Worried that "Helicopter" Ben Bernanke's recent money drop will eventually spark a nasty bout of inflation? Fear not, Fools. Bernanke is gearing up for a ground war against the money supply, and with Congress' approval, he'll have a new kind of ammo that just might work.
Nothing inflated around here
Inflation's not a problem yet, because those gobs of freshly printed bills have largely remained parked on banks' balance sheets, filling holes like the thumbs of so many little Dutch boys. With these additional Grants and Benjamins unavailable for public transaction, we have not felt their inflationary effect -- or if we have, it has simply counteracted deflationary forces.
I know what you're thinking: Inflation is inevitable sooner or later. Indeed, if Bernanke cannot suck all that money back out of the system once banks start to lend again, look out. Unless you're heavily invested in SPDR Gold Shares (NYSE: GLD) or some other inflation-killer, you could be in for some pain at that point. Surging commodity costs would likely do a number on the margins of any company that uses raw materials, from Colgate-Palmolive (NYSE: CL) to Chipotle Mexican Grill (NYSE: CMG).
But not if Bernanke gets his way!
The sterilization bazooka
Recently, the Fed made a small but important remark: It is "seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves." As John Kemp of Reuters has speculated, this likely means that Bernanke wants license for the Fed to issue its own type of debt security, which banks might be forced to purchase under a new regulatory framework, thus providing a surefire way to extract excess bank reserves from the system.
What's so significant about this idea? Recall that the normal process of reducing the money supply involves the Fed selling Treasuries to banks, and/or redeeming maturing Treasuries with the Treasury Department. But in the current situation, the Fed has expanded the money supply in part by buying assets such as mortgage-backed securities (MBS). Unlike super-safe Treasuries, banks may not be so eager to buy back these risky bets. The potentially mandatory component of the sterilization strategy circumvents this pesky issue of market freedom.
It's all in the timing
Assuming that Congress grants the Fed the power it seeks, Bernanke must still make the correct decision about when he requires banks to buy the new-fangled Fed debt securities. Wait too long, and inflation may already be on the rise. Accordingly, inflation protection in the form of a gold miner such as Barrick Gold (NYSE: ABX) or Newmont Mining (NYSE: NEM) still makes plenty of sense. That said, investors who go overboard with inflationary safe havens may find their future returns a tad, well, sterile.
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