Send Ben Bernanke to the asylum

Ben Bernanke's persistence in fighting the effects of inflation with more inflation makes him the most dangerous man in the United States. He will accomplish what Osama bin Laden could only dream of: bringing America to her knees.

Inflating our way out of recession didn't work in the 1970s. It didn't work in Argentina. It didn't work in Zimbabwe. It isn't going to work in 2008/2009.

Bernanke's myopia appears to me to be the result of a focus on symptoms, and an obsession with prices and price "stability." First of all, the pursuit of price "stability" through central planning creates instability. What we need is monetary stability. Is Ben Bernanke God? How does Ben Bernanke know what prices are supposed to be? Tell us, Ben, what are prices of everything supposed to be?

Think about this: over the last several years, prices went straight up. Does anybody remember $4.00 per gallon gasoline? It wasn't that long ago. Unless Bernanke wants $4.00 per gallon gasoline (or more), then what is the problem with deflation? Evidently, Bernanke thinks of the inflationary bubble as normal.

One genesis of Bernanke's error is defining inflation as movements of nominal prices, as opposed to the creation of money not redeemable in a fixed amount of specie - i.e., something the Federal Reserve is directly responsible for. Distorted prices result from Bernanke's tampering with the money supply. Make no mistake about it: the decline of certain prices represents a faux dollar rally, the result of deleveraging. And don't pay attention to the bogus dollar index. The real question is: what would prices otherwise be without Bernanke flooding the economy with his "liquidity?"

By focusing on certain prices, Bernanke will miss the hyperinflation when that happens (the inevitable result of Bernanke's present policy). The price of air isn't going up. Why? It is super-abundant. Bernanke will be able to pluck out one of any goods or items that is falling in price - because things are unaffordable (i.e., still priced too high) and they will collect dust on shelves - average it in with prices of other things, and then claim that there is "no inflation."

But let us focus on a key barometer of the health of the dollar: the price of gold. Does Bernanke remember what the price of gold was in, say, 2001? Has Bernanke noticed the price of gold in the last few years? As soon as gold hit $400 an ounce, Greenspan should have slammed on the monetary breaks.

Also, look at the declining value of the dollar around the rest of the world. All Bernanke has to do is focus on real estate prices within the U.S. to claim deflation. But try juxtaposing U.S. real estate prices with real estate prices in other parts of the world. A house that might sell for $75,000 in the U.S. would sell for more than double that amount in another country. Why? Because our "liquidity" is overseas.

Bernanke's agenda of trying to re-create "savings" on a printing press will only further erode the value of the dollar, making it so that we, as Americans, aren't going to be able to travel outside of the country, nor import goods from other countries. You think that inflation will help us produce and export goods, however? Wrong. Read this and this.

The Federal Reserve can't get us out of this mess, as it is constantly chasing its own tail. The Federal Reserve has an impossible-to-perform mission pursuant to its own charter. If there is deflation, then that is supposedly evil and must be stopped. But if there is inflation, then supposedly the Fed is to stop that as well. Thus when Bernanke's hyperinflation finally kicks in, Bernanke will need to react to an even worse crisis of his own making. The Fed is always going to set interest rates too high or too low.

Here is a prediction: when Bernanke starts "pushing on a stick" by buying up U.S. Treasuries, he is going to lose control. As the government starts spending this money, recipients will take this newly-created money and deposit it into their banks. That is when the hyperinflation is going to kick in, and I believe changing the discount rate or the target rate will be ineffective to stop the flood of Bernanke's "liquidity." FOMC operations may even be ineffective to stuff the genie back into the bottle. He will have but one tool to prevent the impending hyperinflationary holocaust: raising the reserve requirement dramatically.

If only we did the right things, Bernanke's impending catastrophe could be avoided. What are the right things? First, we need to stop the printing press. The "credit crunch" is a symptom of a savings crunch. Diluting the money supply (i.e., inflation) will only cause us to burn through what remains of capital and savings.

If our problem is a savings crunch and a paucity of capital, then we need to deal with ways to raise capital. The government spends too much, taxes too much, regulates too much, and then prints money. The government could help out by doing a lot less and a lot sooner. All levels of government need to be cut dramatically.

No, the problems we have are not due to deregulation. The financial system is the government's baby, having been cartelized by the Federal Reserve. The bailouts are all about the government desperately trying to bail itself out. Regulating its own dead horse will do nothing to get us out of this mess.

If Bernanke stops inflating, this would compel the U.S. government to curtail spending, as the biggest sub-prime borrower it is. The market would be allowed to set interest rates. Given the paucity of savings, letting the market take interest rates where it may would certainly create some problems for the power-hungry politicians, since it would expose the insolvency of the U.S. government. Would the government having to obey the Constitution for a change be so bad, though?

Higher interest rates and a free market would ensure that credit came out of true capital-sustaining savings, and not Bernanke's "liquidity." This would also ensure that credit only goes to credit-worthy projects (yet another problem politicians have with the market setting interest rates). This would ensure that people garnered positive real rates of return (as opposed to with inflation coupled with artificially low interest rates). This is how we raise capital, and is our only ticket to a recovery.

So how will we know when an economic recovery is on nigh? When the politicians and central planners lose their jobs. When is that likely to happen? After they get done causing a complete economic collapse. BTW, you politicians, there can't be a government without an economy, i.e., when you all have no capital left to loot.