Bernanke Adopts Decoupling, Discusses Gold, Does Not Think $1,200 Gold Is A Direct Affront To All Things Keynesian
From Bunning's questionnaire:
Q. Time and energy in macroeconomic analysis is spent attempting to measure business and consumer confidence. Confidence measures are part of macroeconomic forecasting and directly impact monetary policy decisions. Likewise, certain market movements reflect investor confidence or lack of confidence. Gold is at an all-time high because investors have lost confidence in policymakers' handling of fiat currencies. How is the Fed incorporating this market information into its analytical framework? Does the lack of confidence in fiat currencies have the potential to impact monetary policy?
A. Gold is used for many purposes, including as a reserve asset, as an investment, and for use in electronics, automobiles, and jewelry. Thus, fluctuations in the price of gold can reflect changes in demand associated with any of these uses, as well as changes in supply. In monitoring the price of gold, the Federal Reserve must attempt to interpret which of these factors is responsible for its fluctuations at any point in time. One of the ways we do this is by consulting other indicators of market sentiment. A number of measures of expected future inflation in the United States, including measures taken from inflation-protected bonds and surveys of consumers and professional forecasters, have been well contained. Accordingly, increases in the price of gold do not appear to reflect increases in the expected future of U.S. inflation.
Based on this questionnaire the former Princeton professor seems unaware that the price of gold has become nothing more than a risk proxy of the Obama administration's money printing insanity. Dear Honorable Chairman, maybe if you were to visualize the price of gold since President Obama took office your opinion would change? Because, even though it seems completely understandable, the usage of gold in "electronics, automobiles and jewelry" is unsatisfacorily short in explaining the 50% increase in the price of gold since February 2009.
Other gold-related observations indicate that Bernanke has now fully embraced that the world has entered a decoupling phase. In question 26 he points out that gold is rising simply as a correlation with other global commodities:
The most recent increases in the price of gold likely reflect diverse influences, including investor concerns about the many uncertainties facing the global economy; however, it is also the case that the rise in gold prices has not been much out of line with the increases in other commodities. According to the Commodity Research Bureau, after fluctuating in a broad range for the previous 1-1/2 years, the price of gold has risen 22 percent since early July, while the CRB’s index of overall commodity prices has risen 17 percent. These increases appear to reflect the recovery of the global economy, and it is not clear they have been out of line with fundamentals.
Paradoxically this contradicts Bernanke's response to a question discussing the Output Gap. The question is lifted straight from Zero Hedge's previous observations that the St. Louis Fed itself is telling Bernanke his entire monetary policy approach may be completely flawed due to the inability to adjust for bubble impacts over long periods of time (thank you Greenspan).
The bulk of the evidence indicates that resource slack is now substantial, as evidenced by an unemployment rate of 10 percent and a rate of manufacturing capacity utilization of only 68 percent--lower than seen at the trough of every postwar recession prior to the current one. Thus, I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead.
So: recovery in the global economy yet slack resources... 17% commodity price inflation (22% in gold) yet 68% capacity utilization in the US... Fair enough - that can only mean that the Fed Chairman's new official policy is the global economy has entered into a decoupling phase. And in that case, which is a departure from the Fed's previous position vis-a-vis global economic development, how does the Fed propose to account for liquidity and monetary policy imbalances that are a critical part of every "decoupled" world. This is a critical answer that Bernanke should answer before he is reappointed for another 4 years of perpetuating the broken Keynesian thought experiment.
h/t Geoffrey Batt