Bernanke and Co. prefer to play politics
instead of doing what’s correct.
Thursday, April 7, 2011
Euro Pacific Capital, Inc.
By: Michael Pento
First time jobless claims dropped by 10k for the week ending April 2nd. But this again was only accomplished by having to revise up by 4k the data from the week prior. So really it was just a drop of 6k to the level of 382k. While the MSM is pointing to this figure as more evidence of “the recovery”, Jean Claude Trichet was reminding Americans that the whole recovery thing is phony and living on borrowed time.
The head of the ECB isn’t conflicted by a dual mandate of stable prices and full employment. His only mandate is to preserve the purchasing power of the Euro. Since European inflation is up 2.6%, which is higher than their 2% maximum rate, Mr. Trichet raised interest rates by a quarter point to 1.25%. “It is essential that recent price developments do not give rise to broad-based inflationary pressures over the medium term,” Trichet said. Compare that to our conflicted and compromised Chairman who assured us that inflation is “transitory”—with the same conviction he proclaimed that the sub-prime mortgage crisis was contained. Yes, Americans are now being schooled by the French on how to run a sound monetary policy.
Gold, oil, the CRB Index, foreign currencies and Treasury yields are all screaming at Bernanke that it’s time to join Mr. Trichet in a fight against inflation. But the sad truth is that the double-dipping real estate market and the onerous U.S. debt levels prohibit interest rate hikes without dire consequences in the short term. So Bernanke and Co. prefer to play politics instead of doing what’s correct. However, what they are missing is that the bond market doesn’t play any games at all. The yield on the 10 year note is up nearly 40 bps since March 16th and has surged nearly 120 bps since October.
So the only real question is whether the Fed will get ahead of inflation and take rates higher now or will it merely watch the market adjust interest rates to reflect rapidly rising inflation. In either case, rising rates will expose the phony recovery for what it was the entire time—one that was based on artificially produced low rates, inflation and debt. The only difference being the longer Bernanke insists on perpetuating this phony recovery, the higher interest rates will eventually have to go and the more damage the economy will have to suffer.
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.