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Bernanke Fires up the Helicopter

Bernanke and the government have caused more problems than they've solved...

THE DEBT CEILING circus may have left town – at least for now – but there remains one sad clown left standing squarely in the center of the ring, writes Martin Hutchinson, contributing editor to Money Morning.

I'm talking about US Federal Reserve Chairman Ben Bernanke – otherwise known as "Helicopter Ben."

Bernanke got the nickname "Helicopter Ben" from a speech in 2002, in which he announced that deflation was a real worry (this was just when house prices were taking off) and that one possible solution would be to fly around the country dropping $100 bills from helicopters. 

Strange as it sounds, that might actually have been a better approach than the one he ended up taking. 

Small towns in the Midwest and the working poor of such downtrodden urban environments as Cleveland and Detroit could certainly use a visit from the kindly flying Santa Claus. At least those Americans would have put the money to good use. 

But so far, Bernanke's helicopter has only hovered over Wall Street, and his generosity has had a negative effect on the US economy as a result. 

His first two rounds of quantitative easing had three major consequences:

  • Higher inflation.
  • Higher unemployment.
  • And higher borrowing costs for average Americans.

In fact, the only thing Bernanke's policies have managed to suppress is economic growth.

US gross domestic product (GDP) increased by just 1.3% in the second quarter – an indication that an already wobbly economic recovery could tip completely over in the second half of the year.

But if you think that means we'll get a reprieve from Helicopter Ben's razor-sharp rotors, you're wrong. To the contrary, he's gearing up for another flyover – a third round of Treasury purchases (QE3).

Bernanke said in congressional testimony in July that the Fed would consider taking new action if the economy stalls – including a third round of bond purchases. 

As I said earlier, Helicopter Ben's first two flyovers cost Americans dearly – the biggest setback being inflation.

Consumer prices in the United States rose at an unadjusted pace of 3.6% in the year through June. Food and fuel prices provided the impetus for much of that increase. 

Oil prices surged 23% from where they started the year to a peak of $113.39 in late April. 

Meanwhile, at the end of June, food prices at grocery stores were up 4.7% from where they were a year ago, according to the US Department of Agriculture. Beef prices are up 8.2% from June 2010, while pork is 8.5% higher. Coffee prices have jumped 17.6%. Eggs cost 11.1% more. And milk prices are 10.2% higher. 

The USDA projects supermarket prices will rise 3.5% to 4.5% this year, and 3% to 4% in 2012.

Of course, Helicopter Ben's chopper doesn't run on gas, it's powered by his delusion. And since he only eats money, food prices are hardly a concern. 

That's why the Fed's preferred price gauge is so-called "core" inflation, which excludes food and energy costs. But even by that measure, rising prices are starting to become a real problem. 

The core consumer price index (CPI) rose at a 2.2% annual rate for the three months ending in May, up from a 0.7% pace for the three months ending in January. And the core CPI edged up another 0.2% in June. 

Still, inflation isn't the only negative consequence to arise from the Fed's lax monetary policy.

Bernanke's Dollar dumping also has directed capital into the federal budget deficit. That has made it easier for the spendthrifts in Washington to get money while simultaneously making borrowing more difficult for the average American.

Indeed, banks have too easy a time borrowing at zero interest and investing in Treasuries or government-guaranteed mortgages for an easy 3% to 4% return. 

And what's worse is that by failing to make banks do the hard intellectual work of finding creditworthy small businesses to lend to, Bernanke is killing jobs. 

Higher inflation means higher wages in the United States. So many multinationals now are borrowing cheap money in the United States to build factories overseas and move their operations to cheap-labor emerging markets.

Bernanke also is discouraging savers from saving. Think about it: Why the hell should you save when you get less than 1% on short-term money and inflation eats away your capital at 3% to 4% per annum?

In short, we have an inflation problem, as well as an unemployment problem, and Bernanke and the government are largely the cause of it. 

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Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

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