Ben Bernanke has pulled off a neat trick that could well give us the worst of all worlds: a brief commodity deflation, future inflation and a stagnant economy. It will earn him a prominent place in the central bank’s Hall of Infamy. Usually central bankers earn opprobium from history the old-fashioned way, by debasing the currencies under their care. But Bernanke has added a new twist.
He and his predecessor, Alan Greenspan, undermined the integrity of the dollar. This resulted in the housing bubble and the economic disaster of 2007–09, which nearly sent the global financial system into cardiac arrest. A weak dollar always leads to surges in commodity and hard-asset prices. Oil, for instance, averaged little more than $21 a barrel from the mid-1980s until the early part of the last decade. Now it’s more than quadruple that level. You see the same phenomenon with other commodities, as well as with farmland.
After 2009 Bernanke did something a bit different. He churned out globs of new money but then sterilized most of it by paying banks to keep the money parked at the Fed. Banks didn’t mind. It was found money on which they earned — and still earn — easy and riskless profits. Regulators played a role here, beating up on the banks that made traditional loans to businesses and households. Their rationale was that banks must improve their capital ratios and reduce risk. So small businesses couldn’t get reliable and, if conditions warranted, growing lines of credit. Forbes columnist and noted economist David Malpass has been writing about this continuously. This is a key reason that job creation has been punk, the others being the uncertainty over taxes and the horrible burdens coming our way with ObamaCare.
Leveraged speculators are waking up to the fact that we won’t be getting a 1970s-style inflation in the near future and are bailing out — for now. Gold rose sharply in anticipation that all that quantitative easing would flood the economy with excess money just as happened in the 1970s. But as we noted, most of it was bottled up. Or a better metaphor , it lies in a vast reservoir –however in this case, the water is held in place by a very weak dam.
In the meantime, the Fed is still doing enormous damage to the economy by distorting the credit markets both in the pricing of credit and in creating uncertainty about the future value of the dollar. All that hurts investment which is the only way we get a higher standard of living and the creation of more and better paying jobs. The travesty here is that Americans are chomping at the bit to do great things, while our government continues to do almost everything it can to stifle these creative impulses.
By the way, the Fed and most other observers are guilty of fighting the last war. Because we haven’t had a rip in consumer prices the way we had in the 1970s and again in the early 1980s (set aside the question of the way price indexes are formulated these days), they assume there is no real problem. But the disease of a debased money doesn’t always hit economies in the same way. Look at the early 1930s, when every country devalued its currency. The world didn’t get a period of traditional inflation. Instead we got stagnation and the global equivalent of going-out-of-business sales. The end result of the debasement of the last decade showed up in the historic housing bubble.
Steve Forbes, Forbes Staff