Chairman of the U.S. Federal Reserve Board, Ben Bernanke, is now famous for declaring his willingness to use a helicopter to dispense dollars to stop U.S. deflation. In the spirit of shock and awe, he promised the indiscriminate firing of dollars into the U.S. and global economy, without concern for friendly fire casualties. Granted, indiscriminate firing of dollars near innocent savers and trading partners is not friendly fire, but stick with this analogy, it gets better.
During the first leg of the global financial crisis, the up fit of Bernanke’s Blackhawk with every dollar-printing weapon imaginable was priority one, including a few new Fed weapons developed just for the occasion. The battle plan was to stop the clear and present danger of the advancing forces of deflation in the United States.
Bernanke has more than proven his word is as good as gold, irony intended. You can at least respect the man for doing exactly what he tells you he is going to do. He made good on his word to stop the deflationary crash in early 2009, at least temporarily. The fear of Bernanke’s all-in money printing inflationary gambit continues to send shutters through global currency markets and the planning of U.S. trade partners. Gold has spiked, as it should with such monetary policy candor and the hail of trillions of dollars unleashed from the Bernanke Blackhawk to back it up. The dollar was falling as planned from the inflationary onslaught and exporting U.S. deflation to our trading partners. This plan appears to have worked until this past December. Now the dollar is rallying and deflation appears to be stubbornly creeping back into both the U.S. and the global economy, as the inflationary battle plan backfires with our trading partners upping the ante.
Bernanke’s Blackhawk delivered its hail of dollars just as the global economy was overproducing almost every good and service imaginable. This overproduction is exactly as expected in the current economic long wave winter season. In recent years, capacity utilization has dropped to levels last seen in the midst of the Great Depression. The free flow of dollars, euros, renminbi, yen and other currencies is keeping non-viable factories and capacity humming around the world, instead of the weak being shut down as punishment for over calculating demand. Expensive debt is funding most of the global excess capacity, so borrowing is limited. Consumers in developed countries are tapped out.
The world is beginning to realize that debt repayment comes from future cash flows, but it is now too late. The cash flows will simply not be sufficient to cover the debt for many enterprises and governments that have floated billions in junk bonds to keep their doors opened. This is the stage in the long wave when trade wars are most likely, and countries are most sensitive to internal political pressure to respond to trade conflicts by protecting domestic markets. The voters put the politicians in office, and can remove them if they do not at least attempt to protect jobs, even with bad ideas like protectionism. Jobs are dwindling during the long wave winter season, which adds additional political pressure.
The problem with Bernanke’s Blackhawk helicopter is coming into focus about now. If you are China, the UK, Japan, the European Community, Switzerland, Australia, New Zealand, etc., the U.S. anti-deflation weapons work in part by exporting U.S. deflation onto the shores of U.S. trading partners. These countries thought the U.S. was the great free trading partner of the world, willing to engage in the free trade of goods and services under fair trading conditions, without unfair manipulation through subsidies or currency manipulation; they now realize they were wrong.
There is no other way to view it. Dollar printing is a massive and real subsidy to U.S. exporters and a form of currency manipulation. It drives down the price of U.S. goods imported by our trading partners denominated in their currencies. The costs of their exports to the U.S. are more expensive in dollars, so U.S. buyers will buy local and shun imports when possible. The plan worked briefly. U.S. imports fell faster than exports. Exports picked up more than imports during the recovery. This helped U.S. deflation abate as the economy picked up in the normal inventory cycle driven recovery, since the U.S. was effectively exporting a large portion of its long wave deflation.
Bernanke’s dollar printing anti-deflation strategy is clearly a potent trade weapon, even if this is not the primary intent. U.S. trading partners view Bernanke’s Blackhawk as pointed and firing at their country and their manufacturers and producers of all types of goods and services. This is occurring during a long wave winter of growing pressure for trade wars and protectionism. Bernanke is inflicting real and painful deflationary economic damage on U.S. trading partners. Interpreting inflationary efforts by the Fed as something other than currency manipulation that supports U.S. exports is not an honest exercise. Victory in Bernanke’s battle against deflation requires exporting wave after wave of long wave deflation to our trading partners. However, they have grown tired of this undeclared stealth trade war and are responding in kind.
China may have a way to go in terms of manufacturing quality, but they are nobody’s fool. How do you think they view the hail of dollar fire coming from Bernanke’s Blackhawk coupled with the burgeoning U.S. deficits they are financing? While dumping dollars the U.S. is accusing China of currency manipulation and demanding that they let the renminbi appreciate. China is manipulating their currency with exchange rates, to try and stop the onslaught of U.S. exported deflation. The U.S. is effectively demanding that the Chinese economy and the Chinese labor force absorb the Chinese currency rise against the dollar to insure that the U.S. can continue to export its deflation. The Chinese are already toiling at 30 cents an hour for the increasingly frugal American consumer. A rise in their currency will make their exports more difficult to move onto world markets and put additional downward pressure on Chinese wages. They will tell the U.S. to shove their global export of deflation and will focus on protecting the domestic Chinese economy.
Other U.S. trading partners view Bernanke’s Blackhawk in the same light, as a sophisticated trade war weapon. Will they take the hail of dollar fire and roll over to the U.S. demands? Will they import U.S. deflation to support stable U.S. prices, without responding in kind? There is zero chance of our trading partners taking this blatant act of an undeclared trade war without responding.
Here is the glitch in the Bernanke Blackhawk strategy. All these countries have at their disposal central banks that are fully capable of countering Bernanke’s onslaught of dollars. The European Central Bank (ECB), dominated by Germany, just fired off a $1 trillion dollar warning shot that sailed just over the bow of the U.S.S. Spendthrift. Immediately, the dollar rally accelerated. This will cause U.S. exports to slow rapidly, bringing the natural long wave deflation back to the U.S.
Here is a fact that Bernanke and the Fed should now be considering. Since 1945, the world has been remarkably free from the use of nuclear weapons. This remarkably positive outcome is primarily due to a well-known and accepted doctrine in international relations called mutually assured destruction. Fortunately, Germany and Japan have both declined the development and therefore the deployment and potential use of nuclear weapons.
The power of central banks to print paper and electronic money in response to U.S. dollar printing and their willingness to do so is the financial, economic and global trade equivalent of the mutually assured destruction doctrine. The ECB, PBC and BOJ can match the Fed dollar printing with equal and devastating force with the depreciation of their own currencies. As much as it pains deflationists to consider the possibility, it is theoretically possible that the central banks of the world could all fire up the electronic and paper presses and in an all out global currency-trade war at DEFCON 1 and deliver Weimar style hyperinflation to the global economy. However, these sorts of policies have a proven history of leading to real shooting wars between great powers in the end.
Bernanke’s policy of buying bad mortgages served as the cover needed for the ECB to start buying the bad debts of Greece and the rest of the PIIGS eating at the trough of German tolerance and good will. Who knows what other types of bad debt the Fed has been purchasing since they are not required to disclose it. The Fed does not have to tell the American people what they are buying, even if they buy Zimbabwe’s sewer bonds.
The bottom line is the ECB had to start buying Greek sewer bonds in order to stop the rising forces of deflation coming from the U.S. It is clear that China has also cranked up the central bank money press to stimulate their economy with credit. They will likely buy billions in bad real estate debts just ahead as their building boom and its unpaid debts go bust. The ECB and Fed have shown China the way forward to assured disaster.
These are only the great powers. The smaller countries, such as Switzerland, Australia, New Zealand, Canada, Argentina and others, are also facing the rising tide of dollars from the U.S., and now Euros, and likely the wave of renminbi to come, and the resulting deflationary waves washing onto their shores from this U.S. inflationary strategy. They will respond with their monetary printing presses.
Bernanke’s Blackhawk helicopter has effectively raised the global currency-trade war status to DEFCON 2, and we could go DEFCON 1 any day. Mr. Bernanke is now beginning to recognize that his over the top shock and awe war against deflation has unintended consequences. The world will not allow the U.S. to export its natural long wave deflation without a currency-trade war. However, it is hard to imagine that world financial authorities really want to go there. The ECB certainly does not want to go there, that is why their charter never claimed it would deliver economic growth, but would only deliver price stability. The U.S. bailouts forced them to initiate the Greece bailout. However, they do have austerity built into the bailout with real teeth.
Bernanke and the rest of the central banks of the world and the politicians putting pressure on them should all take a deep breath and consider the two distinctly different paths. Why would they intentionally take the world into the financial maelstrom and equivalent of DEFCON 1, a hyperinflationary global currency-trade war? The pain and suffering on everyone would be horrendous. The path less worn is typically the one to take for greater reward.
Herein is the secret to the deflationist view for the conclusion of this long wave winter season between now and 2012. It is not that those with the power to push the inflationary button cannot do it. They can and they have. It is that they will not continue to escalate the conflict to DEFCON 1. In the end, the deflationist argument rest on the case that a new political force is beginning to emerge. On the periphery of the political process around the world, there are emerging forces that are demonstrating that there will be severe consequences at the ballot box if the central banks and politicians hit the hyperinflation button. In this weeks primaries U.S. incumbents were shown the door. If central banks persist, they will lose their independence, and they should lose it if they take the path of inflation. Inflationists, on the other hand, believe the central bankers and their governments have crossed the Rubicon, and the all out global currency-trade war among the great powers is unstoppable. The inflationists are convinced the world is inevitably doomed to hyperinflationary destruction as the world goes to DEFCON 1.
Not so fast. News this morning is that even Sarkozy is talking about balancing the budget of France. The deflationary outcome bet is that central banks and governments will hesitate at this important juncture in human history with the survival of civilization on the line; they really do not want to go to DEFCON 1. They will hesitate, and the natural long wave deflationary forces held back to date will come to the global front of the global currency-trade war. Once the world tips toward deflation, the long wave forces at work will crush inflation with overwhelming debt default and excess capacity. Deflation will force major changes that in the end will be far more positive for the long-term prospects of international free market capitalism.
Mutually assured inflationary destruction of the global economy is not a viable option. The hard working producers should not pay the bad debts of those who made bad investments and those who prefer to consume more than they produce. One of the primary purposes of markets is to instill discipline. Punishment of bad ideas and bad debtors by markets and in the courts when the laws are broken is an essential aspect of free market capitalism.
Bernanke is reassessing the market reaction to the fluid global crisis. He is aware that his battle plan to fight deflation with overwhelming dollar liquidity has only worked to a point. Bernanke underestimated the depth of the global crisis. The overcapacity and global response to the dollar printing is making him reconsider the trade consequences of printing dollars. He is a pragmatist. He is now evaluating his options. He thought markets would adjust more quickly and effectively. He thought that publically funded bankers would dial back the greed when they were supplied taxpayer funds so publically with TARP. Bernanke is highly disappointed with the behavior of the big banks, and this is likely an understatement.
The big banks need to be aware that there is another weapon under development. Bernanke’s Blackhawkhelicopter will shortly be up fitted with it. However, it is not a new weapon of mass inflationary destruction. It will not bail the big banks out of their bad debts once again. It will not force even more deflation onto our trading partners. It is the Volcker-Hellfire missile.
The Volcker-Hellfire missile is being specifically designed with the big banks in mind. At this new and unexpected stage of the global financial crisis and emerging currency-trade war, the big banks are no longer viewed as too big to fail. The big banks have now put the brakes on foreclosures, while the number of delinquent mortgages is rocketing higher. They are scrambling to book their final trading profits so they can sneak out the back door. Millions of homeowners are just walking away for their homes. Many of the big bank’s capital will soon skid below the legal minimums once again.
There will be no TARP II in the emerging leg of the global crisis. The big banks are beating the inflation drums. They want to inflate away all their bad bet debts they created and that are playing the lead role in the global crisis. It will not happen. The Volcker-Hellfire missile will bring the judgment that is due to the greatest era of banking folly in human history. The Volcker-Hellfire missile is guided by new insolvency seeking technology. It delivers an updated larger version of the FDICs neutron style destruction; it leaves the deposits, but takes out management, bondholders and shareholders, sparing taxpayers as much pain as possible, something Volcker has also referred to a euthanasia.
The Volcker-Hellfire missiles will be loaded shortly. Bernanke has demonstrated that once he chooses his weapon, he will not hesitate to use it. He just needs to decide whose side he is on, the big banks or the country he was appointed to serve; including the current and future generations of Americans and his own children and grandchildren.
Bernanke must show global leadership and stand down from trying to force natural long wave U.S. deflation onto our trading partners. The financial weapons of mass destruction and hyperinflation of our trading partners are now live and locked on their U.S. dollar targets. They will stand down and deactivate these weapons, if the U.S. shows leadership to defuse the situation. The U.S., Germany and China should agree to take their respective spheres of monetary influence back from the hyperinflationary abyss. DEFCON 2 can go the other way to DEFCON 3. The bailouts must end in favor of austerity and defaults. The deflation that rewards the prudent and purges bad debt from the system must take its natural course. It is time to balance budgets everywhere, and unwind the insanity of recent decades.
This article has only briefly touched on the long wave forces driving the ongoing global currency-trade war. The Long Wave Dynamics Letter reviews the long wave forces at work every month. The book Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, contains a chapter on the long wave trade war forces presently at work in the global economy and the inevitable outcome. The book is available at Amazon.com.
The final years of the long wave winter season will purge the bad debt and overproduction from the system. Hyperinflation as this stage of the undeclared currency-trade war would be a global disaster that could threaten the very foundations of civilization. Long wave deflation will end relatively quickly if allowed to take its natural course. The deflationary path out of global crisis will more rapidly delivery a new booming long wave spring season for the global economy than the mutually assured inflationary destruction of DEFCON 1. May God help us all.
David Knox Barker is author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009). He is the founder of LongWaveDynamics.com, and the publisher and editor of The Long Wave Dynamics Letter.