Bernanke Meets Bush: The Perfect Storm

The Fed’s Move

Amid pressure of growing concerns of a recession, and contrary to every public comment he has made, Ben Bernanke stepped in to bail out Wall Street at the expense of higher inflation and a declining US dollar. His 50/50 bps cut on the fed funds and discount rates sent stock prices and commodities flying while the US dollar reached new all time lows against major currencies.

I’ve mentioned, on many occasions, that the fed can not cut interest rates ate the current dollar levels without causing a currency crisis and massive inflation. Inflation can be loosely defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money. In other words, when there are too many dollars floating around, the value of it is diminished. It takes more dollars to buy the same goods.

The Disappearing Dollar

European tourists Nadia Arrafie and Jasmin Briz, from Barcelona, take advantage of the dollar’s weakness to stock up purchases on a visit to New York. (Source: NY Times)

The following charts show the relationships between the US dollar, foreign currencies and commodity prices. Notice the dollar made new lows as major currencies and commodity prices made new highs. (Note that these are multi decade or all time highs).

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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.(Ben Bernanke November 22, 2002)

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The stock market is relevant to the extent that fluctuations in stock prices affect the inflation forecast. (Ben Bernanke, March 19, 2001)

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Changes in asset prices should affect monetary policy only to the extent that they affect the central bank’s forecast of inflation. (Ben Bernanke, March 2001)

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“Whenever you’ve got a paper money standard,” said Ben Bernanke, an economist at Princeton University, “all that stands between you and inflation is the central bank’s willingness to keep low and stable money growth rates…” (NY Times 2001)

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Bush Deserves Credit

Floyd Norris of the New York Times writes in a recent report

Dollar Sinks the Lowest Since It Started to Float

The greenback is worth less than ever before, and it has declined faster during the Bush administration than in any president’s term since Richard M. Nixon severed the dollar’s ties to gold in 1971…The dollar index has fallen at a rate of 4.8 percent a year in this administration, considerably more than the previous record of 2.7 percent a year, during the Carter administration. Mr. Bush is the first president not to show a gain against any of the currencies in this index.

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Below is a chart which shows the US Deficit and Saving Rates. Anything jump out at you? The red line represents the federal budget deficit/surplus. Notice the drastic move down from a $300 billion surplus to an almost $500 billion deficit in 3 years! It took Bush 3 years to swing $800 billion to the downside! This coincides precisely with the devaluing of the US dollar which began under George Bush.

Deficits Matter!

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Oh, I should also mention that the blue line, the US savings rate, has been negative for 2 years. But don’t worry, it’s happened before!–In the great depression!

Annual National Deficit

Source: Zfacts.com

Where did the $9,000,000,000,000 national debt come from?

(Source: Zfacts.com)

Bernanke’s Past Predictions

November 2001

Mr. Bernanke was asked if he thought the United States was entering into a recession.

It is a very difficult call…because the indicators are not as synchronized as they usually are.” (Ben Bernanke)

The following charts are of the Dow Jones Industrial Average and the NASDAQ at the time of his comments. I think most people could have called this one!

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February 6, 2003

The dollar has come down, and I think that will pass through over time to a strengthening of our export markets and will help us recover some of this trade deficit that we have been facing. (Ben Bernanke)

Wrong Again Ben. The US Trade deficit has since risen 53% while the value of the US dollar has fallen 25%. I guess the “Lower dollar leads to higher exports” theory works better in countries who actually make something!

United States Trade Deficits (Annual)
2003: -532,350.0
2004: -650,929.0
2005: -767,477.0
2006: -817,304.0

US Dollar Since February 2003

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Comments

[Tom B:]

You're preaching to the choir for me; in my opinion, Bush has not done even one single smart thing in Washington from the day he stole the election. Zip, Zero, Nada. And Bernanke is perhaps his most competent appointee. I am REALLY angry that the dollar is tubing to bail out idiots in the building sector who over-built.

2007 Sep 26 09:44 AM

[Afthought:]

The charts tell it all. A nation can't have war without debasing the currency or raising taxes to pay for it. If this current mess is resolved, I'll miss those the "Alice In Wonderland" commentary provided by the talking heads at CNBC and FOX.
Maybe we need a ten foot tall Alice for president!

2007 Sep 26 04:47 PM

[optimist:]

Im optimistic about the financial ruin of this country, which will start a world wide banking collapse which will trigger world changing events, which will fulfill prophecy, which will usher in a new society led by Christ. Man cannot direct his own step.

2007 Sep 27 06:46 PM