An article yesterday said Fed Chair Bernanke is confident U.S. inflation can be kept at bay. Bernanke is reported as telling the House of Representative Financial Services Committee he has an exit strategy from the U.S. central bank’s recent massive monetary expansion that will keep inflation under control as the economy recovers, and that “we are quite confident that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences”.

The Fed has cut benchmark overnight interest rates almost to zero and has pumped over $1 trillion into credit markets to keep them functioning after the collapse of the U.S. housing market sparked a global credit crisis last year. Bernanke defended the Fed’s cutting of interest rates to almost zero, and its infusion of over $1 trillion into U.S. credit markets, by saying that these steps and steps by others last October resulted in what Bernanke said he seriously believes resulted in the avoidance of “a collapse of the global financial system which would have led us into a truly deep and very protracted economic crisis”. He is reported as going on to say that “It is very important for us, once the economy begins to recover — as usual, the Fed would have to begin to tighten policy — it is very important for us to begin then to unwind our monetary expansion”.

My Comments: I assume the ‘others’ Bernanke referred to are Henry Paulson and his band of Merry Men. Its good to know Bernanke has an ‘exit strategy’ from ongoing U.S. monetary expansion. It would be nice to know precisely what it is. What is going on is such a ‘moving target – literally every day’ it is hard to accept that anyone, including Bernanke has a well-developed strategy for this or pretty much anything else related to the U.S. economy. If only it was otherwise! Again, the ‘recovery’ word is prominently featured in Bernanke’s remarks. Without U.S. economic recovery and growth both from where the U.S. economy is now, and where growth in GDP was before 2008, all the steps taken to date and prospective steps that may be taken by the U.S. Administration and the Fed are simply (or so I think) throwing good fiat currency after bad fiat currency – assuming fiat currency as a medium of exchange is a good thing in the first place. If I am right in this, there better be a quick swing in the U.S. unemployment numbers, and the U.S. consumer better begin to spend quickly from here and with serious vigor. Absent these two things happening I think Humpty Dumpty (the U.S. economy) that has fallen off the wall, and will remain in a smashed and continually deteriorating state (no pun intended). Comments agreeing or disagreeing will be appreciated.

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