May 1, 2012
Free-Market Analysis: Axel Merk of Merk Funds is out with another good analysis of the tremendous monetary inflation now inherent in the Western dollar reserve system and its eventual impact.
We have always argued … wait. Sooner or later there will be tremendous price inflation.
Does Merk agree? He is troubled, at least by the language that US Federal Reserve Chairman Bernanke is using in calling for “humility” and points out that Bernanke’s sense of it and a normal person’s is not the same.
This is, in fact, a kind of elite dominant social theme, in our view. It is the presentation of a fear-based meme that only top money minds like Bernanke’s can successfully manage what’s going on.
It is a kind of promotion as well, for what Bernanke and other central bankers are doing these days is nothing more than a kind of damage control. Today, having fully wrecked the world’s economies, central bankers want to appear “humbled” by the forces they have so destructively manipulated.
The idea may be to create “order out of chaos” – to build a fully globalized monetary system with a worldwide IMFmoney – and a worldwide central bank (also perhaps the IMF) as well.
But if there is actually occurring a take-down of the world’s economy by happenstance or on purpose, it is not necessarily prudent to proclaim it! Better to maintain “humbleness” – and that is the key word that Bernanke seems to have seized on, and that Merk has presented to us within his larger analysis.
The use of the word happened this way … Bernanke was asked at his recent press conference discussing the latest Federal Open Market Committee (FOMC) statement to contrast the US and Japanese experiences regarding current and past economies.
Bernanke (Merk explains) argued that the US avoided the Japanese experience because … “We acted aggressively and preemptively to avoid deflation.” According to Merk, Bernanke focused on the humility (whatever that means) of a move to recapitalize banks. He suggested …
“… that we will avoid some of the problems that Japan has faced. That being said, I think, it’s always better to be humble and just to avoid being too confident, and we need to continue to maintain strong monetary policy support to make sure that the economy continues on a recovery path and returns to a more normal situation.”
That is, Bernanke’s view of being humble means not to assume that deflation has been beaten, but to continue to ‘maintain strong monetary policy support.’ It is very consistent with what Bernanke has argued in the past: that one of the biggest mistakes during the Great Depression was to tighten monetary policy too early. The reason is the same: take the foot off the gas pedal too early and the economy might fall right back down.
We have previously argued that the only reason the Fed gets away with printing so much money is because that money doesn’t “stick” … Some economists argue that such policies don’t amount to “money printing” because banks haven’t done much with the money they received (the velocity of money has not shot up).
Our response to that argument has been that if you were to give a baby a gun, just because the baby doesn’t shoot anyone, doesn’t mean it isn’t dangerous. So, to us, being humble should focus on being most concerned about the potential side effects of monetary easing.
This really is the crux of the matter. We’ve previously argued two things regarding the trillions that Bernanke and other central banks have printed.
First, even though about US$ 15 trillion went out in short-term loans around the world in 2008, it’s unclear to us where this money is and whether it is in a sense still available, at least in part, to be circulated.
Supposedly, the money has been “paid back.” We’ll see. We once figured the total money that central banks had injected into the system since the dollar reserve system effectively died in 2008 was somewhere in the area of US$ 50 trillion.
We also stated that the world’s central banking system would eventually inject up to US$100 trillion to try to salvage the system. So we’re perhaps halfway there. Who knows?
Supposedly, central banks are required to keep accurate records of what they do and don’t do. But so much of modern central banking is tied up in power elite manipulations designed to maintain control of the world’s larger monetary system that it’s difficult to tell what’s really going on.
The system we have currently is not a monetary system per se but a kind of looting. It is based on the dollar reserve system itself that instructs the Saud family to trade oil for dollars and nothing else.
That is, the system is built on force, especially since the early 1970s when President Richard Nixon abrogated the last of the gold standard, though this is not widely acknowledged. “Market forces” are said to be in play. They are not, or at least not as advertised.
Merk’s big point, from our perspective, is one we agree with. The system IS flooded with money and eventually that money will circulate.
It is the CIRCULATION that begins the process of price inflation. And then, gradually, monetary velocity makes things worse.
But of course people have to be in the mood to borrow. Bernanke has effectively slowed if not halted the re-leveraging process by propping up a financial system that should have crashed long ago.
Bernanke’s humbleness is nothing of the sort. It is the arrogance of an elite representative who believes he can lie about money markets and everybody will believe him.
He has propped up a shattered system, turned what would have been a minor crisis in 2008 into a spiraling world depression and then has not been truthful with people about the way money really works.
The problems will really begin when people feel like using more money. But by the time they get around to doing that a worldwide depression may have set in.
Alternatively, price inflation will finally spike and Bernanke will raise rates hard, though Merk thinks the top of the rate raise cycle is only 6 percent today, versus over 20 percent in the 1970s, the last time we went through such a bear-market monopoly-fiat money cycle.
There is nothing humble about what Bernanke is doing or has done. He’s playing around with the lives and savings of billions. It’s impossible for a handful of good, gray men to manage a global economy of tens of trillions. It cannot be done.
Conclusion: It is arrogant to try, and it seems to us even more arrogant to speak of humbleness while doing so.