Bernanke
Confuses Depression Cure with Disease
Peter Schiff
Posted Dec 9, 2005
An article in yesterday's (Thurs)
Wall Street Journal discussed how self-proclaimed "Depression
buff" Ben Bernanke claims understanding of how the Fed caused
the Great Depression and precisely what he would do to prevent
such a calamity from reoccurring under his tenure. Not only are
his assertions naïve and egotistical, but flat-out absurd.
Though he claims to have studied
The Great Depression in depth, Bernanke is completely clueless
as to its actual cause. However, he is partially right about
one thing: the Fed did help create the Depression, but for the
opposite reasons Bernanke believes. The Fed-induced credit boom
of the roaring 1920s laid the foundation for the inevitable bust
that ushered in the Great Depression. Bernanke has mistaken the
disease for the cure, and his antidote, were it ever administered,
would prove to be economically fatal to the U.S. economy.
The mistake made by the Fed
during the 1920s was expanding the supply of money and credit
too rapidly. However, as increasing productivity prevented consumer
prices from rising, the Fed was unconcerned about the inflation
it was creating. Instead, the excess money and credit that spilled
into financial and real estate markets caused asset prices to
rise, which resulted in claims of a "new era" (sound
familiar?). The bust of 1929 led to the Great Depression of the
1930s not as a result of Fed tightening, as Bernanke claims,
but due to the misguided economic policies of the Hoover and
Roosevelt administrations. By preventing market forces from efficiently
correcting the imbalances created during the inflationary boom
of the 1920s, the Federal Government turned what otherwise would
have been a normal, though severe, cyclical recessionary bust,
into what became known as The Great Depression.
During the 1920's the British
pound, then the dominant world currency, was under pressure.
In an effort to prevent British inflation from causing the pound
to weaken against the dollar, Benjamin Strong, governor of the
Federal Reserve Bank of New York, led the charge for higher inflation
in the United States as well. By debasing the dollar along with
the pound, their relative values could be maintained, thus preserving
the illusion of pound stability. Through competitive devaluation,
Great Britain exported its inflation to the United States, much
the way the U.S. now exports its inflation to China and Japan.
However, the money and credit
supplied by the Fed unexpectedly produced the speculative stock
market bubble of the roaring 1920's. When Benjamin Strong died
in office in 1928, his successor George Harrison (not of Beatles'
fame) understood the problems and helped address them by correctly
tightening monetary policy, reversing the inflationary expansion
that occurred under Strong.
It is to this action which
Bernanke objects and for which he blames the ensuing Great Depression.
However, the problem was not that stock and real estate prices
collapsed, but that they rose so much in the first place. It
was not the mistakes of Harrison that caused the bust, but those
of Strong that produced the false boom, making the subsequent
bust necessary.
Had Harrison allowed the monetary
expansion to continue, as Bernanke suggests he should have, the
result would have been hyper-inflation, which would have produced
even more dire economic consequences than did the bursting of
the bubble. The problem is that Bernanke, like Harrison, will
soon replace Greenspan, the modern version of Benjamin Strong
(though a more accurate comparison may be to Montague Norman,
the governor of the Bank of England during the 1920s.). However,
unlike Harrison, Bernanke will likely make the wrong policy choice.
Ben Bernanke believes
that credit expansions need never end - that a boom can be prolonged
indefinitely simply by printing enough money. The fact that the
incoming Fed chairman believes such nonsense is similar to a
cold-war president having believed he could win a nuclear war.
However, Bernanke's finger will not be on the button, but on
the printing press: and he seems itching to crank it up as he
is convinced he will win the deflation war.
When asset prices are too high,
credit out of line with savings, and consumption out of line
with production, serious economic imbalances result. Curing those
imbalances is a painful but essential process. In attempting
to prevent the adjustments from taking place, Bernanke will do
far more harm than good.
As a result of his confusion,
Ben Bernanke wants to cure the disease by killing the patient.
The best analogy is to a heroin addict continuously shooting-up
to avoid the unpleasant reality of withdrawal. He may "succeed"
but only by dying. In economic parlance, hyper-inflation is the
monetary equivalent of a drug overdose, and Dr. Ben (Kevorkian)
Bernanke seems dead set on administering it.
Dec 8, 2005
Do
not wait for pull backs that may never come. Buy gold at current
prices and do not look back. I still believe the best way for
average investors to participate is though the Perth Mint in Australia.
For more information on their unique, safe, private, low-cost
program visit www.goldyoucanfold.com.
In addition, as the dollar's
value is likely to sink far faster than those of other fiat currencies,
investors can learn strategies to protect wealth and preserve
purchasing power by downloading my free research report on the
coming collapse of the U.S. dollar at www.researchreportone.com
and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
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