“Iacta alea est.” – Suetonius to Julius Caesar, upon crossing the Rubicon, January 10, 49 BC
Yielding to Political Pressures
Recent events have clearly shown that humanity, despite its wisdom, often succumbs to the demands of political pressures. Months ago, Senator Chuck Schumer urged Federal Reserve Chairman Ben Bernanke to “get to work.” In a statement released yesterday by the FOMC, Bernanke’s compliance was evident…
“….The Committee agreed today to enhance policy support by purchasing additional agency mortgage-backed securities at a rate of $40 billion per month.”
And here’s the pivotal point…
“If the labor market does not see substantial improvement, the Committee will persist with its purchases of agency mortgage-backed securities, explore further asset purchases, and apply other policy tools as necessary until such improvement occurs within the framework of price stability.”
Following the FOMC’s announcement, stock markets surged. The DOW climbed over 200 points, finishing at 13,539, while gold prices increased by $50 per ounce.
Welcome to the realms of QE3 with no boundaries—an environment quickly spiraling out of control. As Jim Rogers rightly observed, “We will all face serious consequences for this in a year or two or three.”
Endless Printing of Currency
This week, we discussed how, while Federal Reserve Chairman Ben Bernanke may appear unhinged, he’s not without sense. Given Bernanke’s track record and the inflated prices across virtually all asset classes, we anticipated he would wait for market corrections before unleashing more currency into the economy.
Regrettably, we were mistaken. Bernanke chose to implement QE3 amidst historically high stock prices. Nevertheless, we still don’t regard Bernanke as foolish. Upon reflection, it becomes clear he’s merely human, responding to public demands—even if it leads to detriment.
People desire more money, equating it with increased wealth. It is, after all, Bernanke’s duty to provide this. Thus, he feels compelled to comply.
More than two centuries ago, a similar figure emerged—Mirabeau, a fervent statesman and patriotic figure. He was among the most astute and formidable leaders in Europe.
Yet, like Bernanke, he succumbered to the political pressures surrounding monetary creation. By catering to the desires of the French populace, he inadvertently contributed to their downfall.
“Despite all the paper issued, commercial activity became increasingly erratic,” wrote Andrew Dixon White in his seminal work, *Fiat Money Inflation In France*. “Though an abundance of currency initially stimulated production and trade, it eventually led to market saturation and diminished demand.”
Each economic downturn in France prompted further issuances of paper currency, ultimately eroding public trust in money itself. Between 1790 and 1795, the price of flour surged an astonishing 11,250 percent, with other prices following suit. By 1797, France’s currency was rendered worthless, leaving its economy in ruins.
Leading the World to Its Own Demise
At this juncture, let’s take a moment to revisit Bernanke’s principles as articulated in his November 21, 2002 speech titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” As a Federal Reserve Governor (and now Chairman), he laid out strategies for confronting a looming depression…
“The U.S. Government possesses a technology, referred to as a printing press (or its electronic counterpart today), allowing it to produce an infinite number of U.S. dollars at virtually no expense. By augmenting the money supply or even credibly threatening to do so, the U.S. Government can effectively lower the value of the dollar in relation to goods and services, raising prices in dollar terms.”
Later in this same address, Bernanke introduced the concept of a “helicopter drop,” envisioning a central banker hovering in a helicopter while dispensing bundles of cash to the public. This speech earned him the moniker ‘Helicopter Ben.’
During that time, Bernanke’s ideas were largely theoretical. While governments had a history of printing money to inflate debts and fund wars—with typically disastrous outcomes—no one of such eminent status had openly endorsed these strategies since Mirabeau.
Perhaps Bernanke never anticipated he would have the chance to implement his theories in practice. If he were still ensconced in academic circles, he might reconsider some of his conclusions. However, that moment has passed. The course is set, and he has a responsibility to fulfill…
He must continue to aid the world in its path to destruction.
Sincerely,
MN Gordon
for Economic Prism