FED STERILIZATION
How Bernanke Fueled the Collapse in Gold
Chairman Steve Forbes discusses gold market takedown yesterday on Bloomberg.
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Read the op-ed
Steve Forbes - Why Gold Plunged
Ben Bernanke has pulled off a neat trick that could well give us the worst of all worlds: a brief commodity deflation, future inflation and a stagnant economy. It will earn him a prominent place in the central bank’s Hall of Infamy. Usually central bankers earn opprobium from history the old-fashioned way, by debasing the currencies under their care. But Bernanke has added a new twist.
After 2009 Bernanke did something a bit different. He churned out globs of new money but then sterilized most of it by paying banks to keep the money parked at the Fed. Banks didn’t mind. It was found money on which they earned — and still earn — easy and riskless profits.
Leveraged speculators are waking up to the fact that we won’t be getting a 1970s-style inflation in the near future and are bailing out — for now. Gold rose sharply in anticipation that quantitative easing would flood the economy with excess money just as happened in the 1970s. But as we noted, most of it was bottled up. Or a better metaphor, it lies in a vast reservoir –however in this case, the water is held in place by a very weak dam.