Bernanke's Next Move

Ben Bernanke (a.k.a. Helicopter Ben), chairman of the Federal Reserve, has been in the news quite a bit lately.  There is a lot of speculation on QE2 (quantitative easing 2).  QE1 occurred 2 years ago when the Fed more than doubled its balance sheet, mostly by buying toxic assets.

Bernanke is not being specific on what the Fed might do.  He says that he is worried about a lack of inflation.  I guess that means he thinks the average American should be paying higher prices for food and gas than what they are currently paying.

It is hard to imagine that Bernanke is a dumb guy.  Maybe he does or maybe he doesn't understand Austrian economics.  He is certainly a political person, but anyone who gets to that position would be.  The president, congress, and bankers would not allow someone in that position who is not political.  They want somebody who is going to toe the establishment line.

I think Bernanke knows the threat of another major session of quantitative easing (money creation).  The Fed more than doubled the monetary base two years ago and this has not led to high price inflation because most of the money has remained on reserve.  The banks are not lending it out.  If the Fed creates even more money and triggers price inflation, it might lead to the money already created being lent out.  This could be doubly disastrous for price inflation.  I think he understands that the Fed has to be careful.

It seems that a better strategy, if the Fed wants to increase price inflation (whether they actually think it will help or whether it is for political reasons) would be to force the banks to lend.  At least this would more likely prevent a hyperinflation scenario.  We can't be sure why Bernanke is not being specific.  We can't be sure if he is dumb enough to start another round of money creation.  I just can't imagine that he is dumb enough to completely jeopardize the dollar.  Hyperinflation would destroy him as much as every other American.

Right now, the Fed is not inflating.  The monetary base has gone down slightly.  We'll continue to watch the charts more than what is being said.