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BIG BEN - US Fed Inflation Slight of Hand

Economics / Inflation Jan 05, 2008 - 03:18 AM GMT

By: David_Petch

Economics Best Financial Markets Analysis ArticleBig Ben is the largest standing four faced chiming clock in the world and is known for its remarkable accuracy due in part to Edmond Beckett Denison who invented the double three-legged gravity escapement added to the original mechanism. The mechanism was created in advance of completing the masonry and final tower assembly, which is where Edmond found spare time for his improvement.


The hour hand of Big Ben is 9 feet long and the minutes hand is 14 feet long. The focus of this article is to metaphorically dissect the features of Big Ben and apply them to Ben Bernanke. Metaphorical similarities and dissimilarities may not be apparent on the surface but should be crystal clear by the conclusion of the article. A clock having a long hand and a short hand is equivalent to a magician having one arm extended during a trick for distraction of the other hand (hour hand) in the background setting up the trick.

The FED so to speak has repeatedly used this slight of hand on numerous occasions as of later, particularly regarding inflation. A few weeks ago, Ron Paul was questioning Bernanke about why try to solve inflation with printing more money and with the use of several non-informational statements a final point was made that as long as Americans were buying things made in the US there was no inflation. Considering that the US imports 70% of energy for domestic purposes and most manufactured goods (a large percentage of which is processed foods made from China ), this is a real problem because the greenback is quickly losing its status as the reserve currency.

The expression “putting a penny on” with the definition of “slowing down” arose from the method of fine tuning the accuracy of Big Ben's pendulum. Adding or removing one penny to the pendulum can add or subtract, respectively, 2/5 th of one second per day. As the figurehead of the FED, Ben's purpose is to disseminate information on measures the FED agreed to behind closed doors. The pendulum of the economy in fiat terms can be viewed as the addition or removal of interest rates to try and keep things within reasonable growth. i.e. some pennies may have to be added or removed to slow down the economy.

At present, the FED (as other countries around the globe) is removing a penny (lowering interest rates) instead of “putting a penny on” (raising interest rates) in an attempt to minimize further weakness due to the sub-prime mortgage failures and derivative implosions. In the not too distant future once inflation really begins to pick up steam due to real negative interest rates, countries will begin “putting a penny on” in order to try and keep the economic pendulum in balance. Central Banks better hope the pendulum remains within the confines of the structure containing it and not fly through a wall to be exposed to those who stare upon them.

During WWII, Big Ben suffered damage to two faces of the clock and was subsequently repaired. In 1976, the internal mechanism of the clock failed due to metal fatigue. Only once in its lifetime since 1854 did it suffer mechanical failure. Below is a description of the four faces of Ben Bernanke. It is important that two particular faces do not suffer damage inflicted by causal effects or external agents, because when a person loses face, it sometimes is more difficult to regain it if not impossible…these two faces being the public and global central bankers.

Four Faces of Bernanke - “Ignore the man behind the curtain” has a totally different dimension added.

•  Global Central Bankers
•  American Public
•  US FED
•  Ben staring at himself in the mirror

Global Central Bankers

Of all of the faces of Bernanke facing different groups, this by far is the most important. Different countries from around the globe have been purchasing US Treasuries thereby allowing the US deficit to continue growing. “Keeping the Faith” of the central bankers in countries is important to allow the deficit to continue. Loss of faith from other Central Bankers can be viewed to a congregation losing faith in their minister. A minister can pack up his or her bags and simply move to a far away town and start things anew. Unfortunately, there is only one Earth and all of the same clan of bankers have been hearing the same sermon for the past number of years. Once booted out, there is no other place to set up shop. The only way out for the FED to allow continuous monthly deficits in the US is to monetize debt. This action is viewed negatively by other countries and serves to debase the US dollar. As mentioned previously, currency debasement ultimately leads to higher interest rates and inflation.

American Public

The US FED is one of the only private institutions on the planet that controls monetary policy of a country by printing money for them and charging interest rates. This is a privilege that should be reserved for governments only and not have a group of corrupt rich people collecting interest payments off the back of the people. “Keeping the Faith” with the American public is also important because a change in government policy reflected by a vote from the populous could see the US Federal Reserve System dismantled. There certainly would be valiant attempts by the rich bankers to block this (not to be discussed but I will leave it to the imagination), but a strong public outcry and a return to sound money can eliminate this. For now, the FED has been able to keep the wool over the eyes of the public, but once many have been sheered and see clearly, there could be a change in the guard.

US FED

Bernanke is Chairman of the FED and is the mouthpiece for disseminating their collective thoughts and information to the public. There really is no losing face amongst individuals of the FED because they are all serving the same master. For Bernanke to “lose face” with the FED, he would have to speak under his own prevailing thoughts rather than to an agreed bunch of statements before the cameras arrive.

Staring in the Mirror

There is an old saying that “You can Fool Everyone but You Cannot Fool Yourself”. Bernanke's Ph.D. thesis was based upon the study of the Great Depression of the 1930's. His conclusions were that deflation ensued due to the lack of suitable cash infusions at particularly critical points during the crisis. Cash infusions that were too late would not be able to undo sustained damage, so the basic conclusion was that frequent timed injections of cash could have prevented the severity of witnessed deflation. Bernanke's conclusions are now being put to the test in the biggest game of poker ever. The stakes are high and as derivatives continue to unwind, watch for equivalent chunks of money set to be digitally distributed to wherever needed. The likely outcome for this sort of game is going to result in sustained inflation due to the persistence of cash floating around I am not certain if hyperinflation is going to develop, but one distinct possibility is a sort of financial purgatory.

This financial purgatory could be defined as the current level of liquidity is being kept constant by replacing any forms of credit that “deflate” the total amount of available cash (cash equivalents and credit) which is in effect “monetization”. The end game is that either hyperinflation will run its course or that at some point the US dollar will be judged and booted out of purgatory into financial hell, both of which translate into severe deflation. So in the end, when Bernanke wakes up one morning and stares at himself in the mirror, will he lose face with himself for realizing that his thesis was merely a document for how to stave off deflation for some time rather than make it become extinct.

Note: Just so I am not taken out of context for the final statement, I am in the inflationary camp and assume it will continue until some point in 2012…then deflation, not in any other order. I have already written two articles about why deflationists have been wrong the past 20 something years and why they will continue to be wrong until this inflationary cycle completes…for those interested, simply Google “Diatribes of a Deflationist” I and II. Monetary inflation can occur via printed money or introduction of credit extended through various means. Credit is being destroyed, but Central Banks are monetizing the debt…sure it might not hit the public, but it is preventing any significant declines in the available money supplies around the globe.

By David Petch

http://www.treasurechests.info

I generally try to write at least one editorial per week, although typically not as long as this one. At www.treasurechests.info , once per week (with updates if required), I track the Amex Gold BUGS Index, AMEX Oil Index, US Dollar Index, 10 Year US Treasury Index and the S&P 500 Index using various forms of technical analysis, including Elliott Wave. Captain Hook the site proprietor writes 2-3 articles per week on the “big picture” by tying in recent market action with numerous index ratios, money supply, COT positions etc. We also cover some 60 plus stocks in the precious metals, energy and base metals categories (with a focus on stocks around our provinces).

With the above being just one example of how we go about identifying value for investors, if this is the kind of analysis you are looking for we invite you to visit our site and discover more about how our service can further aid in achieving your financial goals. In this regard, whether it's top down macro-analysis designed to assist in opinion shaping and investment policy, or analysis on specific opportunities in the precious metals and energy sectors believed to possess exceptional value, like mindedly at Treasure Chests we in turn strive to provide the best value possible. So again, pay us a visit and discover why a small investment on your part could pay you handsome rewards in the not too distant future.

And of course if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line . We very much enjoy hearing from you on these items.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities as we are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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