Thursday, February 3, 2011

Bernanke on Inflation, Goosing the Economy and the Looming Debt Crisis

During his speech today before the National Press Club, Federal Reserve Chairman Ben Bernanke went from being completely non-credible on inflation to very credible about the looming debt crisis.

During his speech Bernanke said, before explaining why there is little inflation:
On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply.
Bernanke has to know inflation is creeping up the edges beyond the commodities market. The most recent ISM report shows that the prices paid component of the ISM index jumped to 81.5 from 72.5 in December. This is huge. Bernanke has to watch numbers like this and know what is coming.  
And he clearly knows his money printing is goosing the market:
A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.
And there is no question, he understands the debt crisis cloud developing over head:
The long-term fiscal challenges confronting the nation are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs. Indeed, the CBO projects that federal spending for health-care programs--which includes Medicare, Medicaid, and subsidies to purchase health insurance through new insurance exchanges--will roughly double as a percentage of GDP over the next 25 years.3 The ability to control health-care costs, while still providing high-quality care to those who need it, will be critical for bringing the federal budget onto a sustainable path.

The retirement of the baby-boom generation will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits. Currently, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3.4 Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they are still notable.

The CBO's long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits. But if government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, causing further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.
He most likely is putting the debt crisis further down the road then he actually believes, but he is dead on as far as what is going to happen. It will just occur sooner than he is suggesting.

Notice, also, that Bernanke does not mention as an option that the Fed, through money printing, may buy a good chunk of the on-coming Treasury debt. Cute, especially when you know that there will be enormous pressure on Bernanke, or whoever is Fed chairman at the time, to do so.

There was nothing of note in the "Q&A session". These things are so choreographed, I'm thinking Bernanke will end up as the head choreographer for the New York Knicks dance team, after he leaves the Fed.

LaTi reports:
The session was not exactly a news conference. As is its policy, the National Press Club asked for questions in writing from the audience. The host, club President Mark Hamrick, then sifted through the questions and asked certain ones to Bernanke.
After you watch enough of these, you get to know Bernanke's moves. Hours before the "press conference" began, I wrote:
Watch for the plant who will ask a question about the Boston Red Sox or Washington Nationals.
And true to form, the sports question came, though it was about football. A question was asked as to who Bernanke thought would win the Super Bowl. He said that he did follow football when baseball was not in season, but that he was going to be "studiously objective" about the outcome-- although he noted that he has the same first name as Steelers quarterback Ben Roethlisberger.

So there you have it, the usual tap dances around the inflation question, the usual warning about the very
real debt crisis and the closing with the sports question.


  1. I thought you might have posted Bernancke's denial of his Fed and his inflationary activity involvement in the Egypt and Tunisia crisis and filed his public statements contradicting Kudlow's thesis of food inflation as a breaking point for driving the riots and protests. The scary thing about Bernancke's statement is that he's saying the emerging markets should adopt their own monetary policy rather than use US dollars as an anchor. That's just asking for the world to scrap US dollars as reserve currency and decouple the world from US dollar dependence. would go nicely under "Not confirmed until officially denied"

    As for the inflation vs debt crisis, we will definitely have one or the other and based on Bernancke's behavior, very likely both.

  2. OT - congrats, Bob on your 2+ millionth pageview; hopefully this means more people are becoming educated as to what's happening to their money as well as their future. Next stop - topple Drudge! (lol)

  3. He was very nervous and shaky. So much so that you could hear it in his voice. At times, it was hard to follow his immediate train of thought.

    However, when he was asked about audit the Fed, boy did his composure change. His nervousness vanished. You can sincerely tell he was in attack mode.

    This is a very unstable man we're dealing with.