Friday, December 17, 2010

Bernanke on 60 Minutes… AGAIN

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

For the second time in 18 months, Fed chairman Ben Bernanke appeared on CBS' 60 Minutes about two weeks ago. What a dramatic and impressive shift in Fed policy to have the most powerful central banker on earth sell his story to the world on network television. Or a cynic could say that things must be incredibly bad economically for Bernanke to degrade the hallowed institution of the Federal Reserve so much by having to subject himself to common media interviews.

Only time will tell which is true, but it gives me a good feeling that Bernanke is comfortable coming down from the ivory tower and sharing, something his predecessors would never have done. It's still unconscionable to me Alan Greenspan has the nerve to continually defend his actions as Fed chair.

Long time readers know that I have NEVER been a Greenspan fan, even during the booming economic times. After all, his first action upon taking office in 1987 was to immediately drain liquidity, greatly contributing to the stock market crash that year. While he is lauded for always providing liquidity and saving the world during the 9/11 tragedy, Long Term Capital debacle and Asian currency crisis, his reactive, not proactive behavior was symptomatic of the problem, not the solution!

Anyway, I found Bernanke's interview with 60 Minutes very interesting and informative. Although his choice of words were supposed to exude control and confidence, he seemed fidgety, nervous and a little uncomfortable, not the pillar of strength we are used to seeing combat Congress several times a year.

To be unfairly picky, it was hard not to notice that little twitch or lip quiver during the interview. So called body language experts have pointed out a lack of total conviction in his forecast and opinion. He often shook his head no when talking about a positive topic and this supposedly meant he really didn't believe what he was saying.

My takeaway just confirmed what I have believed since January 2008. Ben Bernanke and his supporters are, have been and will always be more concerned about deflation over inflation. He absolutely refuses to let another depression befall our economy.

As I continue to believe and have written here more times than I can count, if the Fed could engineer some real inflation with money velocity, wage growth and increased industrial capacity utilization along with higher consumer prices, it would truly be mission accomplished. As Bernanke hinted and I firmly believe, my 7-year-old daughter could combat inflation. It's just not that difficult! Deflation is the economic killer without a known cure.

Food and energy prices may have risen dramatically, which hurts consumers, but we don't have any wage growth. Capacity utilization remains elevated, but still at recession levels. There is lackluster money velocity from the banks as they continue to hoard cash at the Fed, not to mention the record levels of cash on corporate balance sheets. As I've said for three years, including DEFLATION: The REAL Boogeyman to Fear, there is no worrisome inflation now or in the foreseeable future.

Bernanke should be commended for doing his homework. His detractors point to over the horizon inflation with his appetite for creating money. But Bernanke was quick to point out that our supply of currency has not increased with quantitative easing. In fact, M1 (liquid currency) is actually declining year over year.

When the Fed "prints money" to buy treasury bonds, they are buying them from Uncle Sam to keep interest rates low, in hopes of spurring on economic growth. They do not desire to throw $100 bills from helicopters as Bernanke famously wrote about in a paper regarding cures for the Great Depressions. (Hence the name Helicopter Ben)

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

No comments:

Post a Comment