Bernanke Proves Critics Wrong? Don't Make Me Laugh

LvMIC:

With relatively tame inflation and a recovering, almost bullish, economy, Caroline Salas Gage of Bloomberg has come out heaping praise upon money printer extraordinaire Ben Bernanke today:

The numbers are proving Federal Reserve Chairman Ben S. Bernanke’s critics wrong.
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target.

Even though the economy is showing signs of strengthening and inflation appears in check, Republicans Mitt Romney and Newt Gingrich, who also are running for president, have said they wouldn’t keep Bernanke, 58, when his second four-year term as Fed chairman expires on Jan. 31, 2014. Gingrich said in September that Bernanke was “the most inflationary, dangerous and power-centered chairman” in the central bank’s history.

First of all, Gingrich wouldn’t understand the nuances of monetary policy, or the Austrian school, if it was served face-to-face to him by a divorce lawyer.  The man’s disingenuous call for a gold standard commission is nothing but pathetic vote pandering and a childish attempt to co-opt Ron Paul supporters.  How would a President Gingrich be able to pay for a moon base with the Treasury tied down by a dollar fixed in gold rather than the politically helpful whim of central bankers?

With that small rant out of the way, Gage’s extolling of Bernanke misses one key aspect: where was the great bearded one in the midst of the deflating housing bubble?  Laughing it up with his equally blind central planning cohorts apparently.  That transgressions aside (an economically crippling transgression on a global scale, mind you), let’s look at the true inflation data in the U.S.  As of December 2011, the Consumer Price Index (CPI) is running at 3% annually with food at 4.7% and energy at 6.6% according to the Bureau of Labor Statistics.  The Producer Price Index (PPI) is running at 4.8% annually.  These stats are of course accurate if you buy into the flawed methodology the government uses in calculation.  Still, the fact that the core-CPI measure the Fed uses is running at 2.4%, above the target level of 2%, shows that Bernanke doesn’t have the whole world in his hands, as it were.  Central banks can’t precisely control inflation, just try to influence it by printing money.  As a recent post at Cato@Liberty demonstrates, the trend of core-CPI is trending up (ht Bob Wenzel):

In fact the core CPI continued its fairly steady increase.  Since September 2011, core CPI has been, on an annualized basis, above the Fed’s target of 2 percent (let’s set aside, for the moment, whether this is the right target or if it is even measured appropriately). Remembering that monetary policy works with “long and variable lags” the time to worry about inflation is before it hits, not after.  Given the clear upward trend in the government’s own charts, I’d say we are already past the point where we should start worrying.

And then there is the all important consumer debt and credit trend which is also on the rise, via Wall Street Journal:

U.S. consumers ramped up borrowing in December. Consumer debt outstanding rose at a seasonally adjusted annual rate of 9.3% from November to $2.498 trillion. Behind that was a seasonally adjusted 11.8% rise in nonrevolving credit, which includes car and student loans. Revolving credit, mainly credit-card debt, climbed a seasonally adjusted 4.1% in December from the previous month.

So let’s sum up Cage’s argument: after three years of prime pumping and effectively zombifying the banking system, the U.S. economy is showing more signs of life as the money supply has been increasing at annual double digit rate for the past 6 months.  Isn’t there a theory out there which stipulates that easy money and artificially suppressed interest rates have something to do with causing an economic boom and boosting stock prices nominally as well as the capital goods sector?  Even CNBC, an outlet for many “experts” who missed the housing bubble in spades, gives credit to the Fed for the stock market’s recent strong performance

Federal Reserve  easing has helped fire up one of the strongest stock market rebounds ever, and the promise of more is keeping it going.
The chart of the S&P 500‘s more-than-100 percent run—from its March 2009 low of 666 to its current 1340-plus level—generally depicts the most powerful comeback of the past seven cyclical stock market recoveries, Wells Fargo advisors analysts say.

Like Maestro Greenspan before him, Bernanke is given credit (no pun intended) for engineering an accelerating recovery.  Problem is, if inflation expectations continue to stay on an upward trend, Bernanke may have to allow interest rates to rise, thus curtailing the current boom, forcing the U.S. government’s budget deficit to intensify as interest payments increase in size, and perhaps reveal any malinvestments hidden by easy money.  The second, and maybe more concerning, issue with Bernanke winding down the Fed’s balance sheet is summarized by David Howden at Mises Daily today:

The problem that few considered was simple: what would happen if the Fed’s new assets lost value before they were sold back to the banking system? A qualitative mismatch was made. The Fed bought assets of uncertain value and paid for them with assets fixed at par value by definition (reserves). Any loss of value in the Fed’s new assets would translate into new money that the Fed could not purchase back from the banking system. In other words, inflationary pressures will appear if the Fed realizes a loss on its assets (which it has not had to do, as they remain largely unsold). Alternatively, to bring expectations into the picture, inflationary pressures can build today on the expectation that in the future the Fed will have to realize a loss on its assets.

Bernanke is playing with fire.  It’s becoming more and more apparent that the massive liquidity injection of 2008 and subsequent inoculations were temporary fixes to postpone the inevitable market correction.  The political, financial, and media establishment still regards the printing press as the tool of the Gods and central bankers as miracle workers.  Cheerleaders of central banking were lulled into the exuberance and over confidence of the Fed-induced housing bubble almost five years ago; is there any reason to believe they won’t be blind to the next bubble and the assured bust?

Like Mises declared:

The inescapable consequences of credit expansion are shown by the theory of the trade cycle. Even those economists who still refuse to acknowledge the correctness of the monetary or circulation credit theory of the cyclical fluctuations of business have never dared to question the conclusiveness and irrefutability of what this theory asserts with regard to the necessary effects of credit expansion. These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops.