In recent developments, new evidence has surfaced that not only casts doubt on President Obama’s rhetoric but also raises serious questions about his honesty. The President’s earlier comments might be dismissed as extravagant claims, but they pale in comparison to the more outlandish statements emanating from Washington.
While the President was foretelling calamity and journalist Bob Woodward was accusing him of deceit, Federal Reserve Chairman Ben Bernanke made a statement that could be considered one of the most audacious yet: “My inflation record is the best of any Federal Reserve chairman in the postwar period.” You read that right—this was his claim. See for yourself.
Bernanke must think we are easily deceived. Such a statement hints at either a lack of understanding or a deliberate misrepresentation of facts. In our view, the latter seems more accurate.
Given his background, there’s no way Bernanke is unaware of what inflation truly means. He conveniently refers to it as rising consumer prices, measured through the consumer price index (CPI). However, that narrow view misses the essence of inflation.
Obfuscating Monetary Malfeasance
In its fundamental sense, inflation refers to the increase—or expansion—of the money supply. By that definition, Bernanke reigns as the most inflationary Fed chairman in history. He has expanded the Fed’s balance sheet from $814 billion to over $3.07 trillion since taking charge in February 2006.
Under Bernanke’s leadership, the Fed’s balance sheet grew by more than $2.2 trillion. In stark contrast, the cumulative balance sheet expansion for all Fed chairs from 1913 to 2006 was just $814 billion. To put it plainly, Bernanke inflated the money supply nearly 3.78 times more in a mere seven years than those who preceded him did in 93 years combined.
At present, Bernanke is increasing the money base by $85 billion each month, translating to an annual increase of approximately $1.02 trillion. There is no question—Bernanke’s inflation track record is dismal.
Relying on the consumer price index allows Bernanke to obscure his monetary transgressions. The CPI focuses on consumer goods’ prices but conveniently excludes essentials like food and energy from its calculations.
Many consumer products in the U.S. are imported from nations that also manipulate their currencies. Thus, rising prices can be masked by cheaper foreign labor and production costs. While consumers may find a good-quality laptop for $500 made in China or a $6 T-shirt from Honduras, it doesn’t negate the fact that inflation is at play.
Dead Wrong
Contrary to Bernanke’s assertions, inflation is unquestionably rampant. Creating $85 billion each month in new money is a clear indication of this. Yet, to Bernanke’s advantage, the immediate impacts of his inflationary policies are not evident in consumer prices.
However, when assessed through alternative measures, Bernanke’s inflation record is nothing short of catastrophic. For instance, on February 1, 2006—the day Bernanke assumed his role—gold, a reliable hedge against inflation, was priced at $569 per ounce. In contrast, it recently closed at $1,572, reflecting a staggering increase of over 176 percent during his tenure.
Likewise, crude oil prices on the week of February 3, 2006, closed at $65.37 per barrel, while yesterday, it was at $90.38—a hike of 38 percent. Furthermore, food prices, as indicated by the Commodity Food Price Index, have surged by over 70 percent since February 2006.
These price changes fail to capture the volatile swings in asset prices that Bernanke’s monetary policies have instigated. Gold and oil prices have been erratic since 2006, and other assets like housing and stocks have followed suit with dramatic highs and lows. Housing prices are just beginning to rise after experiencing a string of detrimental inflationary bubbles.
Ultimately, these misguided inflationary policies have led to severe asset price distortions. If economic recovery occurs, consumer prices are likely to skyrocket. Until then, banks will continue borrowing almost at no cost from the Federal Reserve, then lending to the Treasury.
However, once the economy starts to gain traction and banks begin lending to businesses more rigorously, the situation could quickly spiral out of control. The money multiplier effect, combined with fractional reserve banking principles, suggests that each $1 trillion added to the Fed’s balance sheet could eventually translate into $5 trillion—or more—entering the economy.
There’s little doubt that Bernanke’s earlier declarations will come back to haunt him, as they have in the past.
In July 2005, he asserted, “We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”
As history demonstrates, Bernanke was incorrect; housing prices did decline nationwide, and employment levels have yet to rebounding.
Sincerely,
MN Gordon
for Economic Prism