If you’re President Obama, you have to love Federal Reserve Bank Chairman Ben Bernanke — and hate him. On the one hand, the Fed’s easy-money policies have helped goose the stock market and the economy, boosting that public feel-goodism that comes with an inflated money supply. On the other hand, devaluing the money gooses commodity prices, like gold and oil, helping to drive up the price of gasoline, which angers voters.
At the nadir of the recent recession, around mid-September of 2008, the media frequently pointed out that as an economics professor, Bernanke was a “student of the Great Depression.” Implicit in the observation was that Bernanke would try to avoid making the same mistakes the Fed made then, which prolonged the recession.
One of the major criticisms of Great Depression Fed policy was that it sharply contracted the money supply. Well, we can safely say that the current Fed chairman hasn’t repeated that mistake; the Fed has been on a lending, printing, borrowing and spending binge.
First, there were the bank bailouts. David Wessel of the Wall Street Journal reports that “at the end of March 2009, the Fed had $1.3 trillion [not $7.7 trillion, as a November 2011 Bloomberg report seemed to imply] in loans outstanding, both emergency-liquidity loans and those made in the rescues of Bear Stearns, American International Group and others.” Of course, most of those transactions occurred during George W. Bush’s presidency.
Then came the Fed’s two efforts at “quantitative easing” (QE1 or QE2) that occurred between late 2008 and 2011. In this case, the Fed printed money and used it to buy about $2.3 trillion in Treasury securities and mortgage debt.
Last year, however, the Fed concluded that even more needed to be done to boost the economy. It considered a QE3, but the public grumbling about printing more money — which is actually a euphemism, since it creates the money through accounting entries, not printing — encouraged it to take a different, and perhaps less easy to criticize, course: Operation Twist. In this $400 billion program, the Fed sold short-term securities and used the money to buy long-term bonds in an effort to keep interest rates low.
Yet still concerned that it hasn’t primed the pump enough, the Fed has recently been considering what it calls “sterilized bond buying.” As the Wall Street Journal explains: “Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later …”
So the idea is to take some action and call it a new — albeit rather ominous sounding — name in the hope that the public will not connect the inflation dots.
Mind you, this doesn’t count the U.S. Treasury’s $10.7 trillion in outstanding publicly held debt, with President Obama responsible for nearly $5 trillion in new debt.
But, unfortunately, there is a downside to flooding the economy with new money: inflation. If you have more dollars and credit chasing roughly the same amount of goods and services in the economy prices will go up. And although it can take a while to see that inflation emerge in the economy, it often shows up immediately in commodities, which investors often turn to as a hedge against inflation. Hence the meteoric rise in the price of gold, which has stabilized somewhat lately, and, of course, oil.
While President Obama has been complaining about the rising price of gasoline, part of that price increase is a direct result of the Fed’s policies, as well as his own.
Recently, the Joint Economic Committee (JEC, Republican Staff) compared the value of the dollar and the price of oil. As can be seen from the graph, the rise in the price of oil is almost a mirror image in the decline in the value of the dollar. And that inflation shows up at the gasoline pump. The JEC estimates that at a price of $3.80 a gallon for gasoline, about 42 cents of that cost is due to the declining value of the dollar.
To be sure, other factors affect the price of oil, but the Fed’s easy-money policies have had a huge impact, and it appears the Fed may not be finished yet.
Some of the Republican presidential candidates have said they would fire Bernanke because of the Fed’s pump-priming, inflation-creating policies. On the other hand, Obama would probably like to give him a big hug — except that the immediate consumer pain of rising gasoline prices can sometimes override the joy of more money.
Of course, there will be an eventual price to pay for an inflated money supply: inflated prices. And while we are already seeing it at the gasoline pump, Obama hopes that widespread inflation will hold off — at least until December.
March 22, 2012