It is a sad situation when everything the man in charge of our central bank professes to understand about inflation is wrong. Mr. Bernanke does not know what causes inflation, how to accurately measure inflation or the real damage inflation does to an economy. He, like most central bankers around the globe, persists in conflating inflation with growth. The sad truth is that our Federal Reserve believes growth can be engendered from creating more inflation.
However, in reality, economic growth comes from productivity enhancements and a growing labor force. Those two factors are the only way an economy can expand its output. Historically speaking, the total of labor force and productivity growth has averaged about a 3 percent increase per annum in the U.S. Therefore, any increase in money supply growth that is greater than 3 percent leads to rising aggregate prices.
That's why money supply growth should never be greater than the sum of labor force growth + productivity growth. Any increase greater than that only serves to limit labor force growth and productivity. Since Bernanke doesn't understand that simply economic maxim, he persists in his quest to destroy the value of the dollar. Perhaps that's why the Fed Head has decided to keep interest rates at zero percent for at least six years, despite the fact that the growth in the money supply is already north of 10 percent.
Maybe Bernanke believes that a replay of the entire productivity gains from the industrial and technology revolutions will both simultaneously occur in 2012. Or perhaps he feels that the millions of unemployed individuals laid off after the collapse of the credit bubble will all be re-hired this year. What he also fails to understand is that consumers are in a deleveraging mode because their debt as a percentage of income is, historically speaking, extremely high. So regardless of how much money Bernanke counterfeits into existence, it won't lead to more job growth or capital creation... just more inflation.
There is little doubt that global economic growth is faltering. Most of the developed world is mired in an incipient recession. Japanese GDP fell at an annual rate of 2.3 percent in Q4. Eurozone GDP dropped 0.3 percent last quarter and Greece is in a depression -- GDP falling 7 percent as of their latest measurement. U.S. GDP is still a mildly positive 2.8 percent, according to the Bureau of Economic Analysis. But that's because they measured inflation in the fourth quarter at a .4 percent annualized rate. If inflation was reported more accurately by our government, the U.S. would also produce an extremely weak GDP figure.
But this is the age of a very dangerous global phenomenon, where central bankers view the market forces of deflation as public enemy number one and inflation as the panacea for anemic growth.
To that end, the Bank of Japan just added 10 trillion Yen last week to their 20 trillion bond buying program and adopted a minimum inflation target, much like that of the U.S. Federal Reserve. The European Central Bank is deploying their Long Term Refinancing Operation (LTRO) parts one and two. This counterfeiting scheme offers banks unlimited funds for at least three years to go out and monetized Eurozone debt. The first iteration of the LTRO dumped nearly 500 billion Euros into the economy. The second attack on the Euro currency will be launched on Feb. 29. And, of course, our Fed has printed $2 trillion dollars of new credit for banks to purchase U.S. Treasuries.
There is an all out assault on the part of global central banks to destroy their currencies in an effort to allow their respective governments to continue the practice of running humongous deficits. In fact, the developed world's central bankers are faced with the choice of either massively monetizing Sovereign debt or to sit back and watch a deflationary depression crush global growth. Since they have so blatantly chosen to ignite inflation, it would be wise to own the correct hedges against your burning paper currencies.
Michael Pento is the President of Pento Portfolio Strategies .
Follow Michael Pento on Twitter: www.twitter.com/michaelpento1
The corruption is unbelievable, when you look at the faces of various politicians, advisers and economic pundits one can't comprehend how they keep them straight.
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Um, I'll take the "massively monetizing Sovereign debt" thank you very much! It may not be the best thing in the world, but it sure beats the alternative (i.e. watching "a deflationary depression crush global growth.")
But what's really happened there? A: the wealth of the middle class and poor decreased via deflation on their end, and the wealth controlled by the government and the rich Wall Street bankers increased on their end via the monetary levels of the Fed. A win-win for everyone (important), eh?
I understand your concern about credit increasing while assets deflate and the "ponzi scheme" thing, but the alternative would have been milder version of Mad Max and the end result would have been (at best) the same but could have been MUCH worse. Remember, EVERY recession since WWII has taken about three years to truly break out of. We broke out of this recession about 4-5 months ago, pretty darn close to the three year anniversary of this latest recession. Not too bad....
I understand your angst and your sense that the "government and the rich Wall Street bankers" are ratcheting "We the People" closer and closer to the "pendulum of doom" but what is your answer/alternative? And if you say "Ron Paul" I will just be forced to say to you "No, seriously. I meant a realistic answer/alternative."
With globalizatÂion labor remains cheap, and free markets have no pressure to widely distribute income.
Under this scenario the pie cannot grow. It is in fact a case where reducing the number of billionairÂes does increase the pie. Or looked at the other way, decreasing the number of impoverishÂed does increase the pie.
The West's hegemony came about because of a huge explosion of income distributiÂon, concurrent with advances in science and production capabilityÂ.
In today's global economy, there isn't a sufficient explosion of income distributiÂon in the East, where production has exploded fueled by income from the West.
We're facing the friction of Eastern societies, (for the most part), where production has exploded but where the societies have poor methods of income distributiÂon.
The economic pie cannot grow without wide income distributiÂon. Not the other way around.
As Mathew pointed out, M3 growth was not created by the either the CB or the government.
Where is Mr. Pento's criticism of these horrific, asset-boosting private capital marketeers - the ones actually responsible for the total destruction of the economy.?
Second, when it comes to providing the driver for real economic growth, what is Mr. Pento's solution?
The Trillions in Fed 'facilities' lie on the shelf of the investment bankers waiting for the opportunity to grab indentured assets when the crash comes, maybe beginning next Wednesday.
The real tragedy of the money system is its failure to provide an effective management tool to those responsible, including Bernanke and other CB leaders.
Using interest rates to control the money supply is like pushing on a string.
That's why Christine Lagarde has never been so afraid.
That's why Bank of England Governor Mervin King calls this banking and money system, the worst of all possible options, amid his call for reform to a full-reserve system that ends debt-based money creation.
Criticisms of our CB head are well-deserved.
But solutions that actually provide the needed mechanism for increasing aggregate demand in the economy are yet to be seen from either CBs or capital marketeers.
The only comprehensive reform capable of providing non-inflationary growth to employment is in Congressman Dennis Kucinnch's NEED Act of 2011.
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
For the Money System Common
It's time for the investment bankers and free-market capitalists to pick yourselves up, dust yourselves off and have a good look in the mirror.
Sorry, but the "guvmint" and the Fed are not your parents.
Obviously, it takes more than zero percent money to have a flood of lending or we would NOT be in a monetary contraction from debt-repayment right now.
The Fed doesn't force anybody to make loans.
Just because your parents let you drive the car doesn't mean that you need to go drive a hundred miles an hour and crash into a school bus.
If the banks can't be responsible for themselves, no matter the interest rate policy, then we should remove their money-creation powers. Plain and simple.
That way you would never need to reprimand them again for being greedy.
And, that is EXACTLY what the Kucinich Bill does.
Thanks, Michael.
For the Money System Common
Get a clue.
The money supply is only one side of the equilibrium in money markets (there is also money demand), and the money markets are only one determiners of aggregate output (along with the goods and services markets).