A Tale of Two Bens

Paul Krugman has an interesting post up on Ben Bernanke’s contrasting economic policy positions. Simply, the younger Bernanke was much more Krugmanite than the older Bernanke:

[The younger Bernanke] endorsed, at least as possibilities:

– Targeting long-term interest rates
– Currency depreciation
– Money financed deficit spending
– A Krugman-style inflation target

After 2003, however, his menu seemed to have been reduced to:

– Guidance on future short-term rates (the rates the Fed sets)
– Purchases of long-term bonds and other nonconventional assets
– “Oversupplying reserves”, that is, just pushing up the monetary base

Krugman concludes — quite rightly — that Bernanke has been “assimilated by the Fedborg.” Krugman should probably know that Ben’s main goal has nothing whatever to do with inflation, or “aggregate demand” or currency depreciation. Nothing. These are all handmaidens to one thingthe rate that the Treasury is paying on its debt.

America is in an impossibly tough fiscal position:

Even at the government’s impossibly cheap projections, a lot of money is going to be pushed out from the Treasury to creditors.

And so the Fed’s main implicit goal is to keep Treasury rates as low as possible without excessive inflation  — the more inflation, the more creditors will ditch Treasury debt, thus forcing the Fed to monetise more. This is a foreign policy imperative: the bottom line is that America has gotten herself deeply in hock to foreign creditors. The Fed’s task is to keep the creditors buying debt, and to minimise rates so as little capital gets out of America as possible. Ben Bernanke has become precisely what many American accuse China: a currency manipulator.

There are a few secondary goals: reflating housing is one (more home equity means more consumption), and reflating equities is another. But all of these are subordinated to keeping rates cheap and thus delaying America’s inevitable fiscal (and thus foreign policy) meltdown.

Of course, under present circumstances, this is an impossible task. And without another round of QE, rates are rising.

From Bloomberg:

U.S. government securities lost 1 percent from the start of the year to March 29, Bank of America Merrill Lynch indexes show.

And that — in one sentence — is why Bernanke will be printing again soon.