Don't Pick My Pocket, Ben Bernanke

By Bruce Ramsey
The Seattle Times
Times Editorial Columnist
11/9/10


Ben Bernanke's announcement that the Federal Reserve plans to create $600 billion in new dollars has elicited grumbles from the Germans and the Chinese. Their central banks are holding bonds payable in U.S. dollars, and they don't want the value of their pile to go down.

My pile is a dandruff flake compared with theirs, but it is what I will retire on, and it is mostly payable in U.S. dollars. In that sense I am in the same boat as the Bundesbank and the People's Bank of China, and have the same bad feeling about Ben Bernanke printing money.

You're picking my pocket, Ben. I don't like it.

Many people today have no memory of double-digit inflation. I remember it. It was very disorienting. If you were young, you could keep up with it, and you might even gain by it. For old people on fixed incomes it was simply theft. Now that I am closer to being an old person, I think: That's right. It's theft.

At the moment, inflation is a ghost story, at least if your detector is the government's Consumer Price Index. In 2009, the index actually fell, for the first time since 1955. The Social Security Administration announced there will be no cost-of-living increase for 2011 because at the moment there is no increase in the cost of living.

But we don't only live in the moment. In the past 40 years, the price level in the United States has gone up 479 percent. Inflation is not dead. It is only asleep.

Inflation is caused by increases in the quantity of money and in the eagerness of people to spend it. Right now people are building up savings and paying down debt, so that the quantity can go up and not move prices much. But after Bernanke creates the money, it will be there. It will do its work later.

The fear of what will happen is why investors have bid gold above $1,400 an ounce. It is why they have knocked down the dollar against the euro and the yen. They are anticipating a Bernanke inflation.

If our economy were short of cash, injecting $600 billion might be good medicine. But I note that my money fund is paying me interest of 0.04 percent, a rate so close to zero that a dollar today will not double for 1,800 years. And I think: If the system were gasping for funds, it would be offering me a fair price for mine. Even 3 percent would be nice. An offer of only 0.04 percent for my money tells me they don't want it.

The economy is short of confidence. Not money.

The supporters of inflation speak as if money creation and near-zero interest rates were medical science, proved effective during the New Deal. But the policy in the 1930s was not a success. The Depression lasted for 10 years, longer here than in most other countries. In the 1990s, Japan tried a similar policy, with zero interest rates, to dig itself out of a real estate collapse. It didn't work well.

Look who's economy has been doing better than ours: Germany, despite its sky-high taxes. Germany has been following a much tighter financial policy than the Fed's.

Last week the German finance minister, Wolfgang Schäuble, said of the Federal Reserve, "They have already pumped an endless amount of money into the economy." He added, "The results have been dismal."

Schäuble is not a neutral observer. He is biased: Germany holds assets in U.S.-dollar claims. Germany has a financial interest that the U.S. dollar not be any further debased.

And so do I.




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