Ben Bernanke: The Ghost Of Christmas Future
December 15, 2010 by John Myers
"At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate," Federal Reserve Chairman Ben Bernanke, interviewed on 60 Minutes.
You might have thought that Federal Reserve Chairman Ben Bernanke could have waited until after Christmas to spring the bad news. After all, the nation is not looking for a rock in its stocking following two bad Christmases. Yet Bernanke announced his message of bad cheer Dec. 5 on the CBS program 60 Minutes.
So why did Bernanke deliver this cold truth in somber tones about America's continuing economic crisis? Perhaps because he understands that no one in the Federal government has admitted the truth — that the nation is in for years of tough times.
That is not the message we are hearing from President Barack Obama. Almost two years since the presidential election, Obama still praises the core strength of the U.S. economy and says he is on target with his promise to "rebuild America." "We've got to do everything we can to accelerate this recovery and keep our economy moving forward," the President recently said.
Not true, wrote Project Syndicate last week. Instead, "Obama has so far managed to only describe the world that he wants; he has not been able to bring it about."
What America needs far more than Presidential proclamations is jobs. Last week we learned that the United States unemployment rate had climbed to 9.8 percent in November, up from 9.6 percent the previous month. That puts it within a hair of the 10.1 percent peak it reached in October, 2009.
The Obama administration has pushed for unprecedented interest-rate reductions and has instituted stimulus plans to the tune of trillions of new dollars. Still, banks are freezing credit and Americans are not going back to work.
It is true that unemployment, even touching near 10 percent, is not the worst America has experienced. I was just getting started as an investment writer during the rolling recession of the early 1980s when unemployment hit almost 11 percent. But that rate of joblessness was created by a proactive Federal Reserve led by Chairman Paul Volcker. That Fed pushed short-term interest rates to almost 20 percent. That was the price the Fed was willing to pay to squeeze out the inflationary excess of the 1970s. It was a tough pill to swallow, but the medicine was digested in less than two years and the United States, led by the steady hand of Ronald Reagan, was then on firm footing.
Today, unemployment is again almost that high, and not because the President or the Fed has taken tough action. Quite the opposite is true. Bernanke's Federal Reserve is the most permissive in the central bank's 97-year history, and makes the 1970s Fed led by Chairman Arthur Burns look frugal.
Bernanke has driven effective interest rates to zero, and is standing by the Fed's recent controversial decision to initiate a $600 billion Treasury bond-buying program. It is the second round of so-called "quantitative easing," which is meant to stimulate the economy by keeping rates at zero.
According to Bernanke, the Fed may not be done yet. Responding to the 60 Minutes question about the possibility of additional quantitative easing, Bernanke said: "Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks."
"How the economy looks"? I don't know how the economy looks from Bernanke's ivory tower, but from my office it looks terrible. And according to my best friend, who has spent nearly four decades hauling heavy loads across North America, things look even worse from the cab of his truck. He tells me that not only is the construction business not picking up, but interstate traffic is also light. Even the line-up at the U.S./Canadian border is shorter than he has seen in decades. Yet he considers himself to be one of the lucky ones this Christmas. He is still working, while nearly one in five construction workers in the U.S. doesn't have a job.
Business can't seem to recover. And the Fed's actions read like a "how-to" book for a Latin American dictator. That means the economy, including the construction business, isn't likely to pick up any time soon.
"There is, however, a good reason why America's economic performance has been so slovenly," says the British newspaper The Independent. "This is not a post-war crisis. It is like a pre-war crisis, a crisis which unfortunately shares many traits with the Great Depression in the 1930s. House price declines, defaults, bank failures, low interest rates, hopelessly weak credit expansion, high unemployment, depressed levels of economic activity: The ingredients were all there in the 1930s and they're back again today."
What is different is that the Federal government and the Federal Reserve are doing the opposite of what they did during the onset of the Great Depression. Back then the Federal Reserve raised interest rates and Washington slashed spending. Today the United States is taking on debts than would have been unimaginable a decade ago.
China and India, along with more traditional allies like Japan, have bought into Obama's plans by lending the U.S. Treasury Department trillions of dollars. The world is hoping that this universal bailout will rescue the U.S. economy and that America's deep recession won't become a world depression. But unless these countries start to see things turning around, they may hit the panic button. Then it will be every nation for itself, and no country or corporation will be willing to throw good money after bad.
That of course would mean sweeping deflation like that experienced during the Great Depression. The result could be unemployment that could exceed 30 percent. That would mean mass foreclosures and waves of bank failures. The economic crisis could get so bad that Washington might even forsake the Constitution and subject Americans to martial law.
The good news — if you can call it good news — is that we don't have to face such catastrophe this Christmas. For now at least, the world is still backing Obama and Bernanke in the greatest bailout ever attempted.
The Ghost of Christmas Future
My late dad C.V. Myers always insisted that the dark forces of deflation will always be stronger than the ability of central banks and governments to inflate weak economies.
The National Inflation Association (NIA) believes the same. After Mr. Bernanke's 60 Minutesinterview, the NIA wrote, "It is more likely that in 4 to 5 years from now, U.S. unemployment will rise to Great Depression levels. Bernanke's policy of printing money and creating inflation will not create jobs because the money the Fed creates is going to fund non-productive and wasteful U.S. government spending. The only jobs being created are artificial government jobs."
Action To Take:
Over the next six months we should find out if the NIA is correct. The only way to protect ourselves against either extreme inflation or extreme deflation is with physical gold. Physical silver and resource stocks will do great if we end up with inflation. If money and credit are being destroyed instead, I think you should only hold bullion and a few of the biggest gold corporations in the world. I like both Barrick Gold Corporation (NYSE, ABX, $53.47) andNewmont Mining Corp (NYSE, NEM, $62.00).
Both Barrick and Newmont are at all-time highs, but I think both will go higher yet given either extreme inflation or crushing deflation. Keep in mind that during the Great Depression shares in blue-chip gold mining stocks soared. Homestake Mining stock rose continuously from $80 per share in October 1929 to $495 per share in December 1935. That was a total return of 519 percent (excluding cash dividends) during the most devastating bear market ever.
Except for a few special situations and major gold producers like those mentioned above, most of your money should be either in physical gold or physical cash. And I don't mean in a bank account either. I don't know what is going to happen, but if things get very bad I don't think we can trust the banks. When it gets right down to it, we can't trust the chairman of the Federal Reserve.
I hope I am wrong, yet fear that I am correct. All of which makes me feel like Scrooge in Charles Dickens' A Christmas Carol. When Ebenezer's grave is revealed he is overcome with foreboding. Frantically, he asks the Spirit of Things to Come if these shadows are what will be or what may be. The Spirit says nothing, either because it doesn't know or because it won't say. As for me, I simply don't know.
Yours for better times,
– John Myers
Myers' Energy and Gold Report