I am now fully used to U.S. Fed Chairman Ben Bernanke's extraordinary self-regard.

However, I have to admit that even I was surprised by last Friday's CBS Marketwatch headline: "We Saved the World From Disaster, Bernanke Says." Although that's an extraordinarily cheeky claim, it seems to have persuaded U.S. President Barack Obama, who yesterday (Tuesday) recommended reappointing the central bank chief to a second, four-year term.

From the investor's point of view, this is not good news.

Bernanke's claim that the world's central bankers rescued the global economy from collapse – even if true – fails to recognize the role they played in actually creating the disaster in the first place.

Excess money expansion throughout the world (a problem that dates all the way back to 1995 in the United States, although it really ramped up after the 2001 stock-market crash) – led to an asset bubble and a situation of over-leverage that left the global financial system in a highly vulnerable situation.

Yes, greedy bankers were part of the problem, but they got greedy because there was too much money sloshing around. History has shown time and again that excessive money always leads to a burst of bad banker behavior.

Bernanke didn't head the Fed until January 2006. For several years before that time, however, Bernanke had been an active voice encouraging his predecessor, former Fed Chairman Alan Greenspan, to keep printing money.

In a now-infamous speech in November 2002, Bernanke declared that the U.S. economy was in severe danger of deflation, and that the Fed should "drop money from helicopters" to avert the possibility. In reality, deflation was not close at that time and the low interest rates that Bernanke encouraged produced a housing bubble that became the center of collapse.

After 2006, Bernanke was fully responsible for any disasters. He continued Greenspan's policy of raising interest rates only very slowly, allowing asset prices to continue inflating.

In October 2007, when the first cracks began to appear in the financial sector – but before the economy itself began feeling the fallout – Bernanke began aggressively dropping interest rates. The result: Oil prices doubled in less than a year, which sent the U.S. and global economies into a tailspin, even as it further destabilized the financial system.

The September 2008 near-collapse of the U.S. financial system – which either badly wounded or took down such U.S. heavyweights as Lehman Brothers Holdings Inc. (OTC: LEHMQ), Merrill Lynch, American International Group Inc. (NYSE: AIG), and Citigroup Inc. (NYSE: C) – was more Bernanke's fault than anyone else's. The greedy bankers and hedge funds were just reacting to market signals, as they should do.

Since September 2008, the short-term economic pain has been somewhat lessened by Bernanke and his colleagues' aggressive monetary easing and massive bailouts of the financial sector. But it also created two problems.

The first one is that the economic bottom – if it's been reached – is being accompanied by unprecedented budget deficits, stretching several years into the future. This means that there will be a huge financing problem as the economy begins to recover.

Second, the huge monetary expansion will cause inflation. We can already see this effect in an oil price of $75 per barrel in the middle of a global recession. Those who tell you that you can't have inflation and recession simultaneously are wrong. It's called "stagflation," and we've seen its ugly effects before. To take just one example, think back to Britain circa 1975, a period that combined a nasty recession with 10% unemployment, and an inflation rate of better than 25%.

In an ideal world, the next Fed chairman would be Paul A. Volcker, to work his deflationary magic as he did in 1979-87. There is a strong case for re-writing the Fed statutes to ensure that Volcker-style monetary policies are mandatory and Greenspan/Bernanke sloppiness impossible. Given Volcker's age, a second choice could have been Lawrence H. "Larry" Summers, a person who is clearly tough enough to act quickly when inflationary problems appeared – as the most assuredly will.

Bernanke's reappointment means that the "Bernanke's Worldview" will remain dominant at the Fed. This is not good news for U.S. investors, savers, or anyone else whose assets will suffer badly when virulent inflation is at hand.

The last meeting of the policymaking Federal Open Market Committee (FOMC), held two weeks ago, promised to end Fed purchases of government bonds and mortgage-backed securities. At the time, I wrote that this seemed a bid by Bernanke to assist his reappointment by deflecting the wrath of the more moderate sound money types (Intransigent ones like me were little mollified by this belated action). With little opposition, Bernanke's reappointment would thus be assured by an administration that doesn't seem to care much about sound-money management, anyway.

Now Bernanke has been reappointed, the next FOMC meeting – set for Sept. 22-23 – will be very interesting. If the FOMC remains mildly restrictive, we will get inflation and higher interest rates, but the problem will remain containable, at the cost of some very unpleasant budget medicine by about 2011, probably in the form of higher taxes.

But if Bernanke's worst instincts are allowed to dominate, the next FOMC meeting will announce a renewed program of Fed purchases of U.S. Treasury bonds and mortgage-backed debt. That will mean that, over the long term, the Fed will print money to fund a large part of the budget deficit.

That was the policy of the German Weimar Republic in 1919-23, which led to 1 trillion percent inflation, at the end of which you needed a wheelbarrow full of money for daily food shopping. A full-fledged Bernanke policy – "dropping money from helicopters," primarily on Wall Street – would have the same effect.

Either way, Bernanke's reappointment means that we, as investors, should have some gold, to protect the purchasing power of our savings. If the FOMC meeting next month goes the wrong way, we should probably invest in a wheelbarrow, as well.

[Editor's Note: Money Morning Contributing Editor Martin Hutchinson - a veteran investment and merchant banker with nearly 30 years' experience in the world markets - is a firm believer in sound financial management.

But Hutchinson is also an opportunistic investor, who is better than almost anyone at ferreting out the high-return profit plays that market problems usually create. As the editor of the Permanent Wealth Investor trading service, Hutchinson says that gold and "Alpha Bulldog" stocks - those with high dividend yields and the likelihood of explosive capital returns - are the way to pounce on the profit opportunities current government policies are creating.

In a new video - which is available for viewing free of charge - Hutchinson details his strategy, and talks about three new Alpha Bulldog stocks that he's identified for his readers. To watch the video, please click here.]

News and Related Story Links:

• Money Morning Special Report:
  Why Dividends and Gold Are the Keys to Permanent Wealth.
• MarketWatch.com:
  We saved the world from disaster, Fed's Bernanke says.
• Federal Reserve Board:
  Remarks by Governor Ben S. Bernanke (Nov. 21, 2002).
• Money Morning Special Report:
  The Secret to Building a Portfolio that Pays – in Good Markets and in Bad.
• Wikipedia:
  Stagflation.
• Money Morning Market Commentary:
  With His Flawed 'Exit Strategy,' Bernanke Has Set the Stage for Stagflation