Bernanke the Great

Marked inflation in the prices of goods and services should be what we fear. Most economists with a brain will agree that true inflation is fundamentally an issue of the supply of money, not what happens to prices, which is what most consumers understand inflation to be.

Our money supply is controlled by the Federal Reserve, and Ben Bernanke is the director of the show there. In order to fight our recent economic burst bubble, Bernanke and the Fed have massively inflated our supply of money to attempt to re-inflate the bubble. The increase in our money supply in the last 6 months has been unprecedented in all US history.

Bernanke has been on a speaking tour to defend his Fed’s actions. It is rare in history to have a Fed Chairman going out in public to defend the Fed. Bernanke has been on 60 Minutes and in a PBS Town Hall meeting recently. His latest has been an entry in the Wall Street Journal in THIS OP-ED piece to try to explain how they intend to “pull back” all this new money so that it does not lead to massive price inflation.

Read it for yourself and see if you can make sense of it. He shrouds all of his explanations of what they are going to do in quite arcane terms. To translate, he intends to disconnect bank’s incentives to tap into their bank reserves held at the Fed, which is mostly where all this new money now sits. Commercial Banks require a certain amount of reserve capital, much of it is held at the Fed. With their reserves tapped out with failure of loans due to the Great Recession recently, they needed these new reserves (from the Fed) to continue to operate and lend money. But what happens when they resume their profits in banking?

All this new money (from the new profits) will go back out into the general economy and through the money multiplier allowed by a 10% fractional reserve (which will give about a 10-fold increase in money). Nothing that Bernanke has said in his op-ed piece deals with this issue. The commercial banks do not have to release their Fed-created reserves in order to massive inflate the money supply. Their new profits and new loans from those profits will do the multiplication independently. This is how cheap credit from a central bank massive inflates, and thereby, sows the seeds of the new bubble and the new bust to come.

If you doubt the existence of banks’ new profits:

READ HERE — Goldman Sachs

READ HERE — Citigroup

READ HERE – Bank of America

READ HERE — Wells Fargo

I just randomly picked these off the top of my head. I’m sure you can find others. With cheap credit from the Fed flowing, these banks can make record profits, which they will “re-invest” in new loans, thereby inflating the money supply tenfold through fractional reserve banking.

When you see these profit numbers, multiply them roughly by ten to determine what will happen to the money supply as a result. Wells Fargo (smaller than the others) netted $2.58 billion in new profits When they loan these funds out with a multiplier of 10, then $25.8 billion in new money will be floating in the economy. How will Bernanke pull this money back in?

When you increase the supply of money, but not the supply of goods and services, then price inflation results. No reasonable economist will deny this. Our economy is still in recession, with a DECLINE in goods and services, but with the money supply increasing, inflation must result. Even if we miraculously grow at 4% in 2010, our money supply will exceed that level of growth by a multiple of that number, so inflation will result.

Unless Bernanke somehow pokes the bubble and busts it again, cutting off the flow of credit from the Fed entirely, or raises the fractional reserve requirements of banks, then there is simply nothing he or the Fed can do to stop the coming inflation.