But Bernanke actually believes that
high oil prices drive the dollar lower,
not that dollar destruction drives
commodity prices up.
Euro Pacific Capital
By: Michael Pento
June 8, 2011
Mr. Bernanke appears to be getting either worse at economics or better at lying. During yesterday’s speech at the International Monetary Conference in Atlanta GA., the Fed Chairman played the role of a consummate politician with perfection. Almost every line of his speech constituted economic heresy. Below are some brief takeaways from his speech that are imperative for investors to know and understand.
He said it is absolutely imperative that the U.S. address its fiscal imbalances; but the time for doing so just isn’t now. What that really means is that he believes the U.S. must keep the Keynesian spending in place now, but in order to placate the bond market vigilantes, congress should agree to make some cuts in entitlements a decade or more down the road. Of course, Bernanke’s models continue to function with uncanny inaccuracy. By the end of this decade we will most likely have at least $20 trillion in publicly traded debt outstanding and debt service costs will eat up the majority of Federal revenue. We simply no longer have the luxury of waiting years to deal with our deficits.
His speech was also choc-full of platitudes and economic snake oil. One of the most egregious parts of his speech was his profound misunderstanding of inflation, which was on full display. While he acknowledged the surge in commodity prices and the duress they placed on consumers, he blamed the rise not on his own monetary policy but on, “strong gains in global demand that have not been met with commensurate increases in supply.”
Here was his answer to those Fed critics (like me) who have the audacity to blame low interest rates and excessive money creation as the cause of inflation: “…some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar.”
How absurd! He measures the purchasing power of the dollar mostly against the Euro—which is a currency in utter turmoil. If the European Union completely falls apart the dollar would rally on the U.S. Dollar Index. Therefore, even if Bernanke continues to massively dilute the currency and keep interest rates at near zero percent, the dollar’s decline may not ever fully manifest itself against another flawed fiat currency. However, it will always manifest itself against hard assets like gold and oil. When the Fed created negative real interest rates by printing money and buying debt, investors flocked to tangible assets that kept pace with inflation. That is the main reason why energy prices have surged.
But Bernanke actually believes that high oil prices drive the dollar lower, not that dollar destruction drives commodity prices up. Again, in his own words; “...the United States is a major oil importer; any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around.” Exactly backwards yet again Ben; the inflation you create drives investors away from fixed income and into commodities as a hedge against a falling dollar. Not some exogenous shock that he conjured up in his head.
Finally, does Mr. Bernanke regret his actions that have caused a decline in the purchasing power of the dollar and a lowering of living standards in the United States? Read the grade he gave himself and the Fed: “…the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.”
Did you get that, no cost to the budget or the taxpayer? Since he has exculpated the Fed from driving up commodity prices, he can’t be blamed for the destructive and regressive tax of inflation that is crushing the middle class. And in buying $1.5 trillion in Federal debt, he contends our central bank hasn’t facilitated the increased borrowing being done by the government by keeping interest rates artificially low!
During the Q&A session following his speech, the Chairman said that the Fed has kept inflation low since the early 80’s and that is the reason why the dollar is and will continue to be strong. He has the temerity to claim that inflation has been low for the last 30 years, even though the Fed helped create two massive bubbles in equities and real estate and has now dovetailed them both into the biggest bubble of all—the U.S. bond market. Ben Bernanke is hopeless and should be removed from office as expeditiously as possible.
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.