"Helicopter Ben" is no Paul Volcker

Never has a changing of the monetary guard taken place with the U.S. economy in so precarious a position. When Paul Volcker arrived, everyone knew the economy was a mess. Volcker's obvious job was to clean it up. Today, the general perception is that Alan Greenspan will leave the economy in great shape, and that Bernanke's job will be to keep it that way. However, nothing could be the further from the truth. Wall Street's positive reaction to the appointment of Ben Bernanke is yet another example of how completely clueless most investors are when it comes to the Fed and the precipice over which America's economy now teeters.

Historically, the markets have always found a way to test the resolve of an incoming Fed Chairman. For Bernanke, that test is likely to come in the form of his commitment to maintain the purchasing power of the dollar, in direct contrast to his previous statements with respect to his willingness to sacrifice it. That aim can only be achieved by aggressively raising interest rates, even in the face of falling asset prices and recession.

In an apparent attempt to reassure the markets, Bernanke pledged to continue both Greenspan's agenda and America's prosperity. The reality however, is that we need a Fed chairman willing and capable to do the opposite -- to clean up Greenspan's mess, not make it bigger. America's apparent prosperity is nothing but an illusion built on the phony foundation of inflated asset values and consumer debt. Greenspan's strategy to delay America's return to economic viability for the sake of political expediency has come at great cost to the nation's future standard of living. What we need is a Fed Chairman willing to take away the Greenspan punch bowl before Americans drink themselves to death.

Then there is the problem of propping up the dollar. With few exportable products creating demand for US currency, the trillions of dollars now in global circulation maintain their value only as a consequence of faith. For the last several years, that faith has in large part resulted from the near deification of Alan Greenspan. Whether justified or not, such faith will not simply transfer like a baton to Bernanke; it will have to be earned. Given the statements that Bernanke has already made with respect to the use of the invention of the printing press to create unlimited amounts of money at virtually no cost, his advocacy of the Fed doing whatever it takes to combat deflation, including the buying of long-term government bonds, stocks, real estate, and even consumer goods, such as automobiles, as well as his reference to dropping dollar bills from helicopters, which earned him the nickname "Helicopter Ben," gaining the world's confidence will not be easy.

Some have speculated that Bernanke might actually be an inflation "hawk" as a result of his apparent support of "inflation targeting," where consumer price increases are held within a certain limit. However, as rising prices are merely a result of inflation, true inflation targeting would entail limiting the growth of the money supply, something at which Greenspan has failed miserably. Given his constant reassurance that inflation is well contained, as well as his fixation on the "core" CPI, such speculations seem completely without merit. Once Bernanke's many speeches become more widely scrutinized, he will quickly be seen for the inflation "dove" that he is.

When the Federal Reserve was first established, its function was to provide an "elastic money supply", one that grew as the economy expanded, and shrank as it contracted. However, modern central bankers grow the money supply during economic expansions, and then grow it even faster during contractions. As a result the Fed has become nothing more than an engine of inflation, growing the money supply indefinitely, in direct contradiction to its original mission. Had such a hair-brained scheme been proposed during its inception, the Federal Reserve never would have been established in the first place.

Time is running out. Get out of U.S. dollars and dollar denominated assets before the world discovers the truth about "Helicopter Ben".

October 27, 2005

Peter D. Schiff

President/Chief Global Strategist

Euro Pacific Capital, Inc.

www.europac.net