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So, how would the good Dr. Bernanke wish to target inflation? Are rising oil and commodity prices, which are conveniently excluded from the core CPI, not inflation? Mr. Bernanke 'targeting of inflation' centers in my opinion around a flawed theory and is one of economic theory's greatest sophism.
Will Mr. Bernanke try harder than Mr. Greenspan to address global financial imbalances via US monetary policy? This is wishful thinking. Since the formation of the US Federal Reserve Board in 1913, the US dollar has lost 92% of its purchasing power. This after the US dollar maintained its purchasing power between 1792, when the Mint Act was passed, and 1913, when the Fed was formed. Since 1980, US household wealth, driven by easy money and credit has risen from $7 trillion to $49.8 trillion while total credit market debt has exploded from 120% of GDP, in 1980, to now over 320% of GDP.
The US has no other option but to print money. Otherwise their illusionary wealth collapses and drags down the economy in a deflationary apocalypse. So, Mr. Bernanke will print money. That aside, Mr. Bernanke has expressed the view that deficits do not matter or are related to a global savings glut.
All the president's men
Will Mr. Bernanke and the US government clash over fiscal policy as a result of Mr. Bush huge increase in spending and tax cuts? Not at all! Last June, Mr Bush removed Mr. Bernanke from the Board of Governors at the Fed to become the Chairman of the White House Council of Economic Advisors.
This brought Mr. Bernanke inside the White House for a while so that the President could become comfortable with him and be certain that he was serious about printing money to finance the administration's ill fated military follies and alarmingly rising debts that are fueling asset inflation and financing the excessive US consumption. Mr. Bernanke obviously passed his test and will now become Fed Chairman.
Will Mr. Bernanke adopt more pre-emptive monetary policies in order to ward off asset inflation? I regard this assumption also as wishful thinking. Mr. Bernanke has himself expressed the opinion that the Fed should not try to target asset price increases. Moreover, never over-estimate the intellect of central bankers. Here we have a group of people who could have sold gold in 1980 at more than $800 and bought bonds yielding 14%. But no, instead they waited for almost 20 years before selling gold below $300 to buy bonds at less than 4.5% yields.
At the same time we had asset inflation for the last 24 years and bingo, suddenly, at Jackson Hole - having through easy monetary policies and by tolerating declining lending standards fueled the asset inflation like nobody before him, and this on a world wide scale - Mr. Greenspan touches on the subject of asset inflation. It would be comical, if not tragic, because the consequences of paper money becoming worthless will be politically and socially dire. In fact, if it were a crime for central bankers to destroy the value of money, Mr. Greenspan and all the Board Members of the Fed would be sentenced to death.
Japanese equities attractive
So are any assets worthwhile buying? As expressed over the last two years, I think that the Japanese stock market will significantly outperform US equities in the next five to ten years. And, whereas rising consumer prices will be negative for US financial assets, a whiff of inflation will be favorable for Japanese equities, as individuals and financial institutions will be forced to move out of bonds into equities.
In fact, there seems to be a close correlation between the Nikkei Index and both Japanese and US interest rates. The Japanese stock market bottomed out in April 2003 at less than 8,000 and both US and Japanese interest rates bottomed out in June 2003.
Since then the Nikkei and interest rates have been in a rising trend. We expect this trend to continue whereby near-term the Japanese stock market appears to be over-bought. So, we advise investors to wait for a correction to buy Japanese shares.
Dr Marc Faber
