Ben and Barry’s Inflation Problem
Thursday, March 17, 2011 – by TheDailyBell
Bernanke & Obama
Inflation caused by Bernanke’s “Quantitative Easing” may doom Obama’s re-election. Here’s a political equation that ought to furrow the brows of everybody working to get a second term for President Obama: QE1+QT1=DEFEAT. For those not cursed to be economists, QE1 stands for Quantitative Easing, while QT1 means “Quantitative Tightening. According to Ralph Benko, writing in Forbes, Federal Reserve Board Chairman Ben Bernanke may be about to doom the Obama re-election effort with that equation. – SF Examiner/Forbes
Dominant Social Theme: The president may be doomed by factors beyond his control. It is a kind of Greek tragedy.
Free-Market Analysis: There seems to be no doubt that Barack Obama is obsessed with gaining a second term as president of the United States. But this article (excerpted above) makes some very good points about how monetary policy plays into presidential politics. We will examine them further, below.
Ben Bernanke’s monetary stimulation has been pervasive and ongoing; it has also been historically massive. Never before has a central bank dumped US$20-$50 trillion into the marketplace within a two year time-span as the Fed under Bernanke seems to have done. And Bernanke, it should be noted, is not the only one following these policies. Other central banks have been printing as well to ameliorate the lingering effects of the 2008 economic crisis.
The argument of the above article, which first appeared in Forbes, is that sooner or later the money that has been printed and shoved into bank coffers will start to circulate. This will happen when people wish to spend more, thus gradually increasing the velocity of money and allowing banks to lend if they wish to. As banks begin to respond to consumer demand – having rebuilt their own balance sheets – the dollars that are lingering in bank vaults will be injected into the larger economy causing price inflation.
The thrust of the article – the analysis and ultimate conclusion – is that price inflation should begin to peak as the US presidential campaign begins in earnest. At that point the Fed and Bernanke will be faced with several unpalatable alternatives. Either price inflation expands (risking hyperinflation) or the Fed begins to raise rates in earnest, eventually choking off the “recovery” (which always happens as the business cycle turns) and the economy lapses back into recession.
The article acknowledges all this and has the good sense, as well, to point out that slowing monetary velocity (as we have often mentioned) is not a scientific endeavor. Here’s the salient quote: “In the grim reality of the world dollar system, this is virtually impossible. Vivek Ranadivé, the smartest guy in Silicon Valley you’ve never heard of, astutely wrote in 2007, ‘If you applied the Federal Reserve approach to ensuring a suitable temperature in your home, you would turn the heater on and off every three months, overheating or under-heating your house.’”…