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Money Monitor: Dissecting Bernanke's Testimony


No doubt, more and more global central banks are following the lead of the Pied Piper US Federal Reserve...


Dare anyone ask??

Indeed, Federal Reserve Bank Chairman Ben 'Boom Boom' Bernanke was asked in Congress yesterday about the potential inflation warning being sounded by the Gold market.

In a very well worded, and exceptionally well thought-out question, Texas Congressman Ron Paul hit Bernanke with a double-barrel blast that Vice President Cheney would be proud of when he specifically pointed out the following facts:

  • Gold was pegged at $20 an ounce when the Fed was created
  • Roosevelt essentially 'devalued' the dollar by jacking Gold to $35
  • Nixon then 'devalued' the dollar twice, once by 8%, and then by 10%
  • And then Nixon 'abolished' the dollar's gold 'backing,' completely.

Ron Paul then went on to spotlight the fact that the same US Dollar that bought an ounce of Gold in the era before the Fed, is now worth just four cents!!

Moreover, the second barrel was unloaded when Paul pointed out that Gold had stabilized in the nineties, around $250-ish, but that the move since 2000 (really since the 1999 Washington Agreement) represents another sixty percent 'devaluation' of the US Dollar, from its 2000 level.

At the bottom line, Paul puts it this way:

  • In 1934 the USD was 'worth' 1/20th of an ounce of Gold.
  • Today, the USD is 'worth' 1/600th of an ounce of Gold.

Paul asked Bernanke, firing from point-blank range, and while all the world was in awe of the mere mention that the Fed Chairman has gold on his screen (why wouldn't he), we note the deft way in which Boom-Boom' Bernanke managed to side step the double-barrel blast.

Indeed, Bernanke has already told us he would not be concerned with a steep decline in the USD.

And Bernanke's reply to Paul's query reflected the same attitude, as Boom-Boom directed the answer towards the lack of inflation being exhibited by other indicators, specifically citing the core-CPI and the break-even calculation between indexed-bonds and Treasuries.

He then came back to seemingly answer the question and did so in such a deft way as to actually draw applause and acclaim from the gold bugs, by saying,

"If your question is, do I look at gold price, it's on my screen. I look at it every day. I think there is information in the gold price."

But, Bernanke then implied that the macro-monetary information as relates to the 'value' of the USD, to be extracted from the Gold market, is tainted by the 'geo-political risk' factor.

Indeed, Bernanke hit the 'eject button,' and escaped without ever really commenting on the points made by Congressman Paul.

In fact, Ron Paul has a reply for Boom Boom.

We spotlight a statement released on Tuesday by the Honorable Ron Paul of
Texas , before the US House of Representatives, in which Paul comments.

"A recent headline in the financial press announced that gold prices surged over concern that confrontation with Iran will further push oil prices higher. This may well reflect the current situation, but higher gold prices mainly reflect the monetary expansion by the Federal Reserve. Without an enormous increase in money supply over the past 35 years, and a worldwide paper monetary system, this increase in gold would not have occurred."


We have been hyping on the same thing, the thirty five years of intensifying global imbalance in savings, debt, income and trade, ever since overwhelming US debt obligations forced Nixon to abandon the USD-Gold standard in 1971.

In all of our conference appearances and public speaking engagements over the last three years, highlighted by last summer's appearance as a speaker at the Minyans in the Mountains retreat and investment conference in Ojai California, we have spotlighted the secular evolution towards perpetually intensifying monetary debasement of all paper currencies, led by the US Dollar.

In my firm's recent Money Monitors we have repeatedly spotlighted the pertinent credit and money supply data, and focused on Bernanke's commentary, which is amazingly transparent.

In my firm's February 21, 2006 Money Monitor entitled "Monetary Armageddon, and a New Magician," we revealed the changes made to the Fed's "Currency Directive," granting Boom-Boom Bernanke more autonomy and flexibility in terms of purchasing Asian holdings of USD denominated debt.

In our
March 2, 2006 Money Monitor entitled "Badda Bing, Badda Boom," we spotlighted the highly disturbing spike in US monetary aggregates and the explosion in housing-linked credit.

In our
March 20, 2006 Money Monitor entitled "Who's Afraid of the Big Bad Wolf," we looked at Bernanke's testimony and examined his self-proclaimed monetary mandates.

And, in our March 28, 2006 Money Monitor entitled "Boom Boom in a Steel Cage Death Match," we dissected the US housing market, revealing an unprecedented rise in unsold housing supply, which is pushing home price 'inflation' into the negative column.

Indeed, just as the Texan says, it has been at least 35 years in the making.

In the eighties, it was the Plaza Accord, supposedly calling on G-7 nations to take action in an attempt to reverse the trend towards greater imbalance.

In the nineties, it was the Louvre Accord.

Today, the imbalances are more intense than ever, and worse, they intensify every single day.

With that in mind we note one small portion of Bernanke's prepared text from yesterday's testimony:

"The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if the Committee's judgment that risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more of meetings."

In other words, even if inflation risks are skewed towards higher prices, the Fed might stop tightening anyway.


Perhaps this comment from Bernanke, also from his prepared testimony, might shed some light on his thought process.

"Although recent economic developments have been positive, the nation still faces some significant longer-term challenges. One important challenge is the large and widening deficit in the current account. The deficit has increased from little more than $100 billion in 1995, to roughly $800 billion last year or 6 ½ percent of nominal GDP.

… Fundamentally the current account deficit reflects the fact that capital investment in the United States
, including residential construction, substantially exceeds US national savings. To date the United States has had little difficulty in financing its deficit as foreign savers have found US investments attractive, and foreign official institutions (ie: Asian Central Banks) have added to their stocks of dollar-denominated international reserves.

… Moreover, as foreign holdings of US assets increase, at some point foreigners may become less willing to add these assets to their portfolios. While it is likely that current account imbalances will be resolved gradually, over time, there is a small risk of a sudden shift in sentiment, which could lead to disruptive changes in the value of the dollar, and in other asset prices."

Indeed, as we have stated so many times, the entire global economy has become incestuously co-dependent on the consumer, who is now completely captive to the housing market, meaning the global economy, and its 35-years of debt-driven paper wealth reflation, is now hostage to the housing market.

Boom-Boom has stated unequivocally, that he will support a continued floatation of, and reflation in,
housing and asset prices.

In fact, the debt-driven housing boom has spread, specifically within
Europe , as we have been highlighting for months. Thus we also note the mammoth increase in European money supply posted this morning for March, most of which was generated by another huge increase in credit to European residents, much of which was specifically linked to lending for home purchase. Note the stats:

  • M-3 Money Supply up + 81 billion EUR during the month of March, a huge single-month increase equal to +1.1%, or a +13.5% annualized pace of expansion. Thus the year-on-year rate spiked to a new high of +8.6%, soaring from February's already well-above ECB-target growth of +7.9% yr-yr.
  • Credit to Euro Residents (other than Government) increased by + 124 billion EUR, to post its second consecutive single-month increase of +1.3%. Subsequently the year-over-year rate spiked to a new high of +11.5%, from February's already high +10.7% yr-yr pace of credit expansion.
  • Lending for Home Purchase up +12.1% yr-yr in March, accelerating to a new all-time high, from February's growth rate of 11.7% yr-yr.

Bottom Line: Credit to Residents increased by seventy-five percent more than did M-3 Money Supply, and both are far above anything the ECB should feel comfortable with.

But this is a global phenomenon, and is not specific to the EU or US, as evidenced by the data released today by the Bank of Thailand:

  • M-2 Baht Money Supply increased seventy billion baht during the month of March, or more than +1.0%, taking the year-year rate of money supply expansion to a new all-time high of +11.9%, soaring from February's +10.1% yr-yr growth.

Indeed, March's +11.9% yr-yr rate of money supply expansion is a far cry from the growth rate posted in May of last year, at just +2.4% yr-yr.

And, I note the data released this morning by the Czech National Bank:

  • M-2 Koruna Money Supply + 8.4% yr-yr, accelerating from February's +7.9% yr-yr rate of growth, and more than fifty-percent higher than the year-ago March-05 growth rate of +5.3% yr-yr
  • Loans to Households up + 19.9% yr-yr, a rabid pace of increase, and a notable acceleration from the March-05 growth in Czech Household Credit, pegged at + 16.4% yr-yr.

No doubt, more and more global central banks are following the lead of the Pied Piper US Federal Reserve, who has allowed, if not facilitated, a monstrous money and credit expansion over the last thirty-five, if not sixty years. Thus we rewind to 'close' today's Monitor with more of Ron Paul's statement to Congress:

"In 1934 FDR devalued the dollar by 41%. In 1971 Nixon devalued the dollar by 8%, and in 1973 Nixon devalued the dollar by 10%. These were momentous monetary events, and every knowledgeable person worldwide paid close attention.

… Today, we face a 60% devaluation, and counting, and yet no one seems to care. It's of greater significance than the three events mentioned above. And yet the one measurement that best reflects the degree of inflation, the Fed and our government deny us. Since March, M3 (broad monetary aggregate) has been discontinued. For starters I'd like to see Congress demand that this report be resumed.

… If we care about the financial system, the tax system, and the monumental debt we are accumulating, then we must start talking about the benefits and discipline that come only with a commodity standard of money, money that the government and central banks absolutely cannot create out of thin air.

… Should we wait until the dollar is 1/1000th an ounce of gold, or 1/2000th ???"

Indeed, we could not have said it better.

Hey Ron, we care, but alas, 1/2000th of an ounce is likely, someday.

My firm remains bullish on bullion, and bearish on the USD versus Asian and European currencies.

Position in gold
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