Incredibly, in an interview yesterday on 60 Minutes with CBS’s Scott Pelley, Fed Head Ben Bernanke, when asked about the inflationary impact of the QE2, actually said, “We’re not printing money.” According to The Wall Street Journal, the question and answer went this way.
“Many people believe that (QE’s $600 billion) could be highly inflationary, that it’s a dangerous thing to try.”
“ Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And, that’s what we’re going to do.”
Again, this is incredible. The Fed is set to buy $90 billion a month in “treasury securities” over the next eight months, up to $600 billion. When the Fed buys bonds, it credits the seller’s Fed account with dollars that the Fed previously did not own. Dollars are literally created.
The Fed never “owns” dollars. When it buys bonds, it creates the dollars by accounting legerdemain. When it sells bonds, the dollars that buyers pay are “cancelled,” they come out of circulation, thereby lowering the money supply, a basic function of a central bank.
So, when Bernanke says it’s a “myth” that they are printing money, he is stretching the truth. The Fed does not literally print dollars, the Bureau of Engraving and Printing does that, but the Fed does create dollars on accounting ledgers, which inflates the money supply.
Such doublespeak is a politician’s stock in trade. Older readers will remember that in the 1950s we did not fight a war in Korea. Truman’s administration called it a police action.
Regarding Bernanke’s statement, “So, the trick is to find the appropriate moment when to begin to unwind this policy. And, that’s what we’re going to do.”
This, of course, is evidence that Bernanke actually believes that he can manage the economy, that he and the Fed staff can look at statistics and decide appropriate Fed action in the monetary markets. This is a fallacy of the first degree. History is full of deceased centrally-managed economies, a recent being the old Soviet Union and more recent being Zimbabwe.
Finally, Bernanke said that he wished he’d been omniscient and seen the crisis coming. “I didn’t, but it was a very, very difficult situation. And, the Federal Reserve responded very aggressively, very proactively.”
Bernanke also said that the Fed needs more “oversight authority” and implied that the Fed could have foreseen the demise of AIG. Bernanke’s hubris knows no end.
Interestingly, Ron Paul, a student of Austrian economic theory, saw the crisis coming and wrote about it in his bestselling The Revolution: A Manifesto. Bernanke needs to read more Austrian economic theory and to burn his Paul Samuelson texts.