BERNANKE'S DILEMMA UNRESOLVED

BERNANKE'S DILEMMA UNRESOLVED

Posted by Dr. Larry Hunter on June 15, 2009, 11:07 AM

Just as we have been predicting for the past year (See here, here, and here), Fed Chairman Ben Bernanke has painted himself and the economy into a corner. Most Americans are yet unaware of the bind we are in, and all the happy talk about “green shoots” and “economic recovery” hide the fundamental fix we are in.

In a recent blog at Mises.org, Frank Shostak illustrates how the vise is closing on the Fed. Bernanke has artificially buoyed the US economy (and essentially nationalized banks that should have failed) by pumping money into banks and the economy. At some point, as the false “recovery” the pumping has created begins to gather steam, it will be revealed to be another bubble and the buildup of inflation will become visible for all to feel. If he keeps the money pumps going, the result will be rapid inflation but if he reverses the pumps to staunch inflation by siphoning off the liquidity he previously pumped in, it likely would send the economy into the second dip of a double-dip recession.

Conducting monetary policy in a funny-fiat-money system ain’t brain surgery; it’s even more complicated—so complicated, in fact, that anyone attempting it must certainly fail, as Bernanke will. He is destined to overshoot the money pumping and produce rapid inflation or overshoot money siphoning and tank the economy. The solution isn’t finding a smarter central banker to run the economy by fine tuning the monetary flow of fiat currencies, the solution is to replace central bankers and the fiat money they print with sound money anchored to gold.