Bernanke Doesn’t “Understand” Gold

Today we’re going to hand over the lion’s share of Money Morning to Slipstream Trader Murray Dawes.

Murray’s kicked a lot of goals recently, particularly on the short side of the market. I’ve mentioned it to you a couple of times in passing.

So I thought that rather than having your editor try to explain what Murray gets up to with his charts, you’d be better off hearing from the man himself. So, after I’ve finished up with my ramble Murray will take the reins.

Until then, this…

This morning our time, Federal Reserve chairman Ben Bernanke was speaking before the US House of Representatives Committee on the Budget. You can read a transcript of his testimony here.

And if you’re really up for punishment you can view a video of the testimony and questions here.

Just be aware that the dopes at the committee couldn’t get the audio working so the first five minutes of the video is just a few public servants doing what they do best, nothing!

Also be aware that your editor is watching and listening to the video as we write, so we haven’t had the opportunity to view the whole thing yet. So had to rely on the integrity of the Wall Street Journal for the following quote from Bernanke:

“I don’t fully understand movements in the gold price.”

But as we’re writing, we’ve reached around the 35 minute mark of the video where Bernanke has his ‘gold moment’. More on that shortly…

But we do say this, we’re astounded that the drones in the mainstream press still listen to a word the man says. In our opinion the guy has zero credibility. Yet we still see headlines such as this:

“Ben Bernanke all but rules out double-dip”

Well, if Bernanke says it won’t happen then it won’t happen. He’s obviously forbidden a continuation of the recession.

Although there is one thing he’s gotten right. It’s this quote from that article: “It [the recovery] won’t feel terrific… it’s not going to be fast enough to put back eight million people who lost their jobs within a few years”.

It won’t feel terrific because Bernanke and his chums have ensured it won’t feel terrific due to their meddling in the economy, such as the bailouts and monetisation of debt has destined national economies to years of recession and even depression.

But anyway, this is what Bernanke had to say about the gold price:

“So gold is out there doing something different from the rest of the, uh, commodity, uh, group. Um, I don’t fully understand the movements in the gold price, but I, I do think that there’s a great deal of uncertainty and anxiety in financial markets right now and some people believe that holding gold will be a hedge against, uh, the fact that they view many other investments as being, as being risk and hard to predict at this point…”

Amazing! He doesn’t “fully understand the movements in the gold price.”

I tell you what, if gold comprised 68.7% of your editor’s asset base I’d make darn sure I understood “the movements in the gold price.”

You can see from the table below produced by our pals at Wikipedia that shows how large the reported gold holding is by the United States:

So we’re left to consider that Bernanke’s response means one of three things – One, Bernanke isn’t very bright; two, he really does understand the reason for the movement in the gold price but he’s not telling because he’s aware it’s central bank policies causing the rise in the price of gold; or three, Fort Knox doesn’t actually hold eight tonnes of gold and so he’s got no interest in knowing why gold moves.

Alternatively it could be all three. Yep, that sounds just right.

But still the mainstream press can’t get enough of Bernanke and his stonewalling.

However, it wasn’t his comment on gold that amazed us the most, it was his comment on Federal Reserve independence that he made recently in a presentation to the Institute for Monetary and Economic Studies International Conference in Tokyo a couple of weeks ago.

First a quick summary of the background. Bills are before the US Congress that could end up resulting in Congress having the powers to audit the US Federal Reserve. This would mean the Fed would have to reveal to Congress what it does and how it does it.

One of the justifications Bernanke has given for the need to continue Federal Reserve independence was revealed in the Tokyo speech:

“Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.”

Er, OK. Is Bernanke suggesting the boom-bust cycles don’t occur when you have an independent central bank? If that’s the case how come we’ve had nothing but boom-bust cycles since the Federal Reserve’s creation?

But anyway, it gets better. The following quote is an absolute peach:

“Additionally, in some situations, a government that controls the central bank may face a strong temptation to abuse the central bank’s money-printing powers to help finance its budget deficit. Nearly two centuries ago, the economist David Ricardo argued: ‘It is said that Government could not be safely entrusted with the power of issuing paper money; that it would most certainly abuse it… There would, I confess, be great danger of this, if Government–that is to say, the ministers–were themselves to be entrusted with the power of issuing paper money.’ Abuse by the government of the power to issue money as a means of financing its spending inevitably leads to high inflation and interest rates and a volatile economy.”

What an extraordinary comment. What Bernanke is saying is that if government had the power to print money then it would. That much we agree with.

But what the bearded-one is also implying is that an independent central bank would not and does not print money to finance the spending of governments.

Is he serious? We can hardly believe he can say it with a straight face. Printing money to finance government spending is exactly what the Federal Reserve, the European Central Bank and the Bank of England have done.

The idea that central banks are independent is a sham. While they may be independent from national legislatures, they’re not independent from the executive branch of governments as it’s typically the executive branch that appoints the central bankers.

There is no central bank independence, whether it’s in Australia, the UK, Europe or the US.

Perhaps Bernanke could have quoted David Ricardo from ‘The High Price of Bullion: a proof of the Depreciation of Bank Notes:

“It will be a circumstance ever to be lamented, if this great country, having before its eyes the consequences of a forced paper circulation in America and France, should persevere in a system pregnant with so much disaster. Let us hope that she will be more wise. It is said indeed that the cases are dissimilar: that the Bank of England is independent of government. If this were true, the evils of a superabundant circulation would not be less felt; but if may be questioned whether a Bank lending many millions more to government than its capital savings, can be called independent of that government.”

Clearly Bernanke isn’t aware that the Federal Reserve has been monetising the debt of the US government. The Fed has used open market operations to buy government debt from the market and hold it on its balance sheet.

In return, investors that have sold the debt to the Fed receive newly created cash from the Fed. Investors who then most likely buy new issues of government debt from the US Treasury.

If that isn’t issuing “money as a means of financing its [government] spending” then I don’t know what is.

It’s apparent that if Bernanke really doesn’t understand the price movements of gold and he isn’t aware that the Fed is creating new money from thin air to finance government spending, then he’s clearly not up to the job.

But that’s the thing isn’t it? No one is up to the job. One single person or a small group of people just isn’t capable of sensibly wielding that much power over a multi-trillion dollar economy.

It’s why interest rates should only be decided by the free market. A market in which millions of people would determine the rate of interest by their own individual actions. Separate and selfish actions that would result in the most appropriate rate of interest.

Separate and selfish actions that would result in true economic prosperity.

I know it sounds bizarre that a free market could do such a thing, but it can. If only the pin-striped numpties and power-hungry bureaucrats would just get out of the way.

Now over to Murray…

Cheers,

Kris.