Poor Rich Uncle Ben

What’s happening in the United States is outrageous. Federal Reserve Chairman Ben Bernanke is making a gift of hundreds of billions of dollars to President Barack Obama — and thereby starting a dangerous experiment.

How strange. It’s been exactly 10 years since the bizarre (by today’s standards) discussion took place as to why Americans should continue loaning the nation money when it was producing record surpluses, as was the case back then. Long-term government bonds that ran for 30 years could be completely abolished since the nation needed only short-term credit.

But now Americans must again fear that government bonds will become scarce — this time not because things are going so well for the nation, but because the Federal Reserve will plunder the market: By summer of next year, the Fed will purchase $600 billion worth of government securities. In the same time frame, the United States will take on $1.4 trillion in new debt. The Fed will thus finance the Obama administration’s expenditures.

This won’t be the first such program it has tried, but it may well be especially dangerous. Where the first purchases were made as an emergency measure to try to understand the financial crisis, it is now being done out of sheer helplessness. Interest rates are effectively at 0 percent, and investors are even accepting short-term negative interest. The Fed can’t make its money any cheaper, so it now resorts to throwing it freely around.

That’s Ben Bernanke’s solution, and it’s as if he had been preparing for this moment all his life. The reason many ridicule him as “Helicopter Ben” is his past recommendation that if the U.S. economy got really bad, the government would have to dump money to the people by helicopter.

But now things have changed: It’s no longer so bad for the world’s largest economy. America has more or less survived the recession, the rate of inflation is low, and unemployment is, at least by international standards, under control.

But these aren’t Bernanke’s criteria. Above all, he fears deflation — a situation in which products become increasingly cheaper, but also where wages fall, and consumption collapses because purchases are deferred to a later date.

If things should get to that point, the Fed may just as well lock its doors, because its monetary policies would be seen as ineffective. Japan has been struggling with this problem for years. That’s why Bernanke wants to assure markets that inflation is at least a possibility and that things will improve.

In addition to that is the fact that the U.S. Federal Reserve, in contrast to European reserve banks, has a duty to look after the welfare of the economy and not just the stability of its currency.

When Obama comes under pressure because the unemployment figures indicate that his policies have failed, nobody cares about the Fed’s independence any longer, and the administration and the Fed pursue a common goal. That goal is to pump more money into the economy, whether it can be used constructively or not. The main goal is that interest rates stay low, credit loosens up, and jobs are created.

Whether that can be sold is very uncertain. There’s currently no lack of money; there’s just no demand for credit. Worse yet, the Fed doesn’t even have the money; it has to be printed, even if it’s only virtual money.

The ramifications of that, however, are very real. Money floods the market, and it will flow everywhere — even to places where it’s not needed. A couple of years ago, it flowed into real estate markets, where it caused prices to skyrocket; this time it will flow into other places where it will again cause prices to spike for no good reason.

That’s already evident in developing countries like Brazil, where securities and the Brazilian currency are now substantially more expensive. That’s a certain road to chaos.

The huge amount of cash the Fed pumped into the market just after the 9/11 terrorist attacks was one of the main reasons for the ensuing economic crisis. It’s astounding how casually the Fed seeks to repeat that mistake. It would be far better if they followed the example set by their European colleagues and simply did nothing for a change.