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Bernanke’s Gamble: Bubble, Boom or Bloodbath?

 

The buzz today is about the ghost of Milton Friedman following Fed. Chairman Bernanke around as he embarks on a .8 billion dollar injection of fiat money (disguised under the terms, ‘quantitative easing’ or – more transparently – ‘monetizing the debt’).  [Link: http://www.nytimes.com/2010/11/08/business/economy/08fed.html?ref=business ]

 

We are plowing new ground here and Mr. Bernanke is working from a shopworn playbook. 

 

In the same accounts, we learn that Germany, by acting with much more restraint, is undergoing a robust recovery and is able to borrow funds at 2% in contrast with Europe’s fiscal basket cases whose borrowing power is on a par with the sale of junk bonds.  [See the piece in today’s NYT about Ireland.  Link: http://www.nytimes.com/2010/11/08/business/global/08debt.html?_r=1&ref=business  ]

 

In an irony that Milton Friedman would appreciate, unused capital is piling up in banks and corporations because no one trusts governments to allow them to earn profits without damaging political interference. 

 

Bernake is gambling on being able to ignite a boom without setting off another bubble.  The risk is extraordinary because the next bubble will be a systemic currency collapse, something so destabilizing that the Great Depression will be revisited with nostalgia.

 

What can be done?  Later this week, I’ll sketch that out in a piece called “Breakout!”

 

Stay tuned.

 

JBG

 

 

Jay B Gaskill is a California lawyer who served as the Alameda County Public defender before her left his “life of crime” to devote full time to writing.  His profile is posted at www.jaygaskill.com/Profile.pdf .

 

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