Bernanke is A Student of the Great Depression - Lessons Learnt May Not Help Him Now

Pinnacle Digest writes: In Axel Merk’s latest article he explores the question of whether or not the Fed is deliberately trying to debase the US dollar. He explains that despite QE3 being the worst kept secret, the dollar still plunged on its announcement. Considering that every commodity and stock market was pricing in the FOMC decision to implement QE3 weeks in advance, you’d think the dollar wouldn’t have reacted so significantly after the announcement.


Could it be that Bernanke’s intentions are to purposefully debase the US dollar? It’s worth considering.


Axel Merk explains that his company’s Senior Economic Advisor is the former St Louis Fed President William Poole. And Merk stated that “William Poole points us to the fact that the Soviet Union, Cuba and North Korea have one thing in common: monetary policy could not have compensated for the shortcomings of the respective regimes. The successor nations to the Soviet Union, as well as China had economic booms because they opened up, not because of printing presses being deployed. Monetary policy affects nominal price levels, not structural deficiencies. In the U.S., the economy may be held back because of uncertainty over future taxes (the “fiscal cliff”) and regulation; monetary policy cannot fix these.”


Here at Pinnacle Digest, we’ve addressed the very issues Mr. Poole points to. Uncertainty in fiscal policy is what destroys growth in an economy.


It’s been widely publicised that Bernanke is a student of the Great Depression and strongly believes that tightening monetary policy too early is what prolonged the Great Depression.  However, Merk urges readers to consider that major policy blunders by the Roosevelt administration may have been driving factors behind the length of the depression. Merk also explains to readers that a credit boom is what caused the recession in 2008 and naturally, credit tightening follows such an environment.


A credit tightening environment is painful, but again, it is a natural occurrence and at some point has to happen. Merk states “The reason why Bernanke thinks tightening too early after a credit bust is a grave mistake is because a credit bust unleashes deflationary market forces. Left untamed, a deflationary spiral may ensue driving many otherwise healthy businesses into bankruptcy. Nowadays, we hear “it’s a liquidity, not a solvency crisis.” With easy money, the Fed can stem the tide. Whenever the Fed has the upper hand, the glass is half full, “risk is on” as traders like to say; but then it appears that not quite enough money has been printed and, alas, the glass is half empty, “risk is off.”


Axel Merk explains the conundrum Bernanke currently finds himself in as his strategies to date may be leading him into a very tough spot. If the economy begins to pick up, and risk assets become more attractive, then what will happen to the bond market? Rates may be forced to increase or the liquidity in the bond market could dry up. This could have devastating consequences on the US fiscal standing and economic growth.


Click here to read Axel Merk’s latest article with great insight into what Bernanke may be forced to do in the future.