Bernanke Running Amuck, Trashing History And Threatening America's Future

Interest-Rates / US Debt
Mar 22, 2010 - 12:37 PM

By: Martin_D_Weiss

Fed Chairman Bernanke is running amuck, and for the first time since the birth of the U.S. dollar, our government is egregiously abusing its power to print money.

Specifically, from September 10, 2008 to March 10 of this year, he has increased the nation’s monetary base from $850 billion to $2.1 trillion — an irresponsible, irrational and insane increase of 2.5 times in just 18 months.



It is, by far, the greatest monetary expansion in U.S. history. And you must not underestimate its sweeping historical significance.

How the Fed Is Trashing History And Threatening Our Nation’s Future

Precisely 217 years and 50 weeks ago, Treasury Secretary Alexander Hamilton established the dollar as America’s national currency when Congress passed the Coinage Act of 1792.

Since that memorable date, the United States has suffered through one pandemic, two great depressions, 11 major wars, and 44 recessions.

Four U.S. presidents have been assassinated while in office.

Hundreds of thousands of businesses have gone bankrupt; tens of millions of Americans have lost their jobs.

In the wake of these disasters, there were, to be sure, monetary and fiscal excesses. But never did the U.S. government resort to extreme abuses of its money-printing power! Never did it make that unforgivable blunder!

Until now.

Now, all those years of suffering and sacrifice — all that history of leadership and discipline — have been trashed. All for the sake of perpetuating America’s addiction to spending, borrowing, and the wildest speculations of all time.

Louder Voices of Protest

I am not the only one who has shouted this warning from the rooftops. Others, more prominent than I, have also raised their voices in protest …

Thomas Hoenig — president of the Federal Reserve Bank of Kansas City and the lone dissenter in last week’s meeting of the Fed’s Open Market Committee — is among the most prominent.

He sees three possible pathways for our nation’s fiscal and monetary policy:

Path #1 — Monetize. The government runs massive deficits and borrows without restraint. At the same time, the Federal Reserve monetizes the debt — finances it by running the nation’s printing presses. This is the path of least resistance for politicians … and of greatest danger to the nation.

Yet, unfortunately, as evidenced by the explosion in the monetary base illustrated above, it’s also the speedway down which the Fed is now racing.

Path #2 — Policy stalemate. As in path #1, the government runs massive deficits and borrows without restraint. But the Federal Reserve refuses to finance it. Instead, the Fed lets the natural supply and demand for debt drive interest rates higher.

Soon, the government finds it is too expensive — or nearly impossible — to borrow. And ultimately, Washington has no choice but to slash spending despite any near-term consequences.

This is what’s happening to many governments around the world right now — not only in Greece, but also in California, Arizona, New Jersey, Massachusetts, plus scores of other state and local governments across the USA. In the final analysis, Washington cannot avoid a similar day of reckoning.

Path #3 — Fiscal discipline. The government takes strong pro-active steps to reduce the deficit. This is, of course, extremely tough politically in the absence of a massive fiscal and financial crisis. But unless pursued promptly and aggressively, the government winds up forced to do it anyhow — albeit with more urgency and greater trauma for the country and its people.

Hoenig explains the choices this way:

“When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 mark German note. He had been in Germany during its hyperinflation, and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, ‘I want you to have this note as a reminder. Your duty is to protect the value of the currency.’ That note is framed and hanging in my office.

“Someone recently wrote that I evoked ‘hyperinflation’ for effect. Many say it could never happen here in the U.S. To them I ask, ‘Would anyone have believed three years ago that the Federal Reserve would have $1.25 trillion in mortgage-backed securities on its books today?’ Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress.

“If German hyperinflation seems an unrealistic example from the distant past, then let’s come forward in time. Many have noted that in the 1960s, the Federal Reserve’s willingness to accommodate fiscal demands and help finance spending on the Great Society and the Vietnam War contributed to a period of accelerating price increases.

“Although the Federal Reserve was a reluctant participant, it accepted the view that monetary policy should work in the same direction as the Congress and the administration’s goals and help finance at least part of their spending programs. Monetary policy accommodation during this period contributed to an increase in inflation from roughly 1½ percent in 1965 to almost 6 percent in 1970. It also helped set the stage for the Great Inflation of the 1970s as inflation expectations gradually became unanchored …

“Walter Bagehot’s famous dictum about banks holds equally true for governments — once their soundness is questioned, it’s too late. At that moment, governments and their citizens are forced to make sizeable, painful fiscal adjustments.â€