The Coming Bernanke Inflation

A little less than a month ago, Fed Chairman Ben Bernanke took the unusual step of penning an editorial in the Wall Street Journal, on which I wrote this post, entitled, "The Fed's Exit Strategy."

I observed, in my piece,

"Here's the one thing Ben never mentions in his editorial. All of the methods he described involve raising interest rates.

You know what rising interest rates tend to do? Yes, that's right. Choke off recoveries and slow economic growth."

Back about a week before Bernanke's piece, occasional Journal editorialist Andy Kessler wrote a column in which he observed,

"At the end of the day, only one thing has worked- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear."

I don't usually find Kessler's financial sector insights very good, but this time was an exception. I think he's right on the money, as it were. Pun intended.

Then Journal staffer and editorialist Kim Strassel chimed in last week, noting that Bernanke has a big job on his hands trying to get renominated and reconfirmed for his job. She observed Congress' rough handling of the Fed Chairman at hearings, wherein he was vaguely accused of perjury for 'forgetting' key conversations with Ken Lewis and then-Treasury Secretary Hank Paulson.

Strassel shrewdly concluded,

"The once hard line between the "independent" Fed and the rest of official Washington has been blurred. Mr. Bernanke's problems are now the Obama team's."

Personally, I am betting on Larry Summers' getting Ben's job. But that won't keep Ben from trying.

And that, unfortunately, means the Fed Chairman won't tighten until after he is sure he is either renominated, or not. And if not, then why bother?

Either way, here's the thing. We are in for easy money for the rest of the year. And when the US economy gets addicted to cheap, or, in this case, nearly no-cost money, watch out.

There is no safe exit to this monetary policy mess that will leave the US economy in healthy shape.

The monetary-based equity rally of the past few months isn't about a recovery. It's about hope for a recovery with low interest rates.

Whether it's tightening or inflation, there's no obvious safe, easy path out of this mess which includes a healthy, growing US economy in the next year.