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Is Ben Bernanke Lying to You?

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"Downside risks to the recovery have receded, and the risk of deflation has become negligible," says Ben Bernanke. Nevertheless, despite a "temporary and relatively modest increase" in consumer prices, the risk of inflation is "low" through at least 2013.

In a nutshell, the chairman of the Federal Reserve told Congress last week that everything's fine. Nothing to see here. Move along.

Unfortunately, he's wrong.

Political happy talk
No, I don't believe Ben Bernanke is intentionally lying to us about the state of the economy. Instead, he's telling us what he wants to believe -- and thinks he has the tools to achieve. Inflation will be contained. Borrowing costs will stay low. 

Sound familiar? Bernanke was just as convinced, and stated his conviction in terms just as plain in 2006, when he assured Congress: "The subprime problem will be contained." 

Once again, thanks largely to the Fed's ability to buy home mortgages, and housing's 42% role in the Consumer Price Index, the chairman has the ability to exert some influence over inflation's growth -- and help bail out Wells Fargo, Bank of America, and even General Electric from their bad mortgage bets in the process. There's even some basis for believing that his actions have succeeded in ending the recession.

Earlier this month, the Institute for Supply Management published its latest "state of the economy" report, exulting in a "61.4%" reading on its proprietary PMI index of manufacturing activity. Thanks in large part to the chairman's efforts to resuscitate the American economy, U.S. industry is looking stronger today than at any point in the past 18 months. Fourteen out of 18 manufacturing industries are showing growth, and this is the third straight month in which the PMI has shown such gains.

Numbers like these seem to prove that the Fed's actions during this crisis are "working." They encourage Bernanke to continue doing what he's been doing all along -- printing money, pumping it into the economy, and making growth happen. The chairman even believes he can resuck the money back into the firehose at will, should the economy start to overheat. Therefore, it's not surprising that in presenting his report to Congress on Tuesday, the chairman gave every indication that he intends to follow through on his plan to print, and pump into the economy, 600 billion crisp new dollars through June of this year.

But this current $600 billion debt-buying binge by the Fed comes on the back of a $1.7 trillion splurge earlier in the crisis. And if the first two rounds of quantitative easing should fail to create a "sustainable recovery"? The chairman reserves the right to print even more money to prevent a Relapse Recession.

Trouble with a capital "T"
Add it up, folks. That's $2.3 trillion (again with that letter) in stimulus spending, and counting. For months, we've been wondering when all these new dollars would start translating into higher inflation. The chairman's assurances notwithstanding, it happened this week.

Actually, it started to happen a month ago (I warned you). But what was really striking about this latest PMI report was not the continued revival in industrial production, but the cost of that production. I'll pull a few of the pithier quotes from ISM's report for your perusal:

  • "Prices continue to rise."
  • "The Prices Index indicates significant inflation of raw material costs across many commodities."
  • "A continued weak dollar is increasing the cost of components purchased overseas. It is going to force us to increase our selling prices to our customers."
  • "No commodities are reported down in price."

Read that last line again. While the Fed has tools to control some aspects of inflation, no regulator is an island, and there are some flavors of inflation that even Bernanke cannot contain. No commodities are cheaper today than they were a month ago. Nor were they cheaper last month than the month before. And while this inflation boom is also good news for commodities producers like ExxonMobil (NYSE: XOM  ) , Patriot Coal (NYSE: PCX  ) , and Rio Tinto (NYSE: RIO  ) , it means that the oil they drill, coal they mine, and aluminum the refine are fetching higher and higher prices with every passing day.

Bully for them. But this is less good news for you and me, who stand at the end of the supply chain, waiting to pay higher prices for the products manufactured with these commodities. It's nearly as bad news for companies that buy the commodities from the producers -- companies like steelmaker U.S. Steel, which is busily marking up prices to try and make up for higher input costs. It's bad news for Ford (NYSE: F  ) , which incorporates aluminum and steel into its cars, and must now once again try to sell pickup trucks in a $100-a-barrel oil environment.

Foolish takeaway
When Ben Bernanke tells you inflation will stay low through 2013, he may not be consciously lying -- but here's seriously deluded. Inflation is here today. It's right there in the numbers.

How will a devalued dollar affect the fortunes of bankers like B of A? Will rising oil costs boost Exxon's profits, or hurt demand for oil? Will Ford's venture into electric vehicles help it to compete any better in a world of resurgent, $100-a-barrel oil? Click on the links above to add these stocks to your watchlist, and we'll give you immediate access to a new special report, "Six Stocks to Watch From David and Tom Gardner."

Fool contributor Rich Smith does not own shares of any company named above. Rich is not a licensed economist, but he plays one on the Web. Check out his latest stock recommendations on Motley Fool CAPS. The Motley Fool has a disclosure policy.

Ford Motor and Nucor are Motley Fool Stock Advisor selections. The Fool owns shares of ExxonMobil, Ford Motor, and Nucor. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (13) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2011, at 5:31 PM, jrod87 wrote:

    i think deflation is coming to america..the rest of the worl aka China is following what Ben is doing to keep the status quo..that mean deflation..wich will be bad for those with too much stock and bonds, not enough CD's Savings, Gold and Silver. However jpan seems to find a way around it right????....

  • Report this Comment On March 07, 2011, at 5:51 PM, TMFDitty wrote:

    @jrod87: You are correct that Japan is still there after 20 years of deflation. On the other hand, I've heard the Japanese economy described as "a bug in search of a windshield." Their debt situation is just way out of control.


  • Report this Comment On March 07, 2011, at 6:56 PM, jimmy4040 wrote:

    There is no chance whatsoever of deflation, except in the housing industry, unless the economy crashes again.

  • Report this Comment On March 07, 2011, at 7:27 PM, neamakri wrote:

    Bernanke is ignorant. No, wait, he has an advanced degree in economics and he is head of the FED which hires a hundred economists. Okay, he is lying.

    The FED was created of the banks, by the banks, for the banks. Bernanke wrote a $600B check without my authority or yours. The direct recipient of this money is the banks; and by proxy stockbrokers on wall street. Bernanke HOPES the banks will pass some of that money to consumers and businesses in the form of loans.

    Nope, they invested in stocks, bonds, derivatives, and other things I cannot understand.

    What I do understand is that Bernanke took my money (taxpayer) and gave it to the banks. He enslaved my grandchildren and their children with a debt that can never be paid.

    Thanks for listening to my rant.

  • Report this Comment On March 07, 2011, at 7:41 PM, jwitteveen wrote:

    The inflation situation is a very touchy subject, and one this is often misunderstood. I have asked a number of my economics professors about Ben Bernanke. Most of them like what he is doing. Deflation is something that we need to avoid at all costs. With the QE 2 people are worried about run away inflation. One key things in macro economics is what the public perceives. If everyone believes in Ben Bernanke then I think inflation will be held under control. If people start develop irrational expectations then we might have some problems. That is one problem with economics is the assumption that people act rationally, and that can be some assumption! The study of behavioral economics is trying to spot these anomalies to make the science more precise. Until then, I think we need to take Ben Bernanke at his word until he shows us he doesn't have things under control.

  • Report this Comment On March 07, 2011, at 11:04 PM, imathebron wrote:

    I don't know where Mr BuyAluminum is living, but in my world aluminum has seen several price increases in the last 4 months. I run a machine shop and buy a lot of aluminum. Unfortunately, I have little ability to pass these prices increases along. The market is just not ready for price increases that keep pace with the commodity increases. My aluminum suppliers are not exactly getting rich either. Mr Bernanke just does not seem to get it. Tax the snot out of the American business man and get in bed with China. The Obama way.

  • Report this Comment On March 07, 2011, at 11:22 PM, ETFsRule wrote:

    "When Ben Bernanke tells you inflation will stay low through 2013, he may not be consciously lying -- but here's seriously deluded."

    Well, since "here's seriously deluded", could you please make a specific prediction of how much inflation we are going to see? Obviously you don't think we will see "low inflation"... so please, tell us exactly what level of inflation you expect to see, and when you expect to see it.

  • Report this Comment On March 07, 2011, at 11:25 PM, ETFsRule wrote:

    "Tax the snot out of the American business man and get in bed with China. The Obama way."

    Could you please tell me more about these tax increases? Because I was under the impression that Obama had actually implemented massive tax cuts since coming into office. But obviously I must be wrong.

  • Report this Comment On March 08, 2011, at 3:04 AM, derekrlee wrote:


    Yes, you're absolutely right that inflation is something that is often misunderstood, although I'm not sure it is a "touchy subject" as you describe it. However, it's you, and "most of your economic professors" that misunderstand it.

    Fear the all-mighty deflation! God forbid that the purchasing power of your dollar should actually increase, and that the average citizens standard of living should improve for once.

    <<one of the key things about macroeconomics is what the public perceives>>

    Yes, God yes, you've managed to completely summarize macroeconomics in one precise, exquisitely written sentence. Kudos to you, you're obviously one extremely bright individual.

    No, I'm not being sarcastic at all... -_-

  • Report this Comment On March 08, 2011, at 12:41 PM, Acesnyper wrote:

    It's pretty easy to tell when Big Ben's lying, it's when his lips move.

  • Report this Comment On March 08, 2011, at 2:38 PM, dlomax77 wrote:

    I am stunned by the number of people who think that commodities will stay up when the stock bubble pops. It's the same QE2 money that's fueling all these markets. When the banks take the money and run, they're not going to care that you thought commodities were safer than stocks.

  • Report this Comment On March 08, 2011, at 4:07 PM, plange01 wrote:

    remove obama from office and the fools like bernanke he brought in will disappear...

  • Report this Comment On January 23, 2012, at 2:14 AM, BenBernanker wrote:

    Watch the 'Freedom to Fascism'. Ben Bernanke is a professional liar.

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