Fed Chair Bernanke Ready to Crank Up the Printing Presses?

And so, here we have our esteemed Federal Reserve Chairman Ben Bernanke speaking before the Boston Fed telling us what we know: the economic recovery is too weak to create new jobs, which means that there's a case to be made for "further action."

Well who better than "Helicopter Ben" to prime the US printing presses and shower the economy with dollars? (This is a reference to Bernanke's famous 2002 speech, when he said that to fight deflation, "the U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." He was referring to a statement made by economist Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.)

Various Fed officials, including Bernanke, have been hinting that the Fed would be willing to expand its balance sheet by purchasing $500 billion in US bonds to spur the economy. That formal announcement will likely occur at the next FOMC meeting November 2-3.

Bernanke first started mentioning this concept at the end of August and since then, stocks, commodities and pretty much all risk assets have been rising. That's nice if you're an investor or better yet, a money manager whose compensation just got a nice boost in the last six weeks, but if investors are winners, who are the losers?

The answer could be...all of us! When the Fed goes on a shopping spree like this one, it could lead to a drop in the US dollar and a spike in future inflation. So while your retirement account might be rising now, years down the line, you might find that your greenback buys you less, which is a pretty serious concern.

The Fed would counter that argument with, "don't worry, we'll know when to shut down the printing presses, ground the helicopters and it will all be OK." Still, Bernanke himself outlined the risk in this proposed policy when he said that it's hard to convince the public that the Fed can "execute a smooth exit." Still, for some reason, Bernanke said he's "confident" the Fed "will be able to tighten monetary policy when warranted, even if the balance sheet remains considerably larger than normal."

Why is Bernanke so confident? The Fed's track record on smooth exits is rotten. Over the past twenty-five years, what we know is that the central bank, under both Alan Greenspan and Bernanke, has preferred to err on the side of being too easy with money, then too tight. That propensity has led to a series of asset bubbles and subsequent busts. Do we really think that the Fed will get it right next time?