Federal Reserve Chairman, Ben Bernanke, has been eerily quiet during the recent market storm. To be sure, seemingly oblivious to the happenings in EU-land Mr. Bernanke's speech, The Economics of Happiness, was delivered shortly after major riots in Greece and shortly before the historic nearly $1 trillion plan was announced to try and prevent the destruction of the Euro. As for Bernanke's speech a month earlier, the tone was that of victory:
"The lesson has been learned. In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system. As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression." Economic Policy: Lessons from History. April 8, 2010. Bernanke
Strong words from a Central Banker whose balance sheet is contaminated with more than $1.1 trillion in mortgage-backed securities and whose federal funds rate is trapped near 0%.
Regardless, as the correction in the U.S. financial markets threatens to turn into something more ominous, it may be time for Bernanke to concede that recent emergency call(s) with other central banks and short-term currency swaps indicate that sparing the world from a 1930s style cataclysm remains a work in progress. For that matter, with the government's core inflation rate running at its lowest level in four decades, it may be time for Bernanke to acknowledge that under today's paper-money system - that is with China's currency fixed and the Euro fixated on survival - determination alone may not be enough for a welcomed dose of inflation to crystallize.
"...We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." Bernanke. November 21, 2002
Testing The Limits of USD
With countries already in competition to devalue their currencies and investor's becoming more concerned with the risk of sovereign defaults, the U.S. could be dangerously close to the point when the more the Fed does the worse the situation becomes. Quite frankly, having already played their interest rate, bailout, and QE cards, everyone is looking for the returns that these policy choices were supposed to generate, not an encore. Should the Fed recharge its printing press prior to previous interventions achieving their desired effects, you cannot help but wonder how investors will respond.
"If we do fall into deflation...we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation." Bernanke. November 21, 2002
Granted, the world does not appear to be ready to get off the dollar, and even those most strongly opposed to USD hegemony (namely Russia) have temporarily shelved their dissent. Nevertheless, it is noteworthy that there have already been isolated flashes of investor's getting out of fiat money altogether and that even central banks, somewhat paradoxically, are adding gold to their reserves for the first time in a generation.
Can Bernanke Go It Alone?
Remembering that Bernanke's anti-deflation playbook operates under the assumption that interest rates and (if need be) asset prices can always be fixed at advantageous levels, the concern is that the Fed is already locked into a dangerous strategy of ever escalating interventions. Interestingly, in a paper entitled The Great Slump of 1930 the godfather of interventionist ideas, John Maynard Keynes, seemed to suggest that there are limits - that central banks can not act alone and that only great creditor nations can be the source for sparking 'wealth creation'.
"But no one can take the first step except the central banking authorities of the chief creditor countries; nor can any one Central Bank do enough acting in isolation."
With Euro-land already immersed in quagmire, China battling its own unique set of problems, and Japan's record of fighting deflation not exactly enviable, who can Bernanke enlist to join in any future deflation fighting campaigns?
"And even if France, hugging the supposed security of gold, prefers to stand aside from the adventure of creating new wealth, I am convinced that Great Britain and the United States, like-minded and acting together, could start the machine again within a reasonable time..."
As amusing as the line 'supposed security of gold' is, the highlight here is 'adventure of creating new wealth'. What, dear Keynesians and acolytes of Bernanke, has the Fed really created during say the last say 20-years?...
Don't Expect Fed To Admit Defeat
If you believe, like many do, that the Fed has the omnipotent power to always inflate (but never hyperinflate), then current trends suggest that Bernanke and company may soon act and/or that a refreshing dose of inflation is about to set in. If, on the other hand, you conclude that Bernanke's anti-deflation printing policies are toothless when adopted in isolation and/or that the rest of the financial world is unwilling to blithely climb on board for another Bernanke tour, the question must be asked:
How long can the current paper-money system survive if central bankers can supply only an endless stream of adventures, less the creation of new wealth?
The seriousness of this question, which Bernanke and FOMC members have no doubt studied, is largely the reason why Fed members are routinely economical with the truth. Think about it: if playing the role of Mr. Central Banker you cut interest rates to zero, purchased a mess of toxic assets, intervened in the Treasury market, and proceeded to give yourself a pat on the back for averting complete disaster, how forthcoming would you be if before you could unwind a single stimulatory act the threat of having to do even more was rising?
Conlcusion - Roses Are Not Always Red, She said
Don't be fooled into thinking that Bernanke's silence when it comes to the recent market storm is the result of him surmising that the Fed has reached its intervention limits. To be sure, whether it is insolvent corporations or governments inflicting damage on the U.S. economy and financial markets the story is much the same: the Fed would rather print the dollar into oblivion and sing that every financial disaster is 'contained' than ever confess that it has lost control.
And while such printing may eventually lead to a dollar crisis, skyrocketing interest rates, inflation, or even hyperinflation, remember that we are often reminded by Bernanke that his sole reason for being is to avert a repeat of the 1930s. Years from now, with his legacy under severe attack, Bernanke will take the stage, channel the words of Lynn Anderson, and sing:
I beg your pardon I never promised you a rose garden
Along with the sunshine there's gotta be a little rain sometime
I beg your pardon I never promised you a rose garden
I could sing you a tune and promise you the moon
But if that's what it takes to hold you I'd just as soon let you go
But there's one thing I want you to know
You'd better look before you leap still waters run deep
And there won't always be someone there to pull you out
And you know what I'm talking about
So smile for a while and let's be jolly love shouldn't be so melancholy
Come along and share the good times while we can
I beg your pardon ..... I never promised you a rose garden ....