Friday, April 13, 2012

Bernanke’s prophetic warning on debt

By Robert Romano

Federal Reserve Chairman Ben Bernanke has in the past said he opposes a return to the gold standard because it would reduce the central bank’s ability to intervene in the economy, effectively reducing his role to little more than a clerk.

Apparently, he has had little problem since the financial crisis with being the government’s ATM (automated teller machine).
Since Aug. 2007, when the downturn began in earnest, the Fed has more than doubled its holdings of the national debt by some $890.2 billion to $1.681 trillion — effectively monetizing the $15.6 trillion national debt. It already holds more than 10 percent of it now.

Such unprecedented actions by the central bank have not been seen since the World War II, when the national debt last went north of 100 percent of the Gross Domestic Product (GDP).

It has even led some economists, particularly those in the Modern Monetary Theorists camp, to suppose there is no limit to how much debt the Fed can monetize. As described by the Washington Post’s Dylan Matthews, the theory postulates that “the government can never run out of money. It can always make more.”

In that sense, the central bank is viewed as nearly invincible when it comes to servicing the government’s financing needs.

But, if that were true, why then does Bernanke see the need for fiscal restraint?

Speaking to Congress last year, Bernanke warned that spending and borrowing needed to be brought under control. Said Bernanke, “One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point.”

He said one way or another, they will happen, it’s just a question of how: “The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis.”

That’s quite an admission from the Fed head. Here, Bernanke let the curtain drop, if just for a moment, showing his hand.
Get full story here.

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