“By the pricking of my thumbs, something wicked this way comes.” – William Shakespeare, Macbeth
On Tuesday, presidential hopeful Rick Perry made headlines by accusing Federal Reserve Chairman Ben Bernanke of potentially treasonous behavior if he chooses to continue printing money up until the election.
This statement sent shockwaves through political circles, leading notable figures like Karl Rove, White House press secretary Jay Carney, and Democratic National Committee spokesman Brad Woodhouse to condemn Perry’s “very unfortunate comment.”
It’s clear that language carries weight; therefore, it should be wielded with care. Still, we’re in an election year, which tends to invite a bit of hyperbole and the spirit of populism.
When examining Perry’s remarks, there’s some merit to his assertion. Bernanke’s history reflects a concerning pattern. A prime example is the Fed’s Term Asset-Backed Securities Loan Facility (TALF). According to Matt Taibbi from Rolling Stone, TALF funneled billions in bailout aid to banks in various locations, including Mexico and Bahrain, alongside hefty loans to U.S. institutions like Citigroup and Morgan Stanley, and even to a number of wealthy individuals in the Cayman Islands.
Was this truly in the interest of the American public?
Yet, Bernanke persists…
Robbing Savers
Just last week, Ben Bernanke announced his intention to maintain the near-zero federal funds rate at least until mid-2013. This essentially means that the Fed will continue to provide virtually free loans to the major banks. For everyday savers and those with certificates of deposit, this translates into a negative real return on their investments.
The Fed argues that keeping the federal funds rate low will stimulate lending and energize the economy. However, the real outcome is a boost in government debt.
The initial phase of the Fed’s strategy works as intended; big banks can borrow money at no cost. But this is where the supposed economic advantage halts.
The banks recognize the economy’s precarious state. Why risk lending to businesses when they can simply lend to the government at a risk-free return of 2 percent?
It’s a straightforward decision. The banks gain free capital, while the government secures enthusiastic debt buyers.
This zero interest rate policy has been in place since December 2008—over two and a half years—and the Fed has committed to extending it for another two years. While it reduces the interest the government pays on its debt, it simultaneously holds interest rates well below inflation, effectively diminishing savers’ wealth.
When Hell Froze Over
Through inflation, the government unduly impacts the savings of its citizens. In the case of the United States, the dollars are a global commodity; hence, when the Treasury and Federal Reserve increase the money supply, they are taxing dollar holders worldwide.
Recently, the Labor Department reported a significant rise in the consumer price index, which jumped 0.5 percent in July. That suggests an annualized inflation rate of 6 percent. For instance, a 12-month certificate of deposit from Bank of America currently offers a mere 0.45 percent, resulting in a negative yield of 5.55 percent—meaning you’re already at a loss after just one month.
Yesterday was indeed surprising; the DOW plummeted nearly 420 points. The looming threat of another liquidity crisis stirred fears reminiscent of past financial calamities.
However, even more astonishing than the DOW’s dramatic decline was witnessing an extraordinary phenomenon: gold prices soared to $1,820 per ounce while the 10-year Treasury yield hovered at 1.98 percent.
Initially, this seemed too bizarre to be true. Our disbelief quickly morphed into astonishment, and we had to double-check our reality. Indeed, it felt as if hell had frozen over.
Sincerely,
MN Gordon
for Economic Prism