John Pugsley is the author of the 1970s best-seller, Common Sense Economics, along with many other books on economics and investments. He is currently Chairman of The Sovereign Society, and editor of The Sovereign Society's investment trading service, The Stealth Investor.
Dear A-Letter Reader:
It is said that you can always tell when a politician is lying: his mouth is moving. That should apply to the new Fed Chairman, as well.
Three weeks ago, just after Federal Reserve Board Chairman Ben S. Bernanke testified before a Congressional committee that rising energy costs threatened to cause inflation, I suggested in this space that he was either lying or was ignorant of inflation's real cause. Therefore, he should either be indicted for perjury or fired for incompetence.
My essay struck a sympathetic nerve among readers. One wrote saying that "He's an educated idiot," while another accused him of being, "...mostly ignorant and a pseudo intellectual of the kind the Bush and his father are fond of employing, especially if they are yes men and women." A third reader wrote, "... I believe he understands what inflation really is and what causes it-he is not stupid-but for political reasons he must keep up the charade and never admit publicly the real cause and effect." In other words, "he lies."
Since writing the essay, subsequent comments by Mr. Bernanke about the threat of price inflation roiled investment markets, so it's no surprise that the market was listening intently to his speech last Thursday before the Economic Club of Chicago. His speech topic was rising energy costs.
I'm amazed. His speech has been met with relief if not applause by the markets and the world press. Yet, I can't remember any member of the Federal Reserve ever being more specific in giving out misinformation, or the markets being more myopic in their understanding of the dire implications.
Let me condense the key conclusions. Bernanke pointed out what for most is obvious: that in the long run, higher energy prices trickle throughout the economy. He said:
"In the short run, sharply higher energy prices ... can simultaneously slow economic growth while raising inflation. ...The rise in prices paid by households for energy--for example for gasoline, heating oil, and natural gas--represent, of course, an increase in the cost of living and in price inflation...
"[In the 1970s] monetary policymaking was extremely difficult because oil-price increases threatened to result in a large and persistent increase in the overall inflation rate.
"The Federal Reserve attempted to contain the inflationary effects of the oil-price shocks by engineering sharp increases in interest rates, actions which had the consequence of sharply slowing growth and raising unemployment, as in the recessions that began in 1973 and 1981.
"Since about 1980, however, the Federal Reserve and most other central banks have worked hard to bring inflation and expectations of inflation down. An important benefit of these efforts is that the second-round inflation effect of a given increase in energy prices has been much reduced."
This is well-contrived disinformation. He's telling you that price inflation is caused by rising prices. (Rising prices cause rising prices?) Mr. Bernanke, you and I both know that price inflation has one and only one source: the creation of money and credit.
Any third-grader is intelligent enough to see the truth about inflation, if it was explained simply. You have a given amount of money. If you spend more on one good, such as energy, you have less to spend on other goods. Therefore, if the price of energy rises and people pay that price, they have less to spend on other things. The prices of those things must either fall by an equivalent amount, or those things will go unsold.
Falling sales result in a business recession, and when recession threatens, the Fed pretends to come to the rescue. It prints more money. More money in circulation then allows those other goods to clear the shelves, and that's the point at which the overall price level ratchets up.
By setting their own prices in the market, producers don't create money and therefore they don't cause inflation. They are not the culprits. Mr. Bernanke is either ignorant or lying. And I don't think he's that ignorant.
Federal Reserve policies of credit expansion in the 1950s and 1960s were what caused the inflation of the 1970s. This is a surge that, conveniently, he blames on the OPEC-engineered oil price increase of the mid-1970s. To suggest that central banks should be given credit for working hard to bring inflation down since the 1980s is absolute nonsense. They have merely found ways to sequester massive amounts of freshly printed money in places where it isn't noticed, and thereby postpone the inevitable consequences it will have on the world-wide price level.
The Fed is the engine that creates money, and therefore it is the cause of the destructive wave of increased price inflation that is bearing down on us.
While Bernanke's comments seem to have calmed markets, he has clearly signaled that both inflation and interest rates are going to rise. When they do, markets will wake up and respond. Are you ready? Personally, I'm battening down my financial hatches.
JACK PUGSLEY, Chairman
on behalf of The Sovereign Society
P.S. Feel free to read Mr. Bernanke's June 15th speech and decide for yourself what he's really saying. Click here to access the full speech.