The circus known as the debt-ceiling debate may have left town – at least for the time being – but there's still one sad clown left standing squarely in the center of the ring.
I'm talking about U.S. Federal Reserve Chairman Ben S. Bernanke – otherwise known as "Helicopter Ben."
Bernanke got the nickname "Helicopter Ben" from a speech in 2002, in which he announced that deflation was a real worry (this was just when house prices were taking off) and that one possible solution would be to fly around the country dropping $100 bills from helicopters.
Strange as it sounds, that might actually have been a better approach than the one he ended up taking.
Attack From the Sky
Small towns in the Midwest and the working poor of such downtrodden urban environments as Cleveland and Detroit could certainly use a visit from the kindly flying Santa Claus. At least those Americans would have put the money to good use.
But so far, Bernanke's helicopter has only hovered over Wall Street, and his generosity has had a negative effect on the U.S. economy as a result.
His first two rounds of quantitative easing had three major consequences:
- Higher inflation.
- Higher unemployment.
- And higher borrowing costs for average Americans.
In fact, the only thing Bernanke's policies have managed to suppress is economic growth.
U.S. gross domestic product (GDP) increased by just 1.3% in the second quarter – an indication that an already wobbly economic recovery could tip completely over in the second half of the year.
But if you think that means we'll get a reprieve from Helicopter Ben's razor-sharp rotors, you're wrong. To the contrary, he's gearing up for another flyover – a third round of Treasury purchases (QE3).
The Return of Helicopter Ben
Bernanke said in congressional testimony in July that the Fed would consider taking new action if the economy stalls – including a third round of bond purchases.
As I said earlier, Helicopter Ben's first two flyovers cost Americans dearly – the biggest setback being inflation.
Consumer prices in the United States rose at an unadjusted pace of 3.6% in the year through June. Food and fuel prices provided the impetus for much of that increase.
Oil prices surged 23% from where they started the year to a peak of $113.39 in late April.
Meanwhile, at the end of June, food prices at grocery stores were up 4.7% from where they were a year ago, according to the U.S. Department of Agriculture. Beef prices are up 8.2% from June 2010, while pork is 8.5% higher. Coffee prices have jumped 17.6%. Eggs cost 11.1% more. And milk prices are 10.2% higher.
The USDA projects supermarket prices will rise 3.5% to 4.5% this year, and 3% to 4% in 2012.
Of course, Helicopter Ben's chopper doesn't run on gas, it's powered by his delusion. And since he only eats money, food prices are hardly a concern.
That's why the Fed's preferred price gauge is so-called "core" inflation, which excludes food and energy costs. But even by that measure, rising prices are starting to become a real problem.
The core consumer price index (CPI) rose at a 2.2% annual rate for the three months ending in May, up from a 0.7% pace for the three months ending in January. And the core CPI edged up another 0.2% in June.
Still, inflation isn't the only negative consequence to arise from the Fed's lax monetary policy.
Bernanke's dollar dumping also has directed capital into the federal budget deficit. That has made it easier for the spendthrifts in Washington to get money while simultaneously making borrowing more difficult for the average American.
Indeed, banks have too easy a time borrowing at zero interest and investing in Treasuries or government-guaranteed mortgages for an easy 3% to 4% return.
And what's worse is that by failing to make banks do the hard intellectual work of finding creditworthy small businesses to lend to, Bernanke is killing jobs.
Higher inflation means higher wages in the United States. So many multinationals now are borrowing cheap money in the United States to build factories overseas and move their operations to cheap-labor emerging markets.
Bernanke also is discouraging savers from saving. Think about it: Why the hell should you save when you get less than 1% on short-term money and inflation eats away your capital at 3% to 4% per annum?
In short, we have an inflation problem, as well as an unemployment problem, and Bernanke and the government are largely the cause of it.
Four Ways to Brace for the Fed's Next Flyover
Another round of quantitative easing will bring us both high inflation and very likely a serious credit crisis in the Treasury bond market.
So we need to guard ourselves against it – at least as far as we can.
So here are four places to seek shelter from Helicopter Ben's next misguided monetary mission:
- Invest in Gold: We've been telling you for years to invest in gold as a way of hedging against both inflation and foolish economic policy. The SPDR Gold Trust ETF (NYSE:GLD) remains a core holding. Alternatively, you could go for a solid gold mining company such as Yamana Gold Inc. (NYSE: AUY). These tend to move somewhat independently of the gold price, but also become more valuable through earnings as the period of high gold prices lengthens.
- Don't Ignore Silver: Try to work silver into your portfolio, as well – specifically the iShares Silver Trust (NYSE: SLV). Silver has two advantages over gold: It is more leveraged, rising more quickly when gold really takes off, and it's especially appealing to rich Chinese investors, because imperial China was on a silver standard, not a gold standard.
- Book a Flight to Asia: A third option is to invest in Asian stocks – especially those in countries like South Korea and Singapore where the local governments are grown-up, the budget deficits are small, and the political risks are minor. These countries – plus Germany, which currently is too close to the European sovereign debt mess – are the AAAs of the future. That's a club the United States likely won't be a part of very much longer. I suggest the iShares MSCI Singapore Index Fund (NYSE: EWS) and the iShares MSCI Korea Index Fund (NYSE: EWY).
- Flee the Greenback: With the damage being inflicted on the U.S. dollar, the Rydex Currency Shares Swiss Franc Trust (NYSE: FXF) also is a good option. It tracks the performance of the Swiss franc and has an expense ratio of only 0.4%.
News and Related Story Links:
- Money Morning:
Team Bernanke's QE17: A Glimpse of America in 2015
- Money Morning:
"Stealth QE3" Comes to Fruition – Soaring Inflation is Next
- Money Morning:
The No. 1 Way to Profit as the Price of Gold Soars Into Record Territory
- Money Morning:
The Outlook for Gold and the Dollar Make Newmont Mining Corp. (NYSE: NEM) a "Buy"
- Money Morning:
Strong Commodity Prices: My Four Favorite Ways to Profit From the Rebound