Oct 042010

Bernanke came out today and said about the Fed, “they are not out of ammo.” Of course this line has been used before in describing the power of the Federal Reserve, as recently as September 21, 2010 by the former Federal Reserve Bank of Richmond President,  Al Broaddus.

What they do with these types of statements is try to convince people the Fed is in control. But it is just the words they think that will move markets, not actual policy. In other words, they think that just by mentioning something, it is gospel….and so the people and markets will react accordingly, accomplishing their goals.

Here’s the Proof Bernanke “Thinks” the Fed Is In Control

Bernanke in his infamous 2002 speech, “Deflation; Making Sure “It” Doesn’t Happen Here” said the following;

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Lets forget for the moment that Bernanke compares U.S. Dollars to gold. He thinks that “by credibly threatening to” increase the number of dollars (quantitative easing), they can achieve the desired result of “higher spending and hence positive inflation.”

Bernanke, in this case, believes that what comes out of the Fed’s mouth can influence markets. In fact, the Fed has been relevant in doing this as I pointed out in September of 2008 in The Fed Is Relevant…. For Now…. However….. when the Fed was trying to rescue their favored investment houses and banks.

If one were to analyze Bernanke’s statement “they are not out of ammo” further, and inverse it, does anyone really think the Fed would ever come out and say; “Hey America, we’re out of ammo?” Would big Ben Bernanke ever say such a thing? Of course not!

So why should anyone believe Bernanke when he says they’re not out of ammo? Bernanke is all talk and the truth of the matter is, if the Fed uses more quantitative easing through buying of bonds or printing more dollars, it will push the economy into a tailspin, the likes we have not seen since the Great Depression.

The fact of the matter, the Fed is damned if the do and damned if they don’t. Read that sentence again and please be clear, they are damned either way.

The Ammo Itself Needs to be Called Into Question

The reason they are damned is the ammo itself that needs to be called into question. The Fed’s ammo is quantitative easing, or the printing of more Federal Reserve Notes. But it is faith in this ammo that matters. Without this faith in the system, the Fed would fall flat on their face and they know it.

That’s why, in a sense, they are like like the Wizard of Oz saying “Pay no attention to the man behind the curtain.” The Wizard didn’t want you to questions things, but listen to him. Bernanke is no different. Pay attention to what we say! We are the almighty Fed and if we tell you we have ammo, then, well, we do! Do not question us! Do not arouse the wrath of the great and powerful Oz Fed!

Faith in the Fed and Its Ammo

When this faith in the Fed, and especially what makes up their ammo, begins to diminish, the game is over. They know it.

Ironically, the increasing of the ammo doesn’t mean the gun shoots faster either. Bernanke and congress think it does, and so does Paul Krugman, but all it really accomplishes, as it has with Japan for over a decade, is a delay of the inevitable bust.

Japan’s Debt to GDP ratio is the highest in the world, and the Yen is setting itself up for a huge fall.

But it is the psychology of the masses that dictates the Japanese government and Fed to be forced to use words to keep fooling their citizens by saying things like “they have more ammo.” The Fed actually believes this is all that’s needed.

What happens when their hand is exposed? Keep an eye on Japan for answers.

The Yen gained 13% versus the U.S. dollar the past few months, but it still lost 7.87% priced in gold as seen in the chart below. That’s why comparing one fiat currency versus another doesn’t give you the whole picture.

How can people not see the forest through the trees?

Perhaps it’s revealed in the lyrics of an 80′s song “What Are Words For?” by Missing Persons;

Pursue it further and another thing you’ll find
Not only are they deaf and dumb they could be going blind and no one notices
I think I’ll dye my hair blue

Media overload bombarding you with action
It’s getting near impossible to cause distraction
Someone answer me before I pull out the plug

What are words for when no one listens anymore
What are words for when no one listens
What are words for when no one listens it’s no use talkin at all

When People stop listening to the Fed, because they have done their homework and know what’s behind the curtain; a flawed monetary system, the Fed’s game will end. But until that time, you’ll hear people from the Fed screaming all the way to the end; “I am the great and powerful Oz Fed….”

In the meantime, prepare yourself with some gold and silver for your portfolio now, ahead of the Fed end game. Unless of course you think the Fed and congress can somehow pay off all the debt, live within its means, reverse unemployment, stimulate the economy, pay for; infrastructure, government jobs, social security, medicare, Obama’s health plan, city and state government shortfalls, pension short falls, Fannie and Freddie all the while keeping interest rates low and preventing an economic meltdown (and that’s just off the top of my head!).

Unlike Oz who gave the scarecrow a brain, there are no brains in congress or at the Fed. If there were, then they would have prevented our nations slide into this deep recession with no end in sight. Now all of a sudden they’re smart enough to get us out of the mess they created?

Upcoming articles I’m working on relate to whether the stock market is indicative of the U.S. economy, and the real problems with the banks in the U.S.

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Related posts from the Fed Up Blog:

1. Bernanke and the Fed Have Saved Us: Recession is “Very Likely Over” Don’t Believe It!
2. The One Thing Bernanke Is Really Afraid Of

Doug Eberhardt

Doug Eberhardt was a financial advisor for over 20 years. He left the business in 2005 because he didn’t agree with the mainstream advice the financial services industry was trying to pass on to investors. After subsequently working for one of the largest gold dealers in the United States, Doug is now helping investors with his unique insights into how to buy gold and silver the safe way through this blog and his book “Buy Gold and Silver Safely,” available now. If you would like to buy gold or silver bullion coins or bars at the lowest prices in the country, call 888-604-6534 to speak to a representative.