Don't Blame Bernanke For The Sell-Off

 |  Includes: SPY, UDN, UUP
by: Robert Wagner

In this video Speaker Boehner only gets it 1/2 right. He first blames Ben Bernanke for the sell-off using the bizarre excuse that "you can't continue to deflate our money and deflate it and deflate it." That may be a true statement, but there is no evidence that our currency has been deflated. Inflation, the traditional measure of how a currency is deflated, is teetering on deflation, and is lower than it was before QEfinity began. So there is no evidence that Ben Bernanke has been "deflating" our currency if he is talking about inflation, at least not on a relative basis.

The other way to analyze if our currency has been "deflated" is on the foreign currency exchange. From this chart of the trade weighted dollar index, the US dollar trades around 82. The low in 2008 was around 71. Since the low the US dollar has traded in a range between 71 and about 90, so the current level of 82 puts it just about the average. The other thing to note is that the volatility has dramatically decreased since the start of 2012, so not only has the US dollar not weakened with QEfinity, the volatility has actually been decreasing, and those are things we should praise Ben Bernanke for, not criticize him.

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Facts are that since 2008, Ben Bernanke has done everything right. The banking system didn't collapse, we didn't repeat the Great Depression, the economy has stabilized, not a single bank run occurred in the US, not a single insured dollar deposited in an FDIC insured bank was lost, hyper-inflation never developed and the US dollar never collapsed. Monetary policy is a weak policy tool and is often described as "pushing on a string," so the people blaming monetary policy for the slow pace of economic recovery simply don't understand monetary policy. Economic textbooks written in the future will describe Ben Bernanke's actions and results as nothing short of a miracle.

The part Speaker Boehner has right is that Congress needs to get its act together. Markets and economies hate change and uncertainty, especially when it is non-market driven and forced upon them by the government. The most hated of changes have to deal with taxes and critical regulations, and since 2008, there have been plenty of those.

The best analogy I can think of for monetary policy is Ben Bernanke and Congress in an inflatable life raft. Prior to 2008, everyone is floating along relatively nice and easy, then in 2008 Lehman Brothers pokes a hole in the life raft. Congress flies into a panic, but Ben Bernanke calmly grabs the air pump and starts reflating the boat, counting on Congress to patch the hole. Congress however doesn't patch the hole, they poke another hole in the boat with one restrictive policy, and then another and then another. Each new tax or regulation creates more uncertainty and a new hole in the boat. With each new hole created by Congress, Ben Bernanke's efforts to keep the boat inflated and floating are diminished.

Eventually exhaustion sets in and the air being pumped into the boat is no longer sufficient to keep the boat afloat, and it begins to sink. No amount of monetary policy can compensate for failed fiscal policy. Monetary policy is a carrot, whereas fiscal policy is a stick, and right now, fiscal policy is beating our economy into submission, and no matter how many carrots you throw at it, employers are simply too scared to hire, and consumers too scared to consume, and that isn't the result of lower interest rates, it is due to uncertainty created in Congress.

In conclusion; Speaker Boehner is 1/2 correct, Congress has to get its fiscal house in order. The stalemate in Washington is acting like an anchor around the neck of the US and global economy. Blaming Ben Bernanke and low interest rates for the anemic growth is like a bad Hollywood Western where a cowboy beats and whips his horse as he races through the desert to get home. He never stops to feed or water the horse, and simply rides the horse until it collapses. Blaming the horse for not getting the cowboy home in time to stop the massacre is absurd, and so is blaming Ben Bernanke for the failures of Congress.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.