Out on the campaign trail, Fed head Ben Bernanke is an unpopular guy. Mitt Romney and Newt Gingrich have both said they would replace Bernanke, not reappoint him.
Rep. Ron Paul would swap the whole Federal Reserve monetary system for a gold-linked dollar, making the yellow metal legal tender.
Republicans in Washington are equally unimpressed by Bernanke. House Budget Committee Chairman Paul Ryan recently criticized the Fed for bankrolling our huge budget deficits and thereby accommodating a profligate fiscal policy.
And former Federal Reserve Board Governor Kevin Warsh, a Bush White House economic aide and Bernanke intimate before he left last April, just leveled criticism at the Fed’s extensive zero-interest-rate policy and its “operation twist.”
There are two key takeaways from this onslaught of Fed criticism: First, the critics worry that the ultra-easy money pumped out by the Bernanke Fed will in the future create periodic inflationary bubbles (housing and energy), such as we had in the 2000s, which contributed mightily to the ultimate financial meltdown.
Second, the GOP is gradually becoming the King Dollar Party. After watching the greenback collapse almost 40 percent during the Bush years, Republican leaders are moving back to a Reaganesque dollar approach whereby a great nation with the world’s leading economy should have a strong and reliable currency.
The dollar soared and gold plunged during Ronald Reagan’s first term, just as it did during Bill Clinton’s second term. In both these eras, stocks rallied mightily and the economy grew rapidly.
Supply-siders note that a good-as-gold dollar and low marginal tax rates were the ultimate prosperity tonics during these two periods.
But today we’re witnessing the opposite of supply-side prosperity. The current economic malaise seems borne of a weak-dollar/high-gold monetary policy coupled with a huge tax-hike threat looming in 2013.
To be fair, Bernanke has his supporters. They’re mostly from the canyons of Wall Street, where money-market economists are loath to criticize him. Then there’s New York University professor Mark Gertler, who has co-authored research with Bernanke.
A recent Bloomberg story cites Gertler as saying: “Criticism about the Fed being inflationary is not fact-based. In terms of an inflation record, the facts are the Fed has been as close to impeccable as you can possibly get.”
Gertler notes that during Bernanke’s six-year tenure, the consumer price index rose an average of 2.4 percent, lower than the 3.1 percent average for Alan Greenspan and the 6.3 percent for Paul Volcker.
Or course, that’s unfair to Volcker, who inherited 15 percent inflation and by targeting gold and the money supply brought it down to 3 percent.
But the trouble is, after three years of zero interest rates (with more coming) and an outsized Fed balance sheet of more than $2 trillion, there’s still an inflation threat out there, despite the subpar economy. Bernanke has been a massive pump-primer long after the financial emergency has passed.
Over the past year, the CPI has increased 3 percent. Energy prices have grown 6.6 percent, while food is up 4.7 percent. This is a big pinch on consumer pocketbooks and a drag on the economy. Inflation expectations are steadily running at 2.5 percent to 3 percent.
In Milton Friedman terms of too much money chasing too few goods, the 10 percent M2 increase of the past year is way above the 2.5 percent economy. In classical dollar-value terms, the $1,700 gold price is an ominous portent for future inflation.
So the Republican Party is absolutely right to shift toward a strong-dollar policy. Newt Gingrich has gone so far as to propose a new gold commission, such as Reagan had, with investor Lew Lehrman and journalist James Grant as the co-chairmen.
While Bernanke was a good crisis manager, he seems to lack any conviction for a predictable rules-based policy that would create a reliable King Dollar. Stable money is a growth incentive. And history tells us that a golden anchor for money is a key ingredient of long-term prosperity.
Examiner Columnist Lawrence Kudlow is nationally syndicated by Creators Syndicate.
