How can Bernanke solve inflation and keep the bubble going at the same time? He can’t (but please don’t tell that to the Senate).

The Man in Charge has a plan. Well, probably several plans, really. After all, you don’t rise to the highest office in the land without having an idea or two as to what you might do next.

Oh, did you think I was speaking of President Obama’s LBJ moment at West Point, wherein he announced that he had boldly split his advisors’ ideas down the middle re: Afghanistan?

Naaah! I’m talking about one of the guys who are really driving things in Washington these days: Fed Chairman Ben Bernanke.

Say What?

The Commander in Chief can cut orders to send troops most anywhere his whims desire. But they will only go if he can pay them.

Now hang on, folks. I am not – repeat NOT – questioning the loyalty of the Joes serving in our uniformed services. In fact, it warms my heart that folks keep signing up to serve after a solid decade of repeat rotations “in country.”

But we do have to keep up our end of the deal. Can you imagine how short the lines will get at the recruiting centers if word got out that paychecks were bouncing? Patriotism is all well and good, but you can’t eat it, and a lot of these guys have families to feed back home.

“Bubble Heads”

For this whole effort to work, the president needs cash to pay for it all. And he doesn’t really have a lot of it about these days. That’s why there were guys from his budget team at most all of the final meetings regarding the Afghanistan Surge.

To generate cash, he needs tax receipts. Yeah, I know: He could always borrow more. In point of fact, Washington is already borrowing as much as it can get its hands on, and then some.

What Washington needs in the worst way is a bubble it can tax the bejeezus out of. And that makes the man who is providing that bubble a pretty big cheese.

So Big Ben is a pretty powerful guy right now. But not quite immortal, mind you.

The Same Old Same Old

The Chairman of the Board of Governors of the Federal Reserve is nominated by the president and confirmed by the Senate to serve a four-year term. Chairman Bernanke was originally picked by President Bush back in 2006, so his term ends on Jan. 31.

Now, he has already been nominated for a second term by President Obama, who, for all his talk of change, has proven remarkably willing to allow the same old crew to keep on running things.

This has allowed for such logical oddities as Mr. Bernanke and Treasury Secretary Geithner standing in front of Congress excoriating the missteps of previous administrations – despite the fact that they pretty much were the “previous administration.”

Washington’s Quadrennial Prom Dance

But now Mr. Bernanke must face a room full of senators, most all of who need desperately to score a few rhetorical points (and a few that are looking to replace his nominator come 2012). Oh, and perhaps three or four that actually understand basic economic principles and are deeply concerned that we have royally screwed ourselves.

Even the senators that claim to like him have described Chairman Bernanke’s efforts as “far from perfect.” That was from Ohio’s Sherrod Brown, who thinks that Bernanke really ought to be focusing more (read as “spending more”) on jobs, preferably in Ohio.

Kentucky’s Jim Bunning never did care for Bernanke. He voted against him in 2006, and now claims that he was 100% correct in doing so: “His job rating would be zero minus F. He has catered to the big banks, to the Wall Street elitists, to every major money concern in the country and in the world.”

Robbing Peter AND Paul

If Chairman Bernanke wants to retain that title for another four years, he must somehow please both the loose-money folks who want to see this bubble continue in the worst way, AND the inflation hawks who know exactly how these bubbles always end.

That means he needs to have plans – lots and lots of plans. And so we read that the Fed is setting up a strategy to sop up excess cash via “Reverse Repurchase Agreements.” This is where the Fed sells stock shares out of its (alarmingly swollen) portfolio, with an agreement to buy these shares back at a later date. Thus specie would supposedly move from the public domain back into the Fed’s coffers, temporarily making the dollar more dear and shares less expensive.

Keep in mind that the Fed bought these shares on the cheap with rather strong dollars, and would be selling them into a share market that has been rallying for nine months, and acquiring dollars that have shrunk some 17% in value for the same nine months. Even better, implicit in the plan is the promise that he will repurchase these shares should they drop in value, with dollars that have presumably risen in value.

Promise Them Anything!

From a pure business point of view, the Fed actually comes off rather well in this whole odd roundelay. In fact, I’ve gotta say that the scheme raises my estimation of Bernanke’s intelligence a great deal. I trust him even less than I ever did, but I do concede the brilliance of it all.

But to pull it all off, he has to keep his place at the big table. And therein lies the true beauty of his “plans.” Chairman Bernanke can go into his hearings simultaneously claiming to Inflation Hawks that he is preparing to do something about the dollar (if it were to really get out of hand), while promising President Obama and his fellow “bubble heads” that he won’t puncture their balloon by raising rates over zed. They get their bubble and the tax revenues to keep the whole hideous perpetual motion machine running another few months or so.

And we get the bill, when it all grinds to a halt.

Other Related Topics: Adam Lass , Ben Bernanke , Federal Reserve , Inflation Rate , U.S. Dollar , WaveStrength Options Weekly

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