Don't worry everybody. Federal Reserve Chairman "Helicopter Ben" Bernanke says that the U.S. economy is going to be just fine, and that if it does slip up somehow the Federal Reserve is ready to rush in to the rescue. That was essentially Bernanke's message to an annual gathering of central bankers in Jackson Hole, Wyoming on Friday. Bernanke insisted that even though the Federal Reserve has already cut interest rates to historic lows it still has plenty of tools that could be used to stimulate the U.S. economy if necessary. Well, considering Bernanke's track record, the "don't worry, be happy" mantra is just not going to cut it this time. After all, if Bernanke and his team were such intellectual powerhouses the "surprise" financial crisis of 2007 and 2008 would not have caught them with their pants down. The truth is that just before the "greatest financial crisis since the Great Depression" Bernanke was telling everyone that the economy was just fine. So are we going to let him fool us again?
But Bernanke insists that this time is different. This time the Federal Reserve really has got a handle on things. During his remarks at Jackson Hole, Bernanke said that the Fed will adopt "unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."
Could that be a thinly veiled way of saying that Helicopter Ben and his pals will do as much "quantitative easing" as they feel is necessary to keep the economy moving forward?
Unfortunately, most Americans have absolutely no idea what quantitative easing is.
Basically, when quantitative easing takes place the Federal Reserve creates money "ex nihilo" (out of thin air) and uses that money to buy stuff like U.S. government bonds and mortgage-backed securities. By pumping money into the economy like this, the hope is that banks will start lending more and people and businesses will have more money to spend.
As far back as 2002, Bernanke has been openly advocating "easy money" policies as a way to stimulate the U.S. economy out of troubled times....
"The U.S. government 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 no cost."
Now, before we go on and discuss some of the problems with quantitative easing, it must be noted that the statement by Bernanke above is absolutely rife with errors.
It is absolutely frightening that someone like Bernanke has more power over the U.S. economy than any member of Congress or even the president of the United States.
First of all, the U.S. government does not issue our dollars. They are issued by the Federal Reserve.
Just pull out a dollar bill right now. It says "Federal Reserve Note" on it right at the top.
Secondly, the U.S. government cannot produce as many dollars as it wants. Whenever it wants more U.S. dollars it has to give U.S. Treasuries to the Federal Reserve in exchange.
If the U.S. government could produce as many dollars as it wants, it could just print up $13 trillion and pay off the national debt tomorrow.
But under the current system, it cannot do that. The Federal Reserve controls the currency, and the truth is that the Federal Reserve is a private central bank that is about as "federal" as Federal Express is.
Thirdly, there is always a cost for producing more dollars. We'll talk about inflation in a moment, but first it must be noted that any time "the printing presses are fired up" the U.S. government goes into more debt, and every time the U.S. government goes into more debt, more interest must be paid on that new debt.
So there is a very high cost involved in the creation of more dollars.
In addition, every time a new U.S. dollar is created, every other U.S. dollar becomes a little bit less valuable. Essentially, the more dollars there are in existence, the less purchasing power each dollar is going to have. This phenomenon can be masked or delayed for a while, but inflation will always triumph in the end when the money supply is constantly expanded.
The U.S. dollar has lost over 95 percent of its value since the Federal Reserve was created in 1913. This has not been a mistake. The Federal Reserve system is designed to slowly but surely inflate the U.S. dollar. What they do want to avoid, however, is doing it too quickly.
And this is exactly what is in danger of happening in the years ahead. As the U.S. money supply dramatically expands in response to the exploding U.S. national debt we are eventually going to be dealing with some very, very serious inflation.
Right now, the Bush and Obama administrations have been getting the United States into so much debt that there aren't enough buyers in the world to absorb it all (at least at the current super low interest rates on U.S. government debt). So, instead of raising interest rates to a point where U.S. debt would be suitably attractive to investors, the Federal Reserve is stepping in and is "buying" (once again with money created out of thin air) all the excess U.S. Treasuries that don't sell. This is essentially a Ponzi scheme and it keeps interest rates on U.S. Treasuries artificially low.
In addition, the Federal Reserve has been handing gigantic sacks of cash to very large banks and financial institutions such as Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup at almost zero percent interest and those big banks and financial institutions have been turning around and investing a large percentage of that cash in U.S. Treasuries. This has created a gigantic U.S. Treasury carry trade bubble, and it has enabled many of these giant financial monsters to make massive piles of essentially risk-free cash. This is another Ponzi scheme.
But these Ponzi schemes are not sustainable and they cannot last forever. Right now Bernanke and his cohorts have been able to finance trillions in U.S. government debt and still keep interest rates on U.S. Treasuries and inflation very, very low. At some point, their juggling act will come to an end and we will have a gigantic mess on our hands.
But for right now, Bernanke seems quite please with himself. The following is how Bernanke concluded his speech at Jackson Hole....
As I said at the beginning, we have come a long way, but there is still some way to travel. Together with other economic policymakers and the private sector, the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth.
In Bernanke's fantasy world, the U.S. economy is going to roar back to life and will soon be stronger than it ever has been.
But don't you believe him.
The truth is that every single month the U.S. economy is seeing large numbers of jobs leave the country.
The truth is that thanks to our exploding trade deficit, the U.S. economy is poorer at the end of every single month than it was at the beginning.
The truth is that every single month the U.S. government (along with the vast majority of state and local governments) gets even deeper into debt.
The United States economy is not on the road to prosperity.
The United States economy gets poorer and deeper in debt every single month and is slowing bleeding to death.
Ben Bernanke can run around all he wants and try to convince us that "the sky isn't falling", but at some point the American people are going to wake up and simply not believe him anymore.