Is Bernanke Really the Best Fed Chairman?

In his recent testimony to Congress, Ben Bernanke unsurprisingly defended the Federal Reserve’s loose monetary policies. The Chairman even pushed back when he was called a dove by citing the consumer price index. However, looking at the bigger inflation picture, the central bank’s track record is anything but stellar.

Senator Bob Corker, a Republican from Tennessee, called Bernanke the biggest dove since War World II and discussed how savers are being punished by the Fed’s ultra-low interest rate policy. He also referred to the Fed’s policies as “degrading.” Bernanke sees things a bit differently.

He responded, “You called me a dove, well maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period, or at least one of the best at 2 percent average inflation.”

The inflation rate is a controversial issue for many, because the most common measuring stick is the CPI. However, considering hedonic adjustments which factor in quality improvements, and substitution tactics, the index often underestimates inflation and becomes less useful for price comparison purposes. Hidden inflation like smaller packaging and watered-down beer makes the CPI even more distorted.

As a result, several sources have provided some useful charts in questioning Bernanke’s self-proclaimed “best” status…

Starting with the much debated CPI, Bloomberg presents the following long-term chart from Carmen M. Reinhart and Kenneth S. Rogoff that shows the real Fed effect. As you can see, the CPI was quite stable until the Federal Reserve was created in 1913. The creation of a central bank has led to this chart formation for many other countries as well.

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The CPI contains more than 200 categories, but is heavily weighted towards housing. Looking at other hard assets, the inflation picture during Bernanke’s term is very violent, as the chart from Zero Hedge shows. There are certainly some supply and demand issues at work here, but there is a clear contrast from the previous years.

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While the CPI has been contained under Bernanke’s term, the price of gold has exploded. The precious metal has strong price swings that make it less than perfect as an inflation gauge in the short-term, but when central banks inject trillions of dollars into the financial system with a few key strokes, it serves as a major catalyst.

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As the chart from Bespoke Investment Group shows, the price of gold under Bernanke’s  term has climbed almost as high as during the previous three chairman combined. This is not a pleasant sign for the U.S. dollar’s purchasing power.

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Disclosure: Long EXK, AG, HL, PHYS