Jackson Hole: Bernanke as a Magician

by Gary North

Recently by Gary North: Your Portfolio of Lies

This appeared on MarketWatch on August 23: Get Ready for a Jackson Hole Surprise.

After recent tough going in global markets and a raft of dismal economic reports, investors and institutions around the world are looking to the Tetons for Fed Chairman Ben Bernanke and the cavalry to ride to the rescue yet again.

This is no doubt true. The investment world really does await an announcement of an economic cure-all. But what can the Federal Reserve do that will restore the lost productivity? What can restore the weak recovery that never did get off the ground on Main Street? The world answers: "Federal Reserve digits." The investment world desperately wants more fiat money. Its plans call for fiat money. The world's experts are convinced that only a new round of fiat money can save this stock market.

Their faith is in magic: the magic of something (economic recovery) for nothing (cost-free digits).

As the Fed conclave begins this week, the question on everyone's mind is will it be, as Yogi Berra said, déjà vu all over again? And how can one position a portfolio of exchange-traded funds for either a "yea" or "nay" on more Fed action coming from Jackson Hole?

Proponents of a new round of quantitative easing say that the Fed will have to act to try to avert what could quickly become a double dip recession. Certainly the recent spate of dismal economic reports would indicate that the soft patch in this economy just got longer and softer.

Particularly dismal was last week's shocking decline in the Philadelphia Fed Index to -30.7 from a previous +3.2. This indicator has never been at this level without a recession going along with it, not to mention that it's the lowest reading in this indicator since March 2009.

How will Federal Reserve inflation reverse this? The FedFunds rate is at near zero. Fear of recession had driven down longer rates. What can additional monetary expansion accomplish? Businesses are not expanding. They are not borrowing. They haven't in two years. Why will another round of expansion persuade small business owners to borrow to expand?

On the other side of the debate, analysts point out that inflation is on the rise – which limits the Fed's options – while the Fed, and Bernanke in particular, have become political targets of the recent statements and positions of presidential candidates Texas Gov. Rick Perry and Congressional members Ron Paul and Michelle Bachmann.

First, there is no price inflation. Second, there really is public criticism of the FED by people running for President. This has never happened in American history. It is a positive development. It puts Bernanke on the defensive.

So, on the one hand, the investing public believes in the FED, believes in digital salvation. These are the smart people. The voters to whom Perry, Paul, and Bachmann are appealing to have lost faith. Conclusion: the best and the brightest believe in magic. Common people know better.

This forebodes ill for the future of the country. The common people are not in charge and have not been ever since 1913.

Plus, a new round of quantitative easing is likely not to be met with approval from the emerging world, particularly China, or other large holders of U.S. Treasurys and U.S. dollar-denominated assets.

We can safely forget about them in a recession. They are mercantilists. They are stuck with their own programs of monetary inflation. They will continue to buy U.S. Treasury debt and European debt. They are trapped by their own policies of inflation and subsidies for the export sector. They can talk tough, the way Merkel talks tough. It's all for show.

To get an idea of what may happen, one needs only to look at the history of this Fed and its most recent statement. which said, "The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate ... It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate."

So, we are expected to believe that this statement is important. OK, I will now take him up on his challenge. I will look at the history of the press releases of the Federal Open Market Committee over the last five years.

August 10, 2010

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

January 28, 2009

The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

January 22, 2008

The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

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August 26, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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