Back to School Ben: Michael Pento

Monday, November 8, 2010

By: Michael Pento

Bernanke may have received a perfect score on his SAT examination, but I’m sure that’s because there wasn’t an economics section on it. Bernanke’s statement released in the Washington Post last week was a perfect example of his need for remedial education in the field he professes to have so much expertise.

The drivel was entitled, What the Fed did and why:

supporting the recovery and sustaining price stability.

Nearly every sentence of it was a gut wrenching example of his inability to understand basic economic principles. Here’s a quote from the piece, “Although low inflation is generally good, inflation that is too low can pose risks to the economy--especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation."

To that I say so what?

 First off, show me the examples where low inflation morphed into deflation. Isn’t it more correct to say that hyperinflation morphed into deflation after the collapse? Besides, falling prices can be the result of productivity. Technological advances that can lead to producing more goods and services allows for reducing prices while increasing sales and profits.

However, the rub here is that the deflation Bernanke is worried about comes from the inflation created by a central bank first. Collapsing asset prices from an erstwhile bubble are a disruptive, but otherwise necessary outcome. The point here is to avoid them in the first place and that’s where Bernanke could be most helpful.

Instead he is actively pursuing another asset bubble in equity prices. Here’s another gem from his commentary, “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.” Yep, the Fed is now targeting stock prices; not to prevent irrational exuberance but to cause it to occur.

So Bernanke believes inflation is too low, stock prices need a boost, interest rates are too high and consumer spending needs to accelerate. I would think the Fed Chairman deserved an “F” in economics with a special notation on his lack of understanding about inflation.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.