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Bernanke Talks His Book

 February 08, 2012 01:22 PM


Bernanke's testimony to the House last week and to the Senate yesterday held no surprises. Ben has promised to maintain monetary policy at DEFCON 4 levels for as far into the future as we can see.

The prepared remarks were identical for both presentations. I reviewed Bernanke's 10/4/2011 testimony before the Congressional Joint Economic Committee (Link). There is something missing in the 2012 reports to Congress that was included in Ben's statement just a few months ago. Here's what he said in October 2011 about inflation:

Longer-term inflation expectations have remained stable according to the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently.

So last October, Ben was touting up the TIPS/Bond spread as a confirmation that the broad expectation for inflation was very tame. In fact, when Ben made those comments in October he was right.
The five-year TIPs/Bond spread was at 1.60%, a very low rate of expected inflation. That's no longer true.

In his testimony to the Senate this week, Ben did not bother to mention that the TIPS spread has blown out since October. He eliminated any reference to the TIPS spread altogether. The reason? Simple, the TIPS spread is no longer telling Bernanke what he wants to hear, so ignores it.

The following are some charts on the TIPS spreads. First the five-year:


Now the Ten-year:



At this juncture, I'm absolutely convinced that Bernanke is making a biblical mistake. Yes. it will cost Ben his job (and the Fed's credibility) at some point. But the real consequence will be to Americans in general, and also a few billion people outside the borders.

There is zero evidence today that the US economy is in crisis and that emergency monetary policies are justified.

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