It Ain't Money If I Can't Print It! By Peter Schiff |
July 15, 2011
I have been forecasting with near certainty that QE2 would
not be the end of the Fed's money-printing program. My suspicions
were confirmed in both the Fed minutes on Tuesday and Fed
Chairman Ben Bernanke's semi-annual testimony to Congress
yesterday. The former laid out the conditions upon which
a new round of inflation would be launched, and the latter
re-emphasized – in case anyone still doubted –
that Mr. Bernanke has no regard for the principles of a
sound currency.
Tuesday's release of the Fed minutes contained the first
indication that a third round of quantitative easing (QE3)
is being considered. The notes described unanimous agreement
that QE2 should be completed, along with the following comment:
"depending on how economic conditions evolve, the Committee
might have to consider providing additional monetary policy
stimulus, especially if economic growth remained too slow
to meaningfully reduce the unemployment rate in the medium
run." Since the unemployment situation is deteriorating,
and by all accounts will continue to do so, the Fed is essentially
pledging to keep the spigot turned on. The committee also
decided to look only at current "overall inflation"
in making their judgments, as opposed to "inflation
trends." Since new dollars take awhile to circulate
around the economy and raise prices, this means the Fed
is sure to be too late in tightening once inflation starts
to run away, causing more dislocations in the American economy.
If anyone had lingering faith that Mr. Bernanke actually
has a plan to end the US government's addiction to cheap
money, the Chairman's semi-annual testimony to Congress
should have washed it away. In addition to claiming that
his money-printing has helped the US economy, Bernanke told
Congress that gold is not money, people buying gold are
not concerned about inflation, and the external value of
the dollar has no influence on its domestic purchasing power.
He even took a moment to stump for President Obama's plan
to raise the debt ceiling.
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.
If it were true that people bought gold to protect themselves
from market uncertainty, as the Chairman claims, then the
metal should have spiked in the midst of the '08 credit
crunch. Instead, it fell along with most other assets. People
instinctively fled into US dollars and Treasuries because
of their long record of stability. What Bernanke doesn't
understand is that his irresponsible monetary policy is
undermining that faith in US assets, built up over generations.
That is what's driving gold: easy money, negative interest
rates, and quantitative easing.
Finally, by claiming that the dollar's exchange rate has
no effect on domestic prices, Mr. Bernanke demonstrates
that he probably lacks the competence to be a bank teller,
let alone Chairman of the Federal Reserve. A weaker dollar
means Americans have to pay more for imported goods. But
it also means domestic producers have to pay more for raw
materials and imported components, which raises domestic
production costs as well. It also means that more domestically
produced goods are exported, reducing the supply and raising
the price of what is left for Americans to consume. This
is Econ 101.
Given the Chairman's confusion on the basics of economics,
perhaps it's no surprise that he's put quantitative easing
right back on the table, where, despite prior rhetoric,
it has been all along. The Fed has always known that QE3
is coming; it's just looking for an excuse to launch it.
The problem is that fighting a recession with QE is like
fighting a fire with gasoline. As the flames of recession
reignite, more QE, while dousing it momentarily, will only
produce an even larger economic inferno.
At one point, Bernanke said, "The right analogy for
not raising the debt ceiling is going out and having a spending
spree on your credit card and then refusing to pay the bill."
He's got the analogy right, but his conclusions are completely
wrong. Yes, Congress has gone on a spending spree and it's
time to pay up. But raising the debt ceiling is like taking
out a Mastercard to pay the Visa... it just makes the problem
worse. If you or I go out one night, get drunk, and run
up a huge credit card bill, we know that the way to fix
it is to buckle down and pay it back. We might postpone
vacation plans or put off buying a new car, we might cancel
our cable TV subscription or gym membership. The point is
that we would have to reduce current consumption to make
up for the overspending in the past.
Obama claims that raising the debt ceiling is about getting
a hold of the federal debt. Have you ever heard of anyone
getting out of debt by taking on more debt? Has anyone ever
reduced their debt without reducing current consumption?
How can the Fed Chairman endorse such a preposterous idea?
Bernanke actually went a step further and warned against
reducing current federal spending too sharply, claiming
that such a move might impede the "recovery."
He apparently believes that it is the role of the Congress
to go on spending sprees, and his role to pay the mounting
bills with freshly printed dollars. The fact that this formula
has produced larger and larger economic crises does not
seem to bother him. I guess ignorance is bliss.