Ben Bernanke was on 60 Minutes last night. If you didn't get to see it, go ahead and watch it. This is one of the most powerful men in the world. Even if you don't like him and think he is a total liar or a total fool, you should still pay attention to what he is saying.
The interview is quite interesting. The first thing I noticed is that he sounded nervous. Maybe I don't listen to him enough and this is the way he always sounds. While there were a lot of interesting soundbites, the most interesting one was about inflation.
The interviewer asked him about inflation. Bernanke said that "the amount of currency in circulation is not changing. The money supply is not changing in any significant way." He said they are lowering interest rates to stimulate the economy.
I don't understand what he is talking about here. Is he saying that the banks will increase their excess reserves (as was done 2 years ago)? That is what one economist thinks (see halfway down the article). That is really the only explanation for his comment. If the Fed is buying U.S. bonds, then it is creating money. The government could sell bonds to individual investors, to companies, or to foreign governments and none of these actions alone would be inflationary. But if the Fed is buying U.S. government bonds, then the Fed is creating money out of thin air to buy them. Therefore, for him to say that the amount of currency in circulation is not changing, would have to mean that the additional money gets bottled up at the banks.
Of course, he didn't say this and the interviewer didn't follow up with him. It contradicts his other statements. If he is engaging in QE2 to lower interest rates and encourage lending, then how is lending taking place if the banks are increasing their excess reserves? So are the banks going to lend or are the banks going to increase reserves? Which is it Bernanke? And what is it you want them to do Bernanke?
The man is either a liar or a fool. But he is in a position of great power and we must listen to what he says. His actions dictate the future of the economy and they dictate how certain investments will behave. If he is right that there will be no additional money in circulation, then we should be cautious about stocks and gold. If he is wrong, then we should expect high price inflation to follow the high monetary inflation and we could see gold skyrocket more than it already has.