Ben Bernanke Is a Lunatic Paranoid Money Printer
First let me say that the title was made just to grab your attention. I actually have a good deal of respect for Bernanke even though he is wrong often,
after reading his book(most of it anyways, the labor chapters are too boring) 'Essays on the Great Depression' I have come to develop a greater deal of understanding for fed policy and specially for Bernanke's tendencies. It made me a hell of lot comfortable to keep holding my quite levered position on fed funds futures which is a bet Bernanke wont raise fed rates in 2009
Now I know what the Austrian economists think when Monetarists say the Fed was supposed to print more money in the 30's and are supposed to do the same now, 'You can't create wealth through printing of currency, otherwise we would not need to work, we would print our way to prosperity', of course they are right but even Milton Friedman acknowledged that in the book 'Money Mischief'.
Where they are wrong is that changes in the price level can affect the economy in a real way. I cannot make it more simpler than through a minimum wage(MW) example. Lets say the MW is $7 a hour, the Fed then allows deflation to take place during a recession and the price level declines by 10% a year, this means the real MW should be rising by about 10% every year and that’s how changes in the price level could affect the real wealth the Austrians are so concerned about.
If deflation is widespread persistent then at some point the top 10% of the population(the very rich) will be earning the MW, everybody else would be either out of work or breaking the law, needless to say that’s not good for the economy and consumer spending(an absurd example but it makes the point)
The MW is simply one channel of how deflation could work its way into affecting real GDP, debt deflation, liquidity traps, etc would be others.
Now how that leads to global macro trading and money making opportunities? The idea here is to understand the position Bernanke is in and realize given a choice he will choose inflation, the conclusion of his book is that during the 30's the countries that kept their currencies tied to gold and refused to devalue(US, France) had a longer and deeper depression than the countries that did just that(UK, Japan, Canada). The modern equivalent of getting off the gold standard and devaluing is 0% policy rates, quantitative easing and purchasing various assets(even private ones) by issuing electronic money. Preventing bank runs was also a factor he pointed out, although the US has succeeded in that through FDIC insurance and TARP bailouts
But whatever happens one of the few certainties we have is that the USD and higher inflation will pay part of the bill for this Credit Crisis given that its one of Fed policies to drive down the dollar(devalue) and reflate during deflationary environments
Which means betting on inflation down the road will be one of the easiest moneys one will ever make, an Austrian Economist Portfolio will look really good down the road(Long Commodities, Short 30Y TBond, Short USD, Long Canada, Brazil, Australian equities, Long Gold and Silver), the trick here is the timing, I wouldn't pull the trigger in The Great Inflation trade because the trend is down and the global recession should last at least 6 more months and there is a possibility(however small) that the Fed will blow this one and stop printing money
Since the financial bubble has burst the Velocity of Money is collapsing and if they fed doesn’t succeed in balancing the formula of Prices = Money * Velocity/Real Output widespread deflation takes place and the consequences of it will be a self-feeding collapse that will put LeeRockwell in bankruptcy faster than he launch a rant on Paul Krugman.
So instead of trying to pick a bottom here I rather way and be late to the party. If the Great Inflation arrives, I expect it to stay with us for years(and will became a huge profitable bubble mostly due the commodity factor like in the 70's) and there will be plenty of time to get in. Just look for the Treasury bull market, you could have gotten in as late as mid 2007 and still made a killing
And for those who expect a soft landing in terms of prices(Those that expect the fed will magically land inflation at 2% after the crisis is over) I have a quote from none other than Alan Greenspan commenting on how does it feel to try to generate a soft landing in the economy through monetary policy in 1994-95 tightening cycle
"It didn't felt like 'Oh, lets execute a soft landing'; it felt more like 'Let's jump off this sixty-story building and try to land on our feet'"
Mr Bernanke will need a lot of plaster