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As usual, when Fed chairman Ben Bernanke testified before Congress this week not a single Congressman asked him why he deliberately and transparently triggered the Great Recession of 2007-2009, which was accompanied by a frightening financial crisis, gargantuan bailouts and huge fiscal deficits. Nor has Bernanke been held accountable for his culpability during previous Congressional testimony or during his press conferences. Committee members and financial journalists alike are ignorant of the evidence staring them in the face.
Bernanke typically is described as that rarest of combinations: a Republican yet also an Ivy League academic, a bureaucrat who’s nevertheless respectful of markets, an expert on the Great Depression yet aware of the Fed’s role in it, and above all a man supposedly wise enough to not let “it” happen again. Yet in 2008-2009 Bernankedid nearly let “it” happen again — a banking collapse, a depression, deflation — by bringing the U.S. financial system to its knees by roughly the same Fed policy adopted in the 1930s, followed by his blizzard of paper-money printing that has caused a dollar debasement unprecedented in U.S. history. The result has been a huge destruction of wealth, spreading fiscal chaos and stagflation as far as the eye can see.
How did Bernanke create this horrible morass? First, in 2006-2007 hedeliberately inverted the Treasury yield curve, even whileknowing it would cause a recession and credit-financial crisis. Second, he imposed on the reeling economy a $1.7 trillion flood of “quantitative easing” (QE), euphemistic for the hazardous policy of money-printing. His first policy caused economic stagnation, his second policy caused monetary inflation, and combined, his policies have generated “stagflation” — the corrosive mix last seen in the 1970s. It’s the directopposite of the supply-side polices (pro-growth, sound-money) that made the 1980s and 1990s so prosperous.
How can we hold Bernanke accountable for this widespread mess? Consider first the economic stagnation. By training, Bernanke knew full well (and still knows) that an inverted Treasury yield curve — wherein the Fed deliberately keeps short-term interest ratesabove longer-term Treasury bond yields — invariably causes recessions and crises in the modern (fiat paper money) era.
He knows that an inverted yield curve severely and nearly instantly rendersunprofitable most financial intermediation, which is the process of “borrowing short to lend long.” The normal case is for short-term borrowing yields to trade below long-term investment yields (an upward-sloped yield curve), which is profitable for credit intermediaries, given the positive yield margin. In contrast, the rarer case is for short-term rates to trade above long-term rates (an “inverted,” or downward-sloped yield curve), which is far less profitable or an outright loser for lenders, due to the negative yield margin.
Bernanke knows all of this — and far better than his clueless interrogators. In a 2004 [COLOR=#0f2d5f]speech[/COLOR] titled “What Policymakers Can Learn from Asset Prices” Bernanke recounted the unassailable historic evidence that an inverted yield curve is invariably bearish with a reliable time lag of a year or so. “Various yield spreads have been found to be informative about the future course of the economy,” he said, and “some have exceptionally good forecasting track records,” especially “the slope of the yield curve,” which is “measured as the 10-year bond rate less the 3-month bill rate.” He conceded that “evidence for the predictive power of the slope of the yield curve” is abundant, and exists “for other industrialized countries as well as the U.S.”
As Bernanke acknowledged, “the slope of the Treasury yield curve” has been “recognized for some time as a useful indicator of cyclical conditions,” that it “has turned negative between two and six quarters before every U.S. recession since 1964,” that U.S. recessions invariably have “followed the inversion of the yield curve,” and that the yield curve “captures the stance of monetary policy.”
The latter concession means that the Fed can easily and deliberately invert the yield curve whenever it chooses, either with short-term rate hikes or passivity in the face of plunging bond yields. Likewise, the Fed also can always act toprevent an inverted yield curve – and thus also to prevent future recessions. Notably, the U.S. yield curve was inverted prior to all seven U.S. recessions in the past half-century and no recession occurred in that timewithout a prior inversion. That’s aperfect forecasting record. The Fed also inverted the yield curve prior to the 1929 stock-price crash and Great Depression in the 1930s. The only “criticism” the Fed got in subsequent decades was that it didn’t follow its punitive rate policy with massive money-printing.
The forecasting power of the Treasury yield curve certainly wasn’t discovered by Bernanke (that accolade goes to finance Professor [COLOR=#0f2d5f]Campbell Harvey[/COLOR] of Duke University), but he’s long been aware of it — and well in advance of becoming Fed chairman in January 2006 — as have professional researchers at the Fed itself, who for years have devoted an entire web-site to the accumulation of the empirical evidence (“ [COLOR=#0f2d5f]The [AUTOLINK]Yield Curve[/AUTOLINK] as a Leading Indicator[/COLOR]“). Among the key findings is that deeper and longer yield-curve inversions tend to precede deeper and longer recessions. In short, the Fed knows of the harm it can do – and does it anyway.
There’s no longer any excuse for ignorance of such facts. Although Bernanke knew the power of the yield curve, he and his colleagues deliberately inverted it in 2006-2007, ostensibly to “fight inflation” by slowing the economy’s growth (which is nothing but the Keynesian myth that prosperity somehow boosts prices). The recession and crises of 2007-2009 wouldn’t have occurred absent his deliberate monetary malfeasance.
Now let’s consider Bernanke’s more obvious role in the subsequent monetary inflation. Having trashed the economy and undermined financial stability, his Fed then dropped short-term interest rates to near zero and launched its QE money-printing scheme, tripling its balance sheet along with base money, and triggering an inflation that has doubled the gold price to an all-time high of nearly $1600/ounce. In a 2002 [COLOR=#0f2d5f]speech[/COLOR] titled “Deflation: Making Sure It Doesn’t Happen Here” Bernanke happily touted the Fed’s nearly unlimited power to print money, to metaphorically drop it out of helicopters on top of an ailing economy, allegedly and magically to make it grow again, and said it should do this once the Fed Funds rate approached zero.
The policy of a zero Fed Funds rate “is one to be avoided, if possible,” Bernanke said, yet the Fed retained “considerable power to expand aggregate demand and economic activity,” for it “has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost,” so it can purposely “reduce the value of a dollar” and thus “raise the prices in dollars of those goods and services.” Bernanke then listed many things the Fed might monetize, including mortgages, corporate bonds, Treasury bonds and foreign sovereign debt – and the last option will be the one that’ll most likely further balloon the Fed’s balance sheet (see Euro-debt woes) over the coming few years.
Given that Bernanke’s punitive policies triggered the economic-financial debacle of recent years, they unavoidably also contributed to the massive federal (and state) budget deficits that political leaders are now grappling with. Having wrecked the economy and created a cascade of government debt issuance, Bernanke proceeded to (digitally) print trillions of new fiat dollars to purchase (“monetize”) it, in the process causing ever-rising inflation. The result has been a fiscal mess and interminable stagflation. Perhaps worst of all, Bernanke’s policies have established precedents for future monetary malpractice that remain unrecognized.
Yet Bernanke escapes blame from economists, journalists, and politicians alike — and in testimony yesterday he was brazen enough to praise his Fed for becoming such a robust “profit center” to the U.S. Treasury. Delusional observers see Bernanke as a heroic savior, just as they saw his predecessor, Alan Greenspan, as a “maestro.”
Amid Bernanke’s monetary mayhem in 2009 Time magazine crowned him “Person of the Year,” saying he was an “overlord of the economy” who “helped prevent us from going into a depression.” President Obama at the time said Bernanke “led the Fed through one of the worst financial crises this nation and the world has ever faced.” Bernanke himself pushes the Big Lie by claiming economic-financial conditions would have been far worse without his crucial actions.
Only ex-Senator Jim Bunning (R-Ky.) has offered a truly accurate public appraisal of Bernanke, when he once directly told him: “You are the very definition of a moral hazard.” More people should be saying this — armed first with knowledge of the facts.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
By claiming that gold is not money, the Chairman demonstrates his ignorance of much of monetary history. He told Congressman Ron Paul that he had no idea why central banks hold gold, before speculating that it might have something to do with tradition. Yes, traditionally gold is money, which is precisely why central banks hold it. And gold is money because central bankers like Mr. Bernanke cannot be trusted with a paper substitute.
Bernanke further disputes the facts by claiming that the only reason people are buying gold is to hedge against uncertainty, or “tail risks” as he calls them. My advice to the Chairman is to ask the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying has nothing to do with "uncertainty." In fact, it’s just the opposite. I am buying gold because of what is certain, not what is uncertain. I am certain that Mr. Bernanke’s incompetence will destroy the value of the dollar and unleash runaway inflation. - in Europac.net
Inflation is theft in more ways than one: it also steals our liberty.
We know two things: 1) the official policy of the Federal Reserve is to engineer and maintain inflation and 2) inflation is theft. As I have recounted here many times, in nominal terms, it looks like average wages (earned income) in the U.S. have been rising smartly for decades. But measured in purchasing power, i.e. adjusted for inflation, earned income has declined for most workers, especially in the past three years.
Measured in purchasing power, i.e. the number of gallons of gasoline or loaves of bread an average worker could buy with one hour of labor, American workers have experienced a steady decline in the value of their labor for the past 40 years. Whenever a pundit scoffs at the idea that the dollar might lose 95% of its value, readers remind me it already has lost 95% of its value in the past century.
The dollar has lost most of its value just in the past 45 years; according to the [COLOR=#0000ff]BLS inflation calculator[/COLOR] (which very likely understates real inflation), it takes $7 2011 dollars to buy what $1 bought in 1966, at the top of the post-war Bull market.
Can we buy 7 times more goods and services now? Or can we actually only buy 6 times more goods? If so, then our earnings have actually declined by 15%. Put another way: 15% of our earnings have been effectively stolen via inflation. The Federal Reserve robs savers every day of millions of dollars, which it then transfers to the "too big to fail" banks by paying interest on those banks' reserves. Savers earn .01% on their cash while banks are paid 2% interest. The difference is what is stolen from savers and funneled to the banks. Inflation is theft not just of cash but of liberty. Longtime contributor Chad D. explains why:
I've never seen this topic covered (not to say that it hasn't) which is of great interest to me: the nexus of the criminal justice system and the financial system, specifically the inflationary nature of our system. The criminal law books have statutes (and their associated regulations) with provisions regarding the value of property and the relative level of crime with which a person would be charged, if one violated that law. In addition, these statutes spell out the amount of fines and penalties for convictions for those crimes. The trouble is that these statutes are not indexed for inflation, so what happens is people are charged with a higher level of crime than they otherwise would have in the past, for no other reason than inflation.
As an example, if a person in NY decides to intentionally damage the property of another with a value of $250 or more, he is guilty of a felony. Intentionally damaging the property of another which has a value under $250 is a misdemeanor. Well, that statute was passed over thirty years ago, when $250 was a decent chunk of money. $250 in 1980 is equivalent to $653 today, according to an inflation calculator on the web that I used. Conversely, a product that costs $250 today only cost $86 in 1980.
So if the law were to remain equal over time, the triggering level for the felony level of the statute should have been revised upward to around $650 to reflect the inflationary nature of our system. What we have now is a number of people being charged with felonies when they should only be charged with a misdemeanor if the statutes were indexed for inflation.
Let's run through a scenario. In 1980, I decide that I'm going to intentionally damage my friend's stereo that's worth $200 and I get arrested for doing so. I would be charged with a misdemeanor. Fast forward to 2010, I damage the same stereo, but now, because of inflation, that stereo is now worth $522. Now I get charged with a felony.
My actions have not changed and for the sake of this example, the stereo has not changed, either. Now, we have a lot of people getting felony records and we are having to spend more on prosecuting these offenses (felonies generally cost more than misdemeanor to prosecute for various reasons). One can argue that the stereo has gotten better, so my example is imperfect, but that misses the point. The point is that the statute was promulgated upon the assumptions that a dollar represents an adequate measure to value property and also to set a minimal value upon which a felony prosecution would take place. If the relative value of the dollar goes down over time due to government mismanagement, how is that statute a fair one? There was no debate in our legislature or discussion in our society to see if we want additional numbers of people prosecuted for felonies, rather than misdemeanors.
We could look at reporting requirements the same way. For example, one has to file reports with the feds, if one has cash transactions of 10K or higher. Again, back when the statute was passed, 10K was a good chunk of money, but now it doesn't buy nearly as much. Consequently, the number of these reports has skyrocketed, at least in part, due to inflation. How efficient is that? Are we catching more criminals because of it or are we making more criminals out of otherwise decent people? The same goes for fines. Are fines that are promulgated 30 years ago still an effective deterrent? I don't think so, in general. Though, I have noticed that the government is much better at raising fines than raising the levels for felony prosecution.
After writing the above, I decided to do some more research and I found that some NY statutes have been revised upwards (e.g. grand larceny) due to inflation, but not the statute about which I was talking (criminal mischief 3rd). The legislature did raise the minimum felony threshold for grand larceny to $1,000 several year ago, but not criminal mischief, which just highlights the problem in my mind. (Note: Raising the level for felony criminal mischief is currently being considered by the legislature).
Even though some in government are aware of inflation and its nexus with the criminal justice system, nothing (semi-)automatic is put in place to assure a consistent, fair application of the law. In this case, the legislature changed one law, but not another.
What other laws are missing, I wonder? Should the grand larceny level be raised again right now? Why should numerous people be subjected to felony charges, because of legislative/bureacratic inertia? Are other states or the federal government better at taking care of this? What happens when the inflation rate starts to get exceedingly high in the coming years, as we get QE 3,4, 5, etc.? So, it appears some people are looking at this, but not enough, in my opinion. I doubt many law makers and law enforcers really understand how pernicious inflation actually is. One last example: consider the absurdity of the disparity between the current criminal mischief and larceny laws here in NY. For instance, if I intentionally damage a stereo that is worth $750, I would be charged with a felony. If I steal that same stereo, I would be charged with a misdemeanor. Crazy, right?
Correspondent Chris noted the pernicious way that long-term capital gains enable theft of purchasing power via unrecognized inflation:
The problem with long term capital gains is that it taxes inflated gains, not real value.
Say I invest $100 in stocks and then sell them 15 years later for $200. I made a profit of $100 right? Wrong! During that time inflation (caused by government policies) reduced the value of my money so that the purchasing power of my $200 is about the same as the $100 I invested, meaning I really made no money at all. If capital gains laws allowed us to inflation adjust the basis then I would have no problem with taxing the gains at the normal rate of the rest of your income.
Thank you, Chad and Chris, for highlighting two of the many perversions created by the Federal Reserve's explicit policy of stealing from the American public via inflation. Too bad theft via inflation isn't a felony.
