Bernanke Belatedly Starts To Tell the Truth

Chairman Bernanke's testimony to Congress last Wednesday marks a major turning point as well as a flash signal for what lies ahead to anyone that is willing to listen.

No man with a modicum of self respect or at least some ego wants to be remembered as a failure by his children or history books. As Chairman of the most powerful central bank he does not want to be seen as the man who plunged the world into darkness. Whether he succeeds in keeping the world economy afloat and his name intact is another issue. In the mind of many however, the day of reckoning is only a question of "when" and not "if".

His performance before Congress last Wednesday was characterised as a display of "uncharacteristic bluntness" by one commentator. Why so all of a sudden? The answer lies both in the build-up but also in what lies ahead. One must remember that Bernanke was at the helm when the global storm struck but it is Greenspan who had the honour of guiding the ship into the eye of the storm in the first place. All of a sudden Bernanke looks around and sees that a wall of wind and water is ready to engulf the nation and he decides that he is not going to take the blame on his own.

STEP ONE

On August 25, last year, President Obama announced that he would be nominating Bernanke for a second term as Chairman of the Federal Reserve. It took however another 5 months before his appointment was confirmed by a vote of 70-30 at the end of January 2010. Throughout that period Bernanke endured constant attacks, grilling, proposed legislation and accusations in relation to any one of a number of issues. Despite these full frontal assaults on both his Chairmanship and the Fed, he maintained a polite and calm dignity throughout the whole period. Just remember he wanted to be re-confirmed.

STEP TWO

Step One is now history. He has achieved tenure and has avoided the ignominy of being a one term chairman. Now it is time to deal with the reality. And what is that reality? Well since 2008 the Fed has been complicit with Congress in pumping the system with every dodgy financial steroid to keep the Dow Jones and the economy afloat. Signs of economic improvement however, are more like twitches rather than movement and the subsequent hair line cracks in Dubai, Iceland and Greece are but a prelude to the dam breaking.

To quote Bernanke (from excerpts in the press):

"Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having trouble selling their debt to investors, show that the U.S. is vulnerable to sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt." (My translation: We are just as bad as them and we are next)

And:

"It's not something that is 10 years away. It affects the market currently.....It is possible that bond markets will become worried about the sustainability of yearly deficits over $1 trillion, and we may find ourselves facing higher interest rates even today." (My translation: No translation needed. The man did say "today".)

And:

"It's very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position." (My translation: Congress and the government have no plan)

And:

"Indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago." (My translation: Stop looking, there's nothing out there)

And:

"Commercial real estate remains the biggest credit issue". (My translation: Call Noah and order the biggest #@*?! Ark possible)

STEP THREE

We all know that Congress is angling for legislation which will enable it to peer into the drawers and filing cabinets of the Fed. The Fed clearly does not want this but is now trying to deflect the brunt of the proposed legislation by agreeing to release some information at a time when it ceases to be sensitive to the interests of certain banks.

If Congress persists in pushing for legislation that will enable Congress to peer and meddle into the Fed's affairs, Bernanke has issued a blunt warning disguised as monetary rectitude:

"We are not going to monetize the debt." (My translation: We have been doing so already, and if you want us to continue, lay off the Fed, otherwise the world will find out who is the buyer of Treasuries in the 'other' category shown in the books.)

CONCLUSION

Holders of Euros and US dollars are playing a very dangerous game of chance. Dollars and Euros should be accumulated only for near range transactional purposes. Anyone who believes that these currencies present a secure store of value is deluded. Excess currency holdings should be converted into tangible wealth as soon as possible. The new currency when it arrives will be based on fractions of gold, silver, copper and nickel.

In the meantime keep listening to the language between Congress and Bernanke. It will either become more congenial or it will escalate into a war of one side casting blame on the other. It is my opinion that the deteriorating situation in Europe might however make Bernanke and Congress a little more agreeable to each other so as to capitalise on the possible demise of a competitive currency. Failure to do so will give China an opportunity to capitalise and Russia the chance to sabotage.

At the end of the day, Moody's view of the USA credit rating as being AAA gold-plated is nothing but an oxymoron. If it's gold-plated it just can't be AAA. And if it's AAA it's got to be gold. The fate of US dollar holders (in currency and bonds) is sealed unless they use the little remaining time to convert to the time honoured value and tangibility of gold, silver and perhaps some good farming land.

The huge pockets of negative equity centred round insolvent individuals and banks, have now been added to by insolvent governments who can neither repay nor service their current or extrapolated debt with any certainty. Creative accounting that abounds in the books of banks and nations is now slowly being exposed.

If the pace of economic incidents such as Dubai, Iceland and Greece continues unabated and is added to the ongoing issues of geo-political tensions, ongoing persistence of unemployment and above all destructive deficit spending, then by Christmas 2010 we may be having the Black Plague of economics.

While the sight of Europeans calling each other cheats and banana eaters is telling enough, the new show that now features a thinly veiled marital spat between the Fed and Congress is going to have real consequences. It is a classic case of the blind leading the blind at the expense of the nation. A nation that has been told that by printing money and issuing debt it can avoid making sacrifices. Bull dust.

The game will be up by later this year when investors refuse to re-finance commercial real estate (and profligate governments), unless higher rates of interest and some sort of security are provided. The good faith of governments will count for zero. But wait. Won't higher rates simply put a bigger nail into home borrowers' and Governments' coffins? Exactly, so either way the world will be toast.

Sydney Australia