 The Bernanke Fed
Steve Saville
email: sas888_hk@yahoo.com
5 Nov, 2005
Below is an extract from
a commentary posted at www.speculative-investor.com
on 30th October 2005.
Confirmation that Ben Bernanke
will be taking over from Alan Greenspan as Fed chairman early
next year has some implications for the financial markets --
which we'll discuss below -- but we don't think it is a major
deal. This is because, in our opinion, the times make the Fed
chairman, not the other way around. Specifically, during periods
when overt inflationism fits the general mood of the markets
the Fed chairman will be an overt inflationist (if he is not
then he will be replaced by someone who is). By the same token,
when the markets are crying-out for an inflation 'hawk' then
an inflation hawk is what they will get.
The reason that Greenspan enjoyed
such a lengthy stay in the job was that he changed with the times.
For example, during his first few years as Fed chief he was a
Volcker-like inflation 'hawk', but his tune gradually changed
over the years to the point where he became one of the leading
touts of the so-called "new economy" during the late-1990s,
and, following the bursting of the technology bubble, a no-holds-barred
inflationist.
In any case, regardless of
whether the Fed chairman's public persona is that of an inflation
'hawk' or an inflation 'dove', a large increase in the money
supply (inflation) is what we always end up getting. For example,
William McChesney Martin -- Fed Chairman during the 1950s and
60s -- came across as a prudent guardian of the monetary system,
but he presided over massive inflation; Paul Volcker came across
as a vigorous inflation fighter, and yet he presided over massive
inflation; and Alan Greenspan changed his colours like a chameleon
but when he leaves the Fed in January he will have presided over
massive inflation. As such, within the financial universe there
are few prospects that could be closer to a certainty than the
prospect of Bernanke's term at the top of the Fed being characterised
by massive inflation of the money supply. Probably not immediately
because a deflation scare is almost mandatory as far as the coming
12 months are concerned, but eventually.
There are, however, some specific
market implications of having Bernanke at the helm of the Fed,
one being that he is an unknown quantity. The markets have become
comfortable with Greenspan and, importantly, with Greenspan's
proven ability to keep the inflation going whilst maintaining
confidence in the financial system. A general lack of certainty
regarding the new Fed chief's ability to do the same is something
that might lead to additional volatility in the markets when
the next financial crisis occurs.
Another potentially significant
implication is that Bernanke is in favour of using monetary policy
to target specific increases in the Consumer Price Index (CPI).
If he acts in accordance with his stated beliefs he might, for
example, decide to adjust monetary policy in order to achieve
annual CPI growth of around 2%. But conducting monetary policy
in this way in the current environment would inevitably result
in HIGHER-than-usual inflation (money supply growth) because
a) the natural tendency of prices is to trend lower over time
in response to productivity improvements, so a certain amount
of inflation would always be needed just to stop prices from
falling, b) the CPI is calculated in a way that drastically under-states
the dollar's loss of purchasing power, meaning that in order
to achieve an annual increase of 1-2% in the CPI there would
probably have to be enough inflation to reduce the dollar's actual
purchasing power by 5-6% per year, and c) the downward pressure
on goods prices due to the large amount of manufacturing that
now takes place in low-cost regions of the world means that even
more inflation than usual would be needed to keep the CPI in
an upward trend. In other words, if Bernanke really is going
to use monetary policy to keep the CPI increasing at, say, 2%
per year then we can look forward to a lot of money-supply growth
over the next several years. This, of course, will be bullish
for gold.
Generally, in an environment
where there is substantial downward pressure on prices the mistake
of defining inflation and deflation in terms of price changes
-- as opposed to defining them correctly in terms of money-supply
changes -- has the potential to create more problems than usual.
This is because the definition-challenged majority will remain
oblivious to the inflation for longer than would otherwise be
the case.
The effects of the inflation
will, however, always be evident in some prices even if most
people don't realise that inflation is the driving force behind
the price rise. We won't be surprised, for instance, if at some
point over the next few years the situation arises where many
well-respected analysts are scratching their heads in disbelief
and asking questions like: "Why do we have a 4-digit gold
price when the Fed is doing such a good job of keeping inflation
in check?"
Steve Saville
 email: sas888_hk@yahoo.com
Hong Kong Regular financial market forecasts and analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html. We aren't offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://tsi-blog.com
Copyright ©2002-2019 speculative-investor.com All Rights Reserved. Saville Archives
321gold Inc
|
