People tend to avoid the simple answer to questions in favour of the answer they want. Are we seeing a similar situation now in the quantitative easing being conducted by Ben Bernanke’s Federal Reserve? Does Bernanke genuinely believe that printing money is in the best interests of the US economy or is it possible that the US is so far progressed down its path of debt that Bernanke is playing the role needed of him. Funding the United States’ profligate spending?

It is possible that Bernanke believes what he says when he claims that quantitative easing isn’t the cause of global food price inflation (and indirectly, the domestic strife in northern Africa and the Middle East). However, that is unlikely. Due to its position as the world’s reserve currency, when the US dollar drops, commodity prices such as oil or cotton or copper rise. (Gold and silver have also rocketed, but that is also due to their innate abilities to be a true store of value during periods of monetary insanity).

Thus far, the two rounds of quantitative easing have failed to produce the stated aims of Bernanke’s Fed — that is, improving US growth and employment. According to official statistics, unemployment in the US is still hovering at just below 10%, but in reality, the real figure is more likely to be upwards of 20% (the US stops counting people in unemployment statistics shortly after they give up looking for work). While quantitative easing was ostensibly aimed at putting more money in the hands of the banks to lend, house prices actually fell in the December quarter, putting them back at the same levels as 2003. Even worse — quantitative easing has led to higher oil prices, which act as a form of taxation on the economy, actually slowing growth.

So that leaves two feasible reasons for Bernanke’s lust for debasing the US currency and risking a widespread outbreak of inflation.

First, the Federal Reserve is simply looking after his paymasters — the US commercial banks. While Bernanke is appointed by the President (and confirmed by the Senate), the other Fed Reserve board members are appointed by the 12 Federal Reserve districts. These districts are actually controlled by America’s large commercial banks.

By maintaining a virtual zero percent interest rate and pumping trillions of dollars of liquidity into the economy (and a convenient change to the accounting rules in 2009) the Fed helped banks avoid having to write down the value of their toxic assets — this has in turn allowed the banks avoid insolvency (for the moment). It has also assisted Bernanke in his misguided quest to temporarily boost equity prices — stocks in the US, which are up 80% since March 2009.

The Fed looking after its own banks isn’t a surprise. In fact, it was accurately predicted by John Talbott, author of The 86 Biggest Lies on Wall Street (who also forecast the US housing collapse). Talbott wrote (before the Fed started quantitative easing) that:

The Federal Reserve loosens money as the country heads towards recession, not because it helps in job creation as it claims, but rather, to help their commercial banks, which are facing significant loans losses. By lowering interest rates and loosening money, the Federal Reserve makes it easier for banks to recover their equity base by borrowing short at low rates and lending long at higher rates.

This is exactly what has happened since 2009. Bernanke and the Fed have flooded the global economy with liquidity, allowing banks and speculators to borrow at almost zero percent and lend back to the government for 3%-4%, or even worse, speculate on commodities such as oil or copper.

While preventing the banks from collapsing, such policies are devastating to less powerful members of the community. Inflation benefits bankers and speculators and asset owners, while it harms those on fixed incomes, the poor and the elderly. As Keynes famously observed, “by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens”.

This is a key reason for the revolts in the Middle East, where those on low or no incomes have witnessed extraordinary rises in basic items needed for survival (such as food, which is at an all-time high, after rising by 3.4% in December alone). Bernanke denies this, blaming foreign governments for creating domestic inflation. While the attitudes of those governments haven’t helped, commodities are priced in US dollars, so it is the US’ monetary splurge that has led to basic commodities rocketing.

There is a second possible reason for the Fed’s destructive monetary policies. That is, the US government simply can’t afford to pay the bills. Bill Bonner notes:

The feds collect about $2 trillion in taxes. They spend about $3.6 trillion. That is how we get a record budget deficit of more than $1.6 trillion this year.

They spend about $1.80 for every dollar in revenues, the greatest imbalance since WWII.

Is it just possible that the Fed has realised that the music is about to stop for the US and they better buy US debt, for fear that no one else will? If you think this is far-fetched, then consider the current strife in Wisconsin, which has seen mass union rallies in response to a suggested cut to pension and health benefits to balance the state’s crippling budget deficit. Or California, which reported a budget deficit of $US26 billion in December, and, with a debt approaching $US100 billion ($US2700 for ever man, woman and child) has been compared to Greece.

So perhaps Bernanke isn’t as stupid as he seems. Perhaps he realises that his monetary stance is causing enormous destruction but believes that protecting the banks and maintaining an image of US solvency is more important than affordable food.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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