The Motley Fool Previous Page


Is Ben Bernanke Lying to You?

http://www.fool.com/investing/general/2011/03/07/is-ben-bernanke-lying-to-you.aspx

Rich Smith
March 7, 2011

"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 lik