Washington & Wall Street: Ben Bernanke's Global Inflation Strategy

Washington & Wall Street: Ben Bernanke's Global Inflation Strategy

The Bank of Japan has embarked on a deliberate act of economic warfare, aimed in part against China and the other nations of Asia. The attack is in the form of expansion of Japan’s money supply and the related decline in the value of the yen, this to boost Japan’s economy. The Japanese are desperate to boost economic activity, albeit by imitating the Fed’s own failed pro-inflation policies. 

The BOJ creates new yen and then sells its currency and buys dollars. The Japanese are one of the biggest buyers of US agency securities, for example, effective duplicating the Fed’s own “quantitative easing” or QE to keep mortgage rates low. But what neither officials at the Fed or BOJ understand is that their actions are futile in terms of creating real jobs and growth, and dangerous regards inflation. Two percent inflation over two decades destroys the purchasing power of working people, but nobody at the Fed cares. 

“The Bank of Japan is taking down the entire world,” worries lawyer and author James Rickards, but allows that the Japanese are only following the bad example of the Federal Open Market Committee. “Bernanke has advanced the idea that if we all hold hands and devalue together, it is OK as far as inflation is concerned.  If we all ease at the same time, then it is not a currency war.”

The Fed has already embraced an inflation target as a matter of explicit policy, some measure of how desperate the socialist majority on the governing body of the US central bank has become in recent months. Luminaries such as Chairman Bernanke and Governor Janet Yellen believe that by monetizing the debts of the US Treasury and depriving individual and corporate savers of a decent return on their money, they will restore nominal growth to the US economy.  

My view is that Fed zero interest rate policy stopped being helpful some time ago. Now Bernanke et al on the FOMC are stoking deflation internally and economic strife internationally by encouraging competitive currency devaluations. The US central bank operates in the world of neo-Keynesian mechanics, you understand, with no pretense of paying attention to free markets or sound money. Aggregate demand today, in a Keynesian sense, is all that matters. 

Hubris is the key policy driver at the Bernanke Fed and Obama Treasury, including lectures for our allies.  This weekend, the New York Times quotes an anonymous Treasury official about the duty of Germany to manage of consumer demand in Southern Europe, no less. For months the US central bank has overtly encouraged inflation in financial markets, thinking the mere recovery of asset prices is the same as economic prosperity. Witness the modern-day tulip mania orchestrated by the Fed in housing. The proliferation of IPOs for companies focused on managing single-family homes for rental has not changed the economics of this difficult business, rest assured.   

After five years of extraordinary monetary policy, the Fed has managed to stabilize markets but it cannot foster real growth. Oppressive levels of debt, especially in sectors like housing and student loans, hobble the very young people who are supposed to be buying homes and stimulating the economy. This lack of restructuring in the western economies is viewed as an achievement by Bernanke & Co, but others worry that the Fed is merely putting off the inevitable.

“While a purely “Austrian” response (that is, austerity) to bursting asset and credit bubbles may lead to a depression,” argues economist Nouriel Roubini, “QE policies that postpone the necessary private and public sector deleveraging for too long may create an army of zombies: zombie financial institutions, zombie households and firms, and, in the end, zombie governments….QE needs to be phased out over time.”

But of course the Fed has no intention of moderating its money expansion. In fact, financial ministers from the Group of Seven nation just met and spent most of their time trying to convince the Germans to behave as recklessly as the Japanese. Liberal economists argue that nations like Germany and the UK should reject “austerity” and print money too. But higher inflation in the future is the only result of current Fed reflation policy, with no growth in terms of real jobs and real wages.