises within China, such as the double-digit rates of increase over the past year in the prices of food and housing. Our point is that China's policy-makers CHOOSE to import US inflation. They do this because of the misguided belief that it's good strategy to maximise the quantity of valuable goods that their countrymen exchange for pieces of paper created by a foreign bank."

  10. KS - I get the idea that if there are billions of new dollars in circulation the value of each goes down. However, there seems to be a problem in that people are not working, they are therefore not spending money (that they don't have) and those that are working and making money aren't spending that money because of fear that they will soon be in the swelling ranks of the unemployed. The money they do spend is going to pay off mortgages for homes that are underwater and credit cards that have 19.99% So the amount of dollars in circulation is dwindling and dwindling. So are there additional billions in circulation or are we just trying to get back to a level of dollars in circulation that we had before the crisis?
    I'm not trying to proselytize for demand-side economics, I'm just curious because I can see the reasoning on both sides of the argument. I'm starting to lean more and more toward bi-flation as the best explanation of where we are/are heading.

  11. Rising commodity (food) prices hit people in places like Egypt first and hardest because such people are living on the financial edge, spending about half their net income or more on food. An increase in food prices is a direct threat to their very survival.

    Here is an excellent article, with an absolutely stunning graph, that explains how Fed money printing is driving up commodity prices worldwide ( the USD is still the world's reserve currency, so the Fed in effect is the world's central bank):

    James Turk is usually very clear and understandable. The above article us no exception.

  12. Doug,
    What you describe is due to a money system that incentivizes debt and creates debt out of thin air. The amount of debt created is greater than the amount of money in circulation the day the debt is created.

    Debt is incentivized by a system characterized by fiat money, fractional reserve banking, and a central bank that artificially suppresses interest rates.

    Fractional reserve banking allows banks to lend out more than they actually have on deposit.
    When consumer confidence is up and rates are artificially low, mountains of new debt are created and plowed into the sector du jour. During the tech bubble it was tech stocks. During the housing bubble it was houses.

    When the debt bubbles pop, there is not enough money in the system to pay off all the debt because "real" money was never lent out in the first place. It was created out of thin air.

    Small and medium sized banks get shut down. The TBTFW (Too Big to F@%# With) banks get bailed out on the backs of the taxpayer and live on to lend again.

    "The borrower is the slave to the lender." Proverbs 22:7

    Our money system is set up to create debt slaves. So is Europe's. So is every other central bank fiat money system. Those who avoid debt must pay anyway thru the taxes necessary to prop up the system.



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The cult of stability is a culture of death.