Friday, August 26, 2011

Bernanke Indicates the Fed Is Set to Debase The Currency Even More

During today's speech at Jackson Hole, Ben Bernanke, while not announcing further stimulus, strongly indicated that there would be an announcement of additional stimulus after their September meeting.  During the speech, he said:

The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow.

So they've already discussed additional monetary stimulus and will even extend the scheduled meeting so they can discuss everything fully.  Then he goes on to justify the need for additional stimulus, implying that it would not only stimulate the economy near term but might actually help our long term growth.  It really could not be any clearer what he intends to do. 

While he makes it all sound very reasonable, what he is actually talking about doing is insane.  We just had a massive $600 billion round of monetary stimulus (aka QE2) that started last November and just ended less than 2 months ago and what exactly did it achieve?  It juiced up stock prices as nobody wanted to "fight the fed" and caused commodity inflation but did not achieve anything positive for the economy.  The GDP in the quarter before QE2 was 2.5% which went down to 2.3% in the fourth quarter and then 0.4% in the first full quarter of the "stimulus" and was 1% last quarter.  Clearly any wealth effect from juicing stock prices was overwhelmed by the food and energy inflation which it sparked, as that inflation cut into consumer spending.  So tell me how anything even close to that is a good idea? 

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