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Fed Boss Successor Ben Bernanke–Bearish for the Dollar and Bullish for Precious Metals? (SAs: Economics, Contrarian Investing)
I’m not the first to observe that the upcoming scheduled departure of Federal Reserve Chairman Alan Greenspan will have some substantial effect on monetary policy and the economy. The man anointed for the top slot is Ben Bernanke, a Federal Reserve governor and chairman of the Council of Economic Advisers. Just who is this man, and how is how likely to change the Fed’s policies? The best indicators are probably some of the statements that Bernanke has made in speeches in recent years. These include:
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
“Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.”
“Although the Federal Reserve does not have an explicit numerical target range for measured inflation, FOMC behavior and rhetoric have suggested to many observers that the Committee does have an implicit preferred range for inflation. Most relevant here, the bottom of that preferred range clearly seems to be a value greater than zero measured inflation, at least 1% per year or so.”
“The essence of constrained discretion is the central role of a commitment to price stability. Not only does such a commitment enhance efficiency, employment, and economic growth in the long run, but — by providing an anchor for inflation expectations — it also improves the ability of central banks to stabilize the real economy in the short run as well. An important and interesting implication is that, under a properly designed and implemented monetary policy regime, the key social objectives of price stability and maximum employment tend to be mutually reinforcing rather than competing goals.”
and lastly, on asset bubbles:
“[I]t’s extraordinarily difficult for the central bank to know in advance or even after the fact whether or not there’s been a bubble… The central bank should focus the use of its single macroeconomic instrument, the short term interest rate, on price and output stability. It is rarely, if ever, advisable for the central bank to use its interest rate instrument to try to target or control asset price movements, thereby implicitly imposing its view of the proper level of asset prices on financial markets.”
As we transition from the “Mr. Magoo” Greenspan era, to the “Helicopter Ben” Bernanke era, be prepared for some changes. Bernanke appears predisposed toward easy money policies and inflating his way out of problems. We should anticipate a more rapid rate of inflation for the dollar. That could be bearish for the dollar’s rate of exchange with many foreign currencies. The dollar index may very well resume its five year slide. Meanwhile, look for a boost in the prices of gold and silver, which have traditionally been hedges against weak paper currencies. Don’t worry about those Black Helicopters. Instead, watch the skies for Federal Reserve helicopters.