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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
I happen to agree with everything in here. I went big into gold using graded slabbed US $20 double eagles mostly in MS condition (out of fear for confiscation) back with the tarp. When gold hit the lofty levels of $1000, I kept those, but started into silver when it was at the lofty levels of $17 or so. Bought some more silver recently around $36. As far as I was concerned, these jokers telegraphed their intentions with the tarp. Until that point, it was always possible they'd do the right thing. That was the signal to "back up the truck".
For those who haven't acted yet, I'd emphasize that while gold at $800 was a better idea than at $1700 and silver at $17 was a better idea than at $40, it's still not too late.
Higher inflation, higher unemployment and higher borrowing costs are the result of Bernanke's monetary policies? I don't think so. Corporations are turning in record profits and have huge stashes of cash on their books but they are not hiring in the U.S. at least. They are outsourcing to China and India and using rechnology to cut costs. This has nothing whatsoever to do with Bernanke's policies. Higher borrowing costs? Interest rates are at record lows. I'm not sure what interest rate chart you are looking at. Credit card companies have been screwing the consumer for years so there's nothing new there. As far as inflation is concerned, it's a mixed bag. While gold has soared, oil has been primarily range bound. In any event worldwide demand for commodities is increasing so price increases can not be solely blamed on Bernanke. Most of the money supply increase due to quantitative easing has not even worked it's way into the economy as it has been held as bank reserves. It would be nice if banks started loaning again and some of that money did work it's way into the economy. Then we might see a meaningful jump in the employment numbers.
All of the QEs are a direct devaluations of the dollar. The dollar, on the US Dollar Currency Index, has devalued about 10% since Jan 7th when it closed at 83.26 to June 7th when it closed at 73.52. Further more the dollar has devalued about 15% since June 2010 when it was at 88.23. Perhaps inflation is a lot higher than reported. With devaluation of the dollar there is higher cost for goods, less goods being bought, therefore higher inflation, higher borrowing costs for average Americans, higher unemployment and suppression of economic growth.
The Fed has to buy U.S Treasuries. They are quickly becoming the only ones who will buy U.S. debt. Even the Chinese are beginning to soften on U.S Treasuries. The country is heading down the slippery slope at an increasing rate of speed. The debt ceiling deal was a joke. Politicians sold the country out again. This means inflation with a capital "I" and more taxes regardless of what politicians are saying.
You need to start writing about the big flaws in federal budgets/spending !!!!!!!!The Fed Budget each year,to "be equal to the previous spending levels is increased by 7-8%. So it gets a big raise for CBO scoring!
We need to introduce a zero base budgetr where each year the start point is the previous years actual spending! then , if we simply cut 1 % from the previous year's $ spent, this country will start to crawl out of the red ink forest!!!!!!!!!
Great article,but I suspect you are preaching to the choir here.Unfortunately,the majority of Americans have no clue to what a good govt should be.
Martin,
Thanks for the laughs, certainly the circus act we have attended has not finished.
I have been wondering for some time, why if the US does not have money, it keeps fighting two wars that have not bear any good for Americans. If history were useful, the lessons learned from Napoleonic Wars that devastated France should be the mark for Americans to say enough is enough!
In this scenario what is most questionable is Democracy itself, and the bearing of the standard and imposement of democracy at the expense of the well being of its citizens, suppossedly to bring peace and democracy to other nations that are not asking for it, nor will benefit of the disaster caused by the invasions to those countries. What Mr. Obama and all the US Citizens must vote now is for a complete withdrawal of troups from Afganistan and Irak, ask forgiveness to those citizens for the mess caused in the name of Democracy, and with all the money saved avoid going into QE3. America has lived long from borrowed money, its time to stop the bill presses. In a real democracy the US citizens would be able to make a stop to all those clowns in government. What I realize is that we are living in the world of fantasy, I just wonder when is the next US financial crisis going to happen!!!
Totally in agreement with King Ralph. May I add that the US govt is hell bent on changing policies at public expense of poverty it seems, as religion does not work, and the war effort is getting a bit pale with popularity.
Everything HeliBen does is strictly in line with the Feds internal planning , to say they have no plan is an understatement, they can't keep up with the sudden technology explosion, just stalling while they look at ways to suppress newly announced hydrogen fission processes, which undermine the fuel burning future – can we rename him HellBent ? I provide a suggestion – As the feds are naturally only too keen to bury the Constitution with debt , which is what will happen – I.M.F bail out will come with a re-written U.S. Constitution.
The suggestion : Is to give the feds the flick , while you still have a Constitution. Then create your own internal bank , reissue capital in a new currency, with 1 % fixed interest. Default on all debt, as its in the wrong pockets anyways. Change the board on any major corporation needing assistance, to nominated workers.
Carlos adds realism to the U.S. future – the Feds just can't believe their luck , how easily led a nation they seem to control. History tells us the only ships to sail between England and France in that war is Rothschilds.
History tells us that every war thereafter was financed and planned, a conspiracy which this Constitution can demand recompense. Its time to dismantle those empires to pay back this fabricated global debt , which after all is a very selective poverty , controlled by fiscal policy and "federal legislation" that set them up in the first place. How stupid is an entire population of the planet ? This is an international event. I'll be back .
It clear the problems are always caused by financial mogel types moving into management positions who have no interrest for economy apart from their own. There are books on the subject. Wake up America.
What a pitty that they continue to destroy the US.
It is easy way out.
CUT UNECESSARY SPENDINGS, not pensions or benefits of honest workers.
TAX those who benefited the most from last 15-20 years (it is easily trackable).
I don't say – confiscate, but balance it somehow.
I'm sure there are honest people who would prepare right model.
US should not lose its face (Dollar), but within 10 years it is EASILY POSSIBLE to reduce debt to ZERO.
Not with such people in Government of course, shame for nation and whole world is surprised about what we are seeing now.
It is actually WAR situation, total danger of country's destruction and those imbecils are talking about their ambition. Minimum what they deserve is hell.
King Ralph doesn't get it. Smart consumers don't use credit so they don't get screwed. If the US government worked the way big companies do (who have hoards of cash) we would not be leaving all this debt to our grandkids. The US needs a balanced budget amendment and a cleansing of Congress. It's apparent we need fewer lawyers running the country and more businessmen.
Oil's dropping like a rock and even with an S&P downgrade money is moving into treasuries. Voiceless in a democracy seems to have gotten a voice. Smart consumers don't use credit? Then I guess smart businesses don't use credit either. The credit markets run the world. As far as a cleansing in Congress is concerned good luck on that one. Businessmen ran the world economy into a ditch in 2008 so the notion that businessmen will make better political leaders is bogus. We need competent individuals regardless of their background. A balanced budget amendment is just another ploy because as soon as there is a national emergency it will be overriden.
Just read your newsletter for the first time. Very informative, please sign me up for the Money Morning Newsletter.
Thank you,
Bryan
Politicians blaming the firemen (S&P) while uncle Ben is busy trying to put the fire out with dollar bills. Pretty soon a helicopter may not be big enough he may need a B52.
"Public" news sources are not enough to keep up with the current pace of changes. What is missing? Honest and thorough journalism by people who are independent of those who control the US and foreign economiies: that means facing the Leviathan: For starters, let's pick on the 'CFR(Council on Foreign Relations), the Tri-lateral Commission and the Bilderbergers, among other half-public and half-
private power mongers. Those who fail in this respect are just as responsable for the US and European fiscal mess as the politicians and economists. Anyone who questions these social/political realities is part of the problem. Heaven help the Teapartiers, as they will be blamed for everything and anything that hurts the United States of America. I would like to see some fiscal commentators emerge with guts.