Guest Post: Bernanke’s ‘Cash For Spelunkers’
Submitted by Jed Graham of Investor's Business Daily
Bernanke’s ‘Cash For Spelunkers’
Like “cash for clunkers,” the housing tax credit and other attempts
to provide short-term fuel, the Federal Reserve’s second round of
quantitative easing can only buy a little time to fix what ails the
Unfortunately, in the prior instances, the short-term fuel led to
short-term complacency about the economic trajectory, leading
policymakers to let down their guard. In the end, all that resulted
was a letdown for the economy.
What’s different about quantitative easing — an effort to lower
market interest rates by bidding up Treasury debt — is that the Fed
has no ability to direct its fire. What’s likely is that much of the
investment capital freed up by Fed purchases of Treasury debt will
overshoot its target — the U.S. economy — and flow to emerging markets
and especially into commodities that serve as a hedge against a
Hence the “cash for spelunkers” label: The only thing certain to be
stimulated by quantitative easing is mining and, perhaps, other
underground exploration. Already precious metals have seen a big
run-up in prices in advance of further Fed easing, as have industrial
metals, crude oil and agricultural inputs — anything that can hold
value as the Fed prints money.
The downside is that the squeeze from higher commodities prices, both
on businesses facing higher input prices and households seeing little
income growth, is likely to dampen the positive impact of
And if the net impact is quite small, then the Fed’s success in inflating asset prices will prove fleeting.
The reason that the Fed is expected to move aggressively is because
Congress is letting its stimulus spending gradually begin to wind
down, even as the economy grows too slowly to keep the jobless rate
from rising further.
But the Fed’s ability to move independently from the political
sphere, even when there’s gridlock in Congress, is a mixed blessing.
The risk is that Fed intervention will take pressure off of the
incoming divided Congress to reach difficult agreements that will
address some of the underlying ills that could sap the recovery.
Not least, of course, is the need to agree on a difficult but
carefully mapped out path back to fiscal sustainability as the
recovery strengthens. Without such a path, Fed money printing could
undermine confidence in the dollar and Congress may hit the fiscal
brakes too abruptly.
It’s no coincidence that the economy began to slow in the spring as
the Fed ended its first round of asset purchases and federal stimulus
hit a peak from which it began to descend. Hopefully we are not
headed for an eventual second round of QE-letdown.