Bernanke and Gono: Modern Central Bankers

0:00Now I suppose most of you know what the Ludwig von Mises Institute is but always at these events I find people who've been drugged here against their will They were misled they thought they were doing something completely different. Hey, we're going to go to a hotel Saturday afternoon, it's going to be like a spa day, you know, you're going to love this they get stuck here listening to You know talks about economics But the Ludwig von Mises Institute was started in 1982 by our founder, Lew Rockwell, and we've really become the center for classic liberalism, libertarian political theory, and of course, the Austrian School of Economics. So, it's really a worldwide movement. We're at the center of it, and it's terribly gratifying to be a part of it.

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4:18And with that, it is time to get the program going. As you notice from your program, I am the warm-up act. And so we will proceed in that direction. And I'm going to talk about two central bankers, one of which I think you know, and one of which I don't think you know a whole lot about. And I think if you follow economic affairs at all, you know who Ben Bernanke is. He's the chairman of the Federal Reserve. He was Time's 2009 Man of the Year. CBS News said he may be the most important Federal Reserve chairman in history.

5:07When Scott Pelley interviewed him for 60 Minutes last year. You know, Bernanke is an expert on the Great Depression. We've been told that time and time again. And he famously said back in 2002, but the U.S. government has a technology called a printing press. Or today it's electronic equivalent that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of the dollar in terms of goods and services, which is equivalent to raising the price in dollars of these goods and services.

5:56We conclude that under a paper money system, a determined government can always generate higher spending and hence positive inflation. But while Helicopter Ben is considered the great inflator, he's no match for Gideon Gono. Gideon Gono is the governor of the Reserve Bank of Zimbabwe. So Bernanke may have been named man of the year in 2009. Gonoa was awarded the IG Nobel Prize in 2009 for giving people a simple everyday way to cope with a wide range of numbers by having his bank print notes with denominations ranging from one cent to 100 trillion Zimbabwe dollars.

6:53The aim of the Ig Nobel's is to honor achievements that first make people laugh and then make them think. But don't think Gono is lacking for self-esteem. When he was interviewed by Newsweek in 2009 and asked if he viewed his term as Reserve Governor as success, Dono responded, I am modestly credited with the survival strategy of my country. On the other hand, Mr. Bernanke can count on his friends to sing his praises. I shudder to think what the world would be like if Ben hadn't been running the Fed. Former Secretary Hank Paulson says, it's just hard to explain that yes, we're in deep doodoo, But we would have been in much deeper doo-doo.

7:49Now Mr. Gono is a relatively young man, 50 years old, started his career at national breweries. He joined the Zimbabwe Fertilizer Corporation when he was a young man. I don't know if that's significant, maybe. And then he went on into banking, which was a natural progression, of course, with Zimbank, which is operated, of course, by the government. He then went to the commercial bank of Zimbabwe and he became Zimbabwe President Robert Mugabe's personal banker. He was appointed to head the University of Zimbabwe Council. He was granted an honorary degree. Andono has a doctorate in strategic management from Atlantic International University after beginning his secondary education at Rapid Rewards College.

8:43So for those of you wanting to get into central banking, go start. You may want to start your career at Rapid Rewards. Meanwhile, Mr. Bernanke, on the other hand, has a doctorate degree from MIT, and he studied at Harvard. Now both central bankers embrace their humble beginnings. Gono told Newsweek, I owe a lot of my character and who I am today from my humble background. I was poor. I got to start making tea and keeping house. I'm a normal guy. I miss going to the supermarket. Bernanke grew up in a small town in Dillon, South Carolina, and he emphasizes his main street, Middle Class Roots. And his wife still makes him do the dishes and take out the trash.

9:31According to Time. And while Bernanke wears off-rack suits, owns a pretty nice four-bedroom townhome in Washington D.C. that he paid $839,000 for, his counterpart, Gono, lives in the richest suburb of career, Barrowdale Brook, in a 47-bedroom house down the street from President Mugabe's Now the Gono Residence, in addition to having as many rooms as a small hotel, has a glass swimming pool, a mini theater, landscaped gardens, and a gym larger than many of the houses in Zimbabwe's capital city. Gono also owns numerous farms that were of course confiscated by the Mugabe government.

10:21One is near Norton, which when the seasonal weather is dry, it draws clean water from a 25-mile-long pipeline linked to a reservoir. Now this is water that's supposed to supply water to the people of career. Gono also owns property in Malaysia. On the other hand, Chairman Bernanke lives a relatively modest lifestyle. He and his wife reportedly just own a Ford Focus for an automobile, while Governor Gono glides around in a 12-cylinder Mercedes Benz. So Gono would seem to be doing much better than Bernanke, who lives on a salary of less than $200,000.

11:07But Bernanke's employer, the Federal Reserve, is making money like, well, like they were printing the stuff. Last year, America's central bank made $52.1 billion, the highest in its 96-year history. The central bank made over $30 billion in each of the previous two years, after making $29 billion in 2006. This shows that central banking is a great business to be in, especially in a crisis, said former Fed official Vincent Reinhardt to the Washington Post. You buy assets that have a nice shield and your cost of funds is very low. The difference is profit.

11:53Low cost of funds? Well, I guess. Reinhardt leaves out that part about creating money out of nowhere to buy these assets. And while it's the Zimbabwean way for the head banker to take the central bank largesse for himself and build a private palace, in America the central bank builds work palaces for its economists around the country. Now before Gono moved into his place, he had extra security sensors that were installed on the outside perimeter, biometric iris recognition on the inside of his place, and fingerprint authentication systems were also fitted in the interior. But he still wasn't sure it was secure enough.

12:42By the way, the security at America's central bank locations is equally as tight. Now we have to be fair to Mr. Gono. This wasn't exactly great in Zimbabwe when he took over in 2003. At the time, the annual inflation rate in that country was 619 percent. In the interview with, before, Ankama with New African in the fall of 2007, with his country's inflation rate at 4,500 percent, Gono blamed the high inflation on the differences that Zimbabwe had with its former colonial master, the UK, and added, we are busy laying the foundations for a serious deceleration program.

13:32But the Gono deceleration program didn't end up being all that serious. By the end of 2008, the inflation rate exceeded 231 million percent. And at the time, the Times Online wrote, A police inspector's Christmas bonus last week was worth one American cent in the widely used parallel black market. So while Bernanke is worshipped in the US, the Zimbabwean people have been angry with Gono, even resorting to throwing rocks at the reserve bank building. And many in the rock-throwing mob were low-grade civil servants, by his prison staff who had been trying to get money for Christmas, only to find that the banks had run out of cash despite introducing, just that morning, new 1 billion, 5 billion, and 10 billion Zimbabwe dollar notes.

14:29Now, Gono believes that there is a, quote, positive correlation between the drought and inflation. And he pointed out in his 07 New African interview that the droughts have become more frequent. Instead of a drought every 10 years, the drought has persisted through much of the early 2000s and mid-2000s. Those aspects have got a serious bearing on our inflation level, Gono said. So forget about money printing. Inflation is all about the weather. Lack of support from other nations, political sanctions. In Governor Gono's mind, he's had nothing to do with the hyperinflation in his country. No other central bank governor has had to deal with the kind of inflation levels I have, Gono told Newsweek.

15:20The people at my bank are at the cutting edge of the country. But Ludwig von Mises anticipated Gono's claims years ago in a book called Economic Policy. The most important thing to remember is that inflation is not an act of God, Mises wrote. That inflation is not a catastrophe of elements or a disease that comes like the plague. Inflation is policy. Now Mr. Bernanke also feels his central bank has nothing to do with inflation. When he was interviewed by 60 Minutes, he said, well, the Fed is an institution that people don't hear so much about, but it's a very important one.

16:07It manages monetary policy for the country. It's one of the main tools we have for stabilizing our economy and keeping prices stable. Reminds me of Murray Rothbard, who quipped in his book, The Case Against the Fed, Murray wrote, the culprit solely responsible for inflation, The Federal Reserve is continually engaged in raising a hue and cry about inflation, for which everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts out shouting, stop thief, and runs down the street pointing ahead at others. So you need dams and irrigation equipment, But of course, the citizenry has not saved and accumulated capital because what they did save was confiscated by the government directly or inflated away.

17:03Well, Governor Gono has the answer. We are printing money to build dams and buy irrigation equipment, he explains. Combine that infrastructure and the abounding energy of our people to succeed, and you have the makings of an agricultural revolution that is bound to take us to levels not seen in our living memory. But Zimbabwe already had an agricultural revolution. It was once one of southern Africa's most prosperous countries. It was referred to as the breadbasket of Africa. Its Victoria Falls is one of the seven natural wonders of the world. The Zimbiti River boasts abundant wildlife and pulsing rapids, the country's lush soils, the envy of all of Africa.

17:50The country is said to hold 80 percent of the world's platinum deposits, and it also has huge natural gas resources. And along with natural gas and other commodities, the Zimbabwe population has a literacy rate Exceeding 90%. So what happened? Well, committed Marxists, Robert Mugabe took over in Zimbabwe in 1980, and besides running the printing presses, Mugabe and the Zimbabwe Parliament pushed through an amendment to their constitution allowing for the seizure of white-owned farmland despite voters turning the measure down just two months prior. Now, the country that for many years was a major food exporter to the region has a quarter of its citizens dependent on international food relief.

18:46And while Gono blames the heavens for being stingy with rain, an all-parliamentary committee warned before the start of the rainy season that production would be at an all-time low due to shortages of diesel, seed, fertilizer, chemicals, functioning farm machinery and skilled labor. Printing money with more zeros will not increase production, it's just the opposite. But Gono looks to America for inspiration. Look at the bridges across the many rivers in New York and elsewhere, Gono says. And the other infrastructure in the country that was built with high budget deficits. These are times when it is necessary to dig deeper and construct and reconstruct.

19:35Therefore, printing money to sustain lives, to build infrastructure and a springboard from which to lead forward cannot be bad, Gonoz said. Now, that sounds familiar. That's what the financial rescue of 2008 and 2009 was all about, right? Sustaining lives, especially those on Wall Street and in Detroit, and providing a springboard for consumption, spending on shovel-ready infrastructure and hiring census workers and all of that. And Bernanke's been celebrated for pulling the American economy back from the edge of the abyss with a massive expansion of its balance sheet and interest rates just north of zero.

20:21And now Washington and the Federal Reserve believe they can cure what ails American economy and the speculative binge that caused the financial meltdown with stringent regulation. That's what's needed. The London Times reports that in his pugnacious lunchtime speech in January, President Obama introduced a sweeping series of measures aimed at checking the behavior of banks, which will be the biggest regulatory crackdown on banks since the 1930s. Yes, the authorities in Zimbabwe have also been cracking down. There is a very high level of indiscipline and corruption in the Zimbabwean economy, Gono told Newsweek. I would enact tougher legislation that would ensure offenders would never do it again.

21:12Gono went as far as closing down the Zimbabwean stock exchange in the November of 2008, and said a couple months later, unless there is more discipline and honor, the exchange will stay closed. I can't be bothered. I don't know when it will open. And then Governor Gono commissioned a study. And you won't believe what this study found. The stock market has been traditionally one of the drivers behind Zimbabwe's hyperinflation. The stock market opened again in February 2009, but trading has been thin and only in U.S. dollars. One Zimbabwean businessman told the BBC, I don't even know if I'll have a job at the end of the week because there is so much uncertainty.

22:01There are so many companies closing down. It is quite interesting to see people going in banks with bags and sometimes even suitcases. You know that there are large amounts of money in there, which unfortunately will not buy very much. The things we buy, the groceries at home, the things that we get for our children, we have to buy immediately. As soon as we get the money, according to one woman, we know that if we wait, the prices are going to go up again. If we wait another week, we will not be able to afford anything. Now, as I said before, we're repeatedly reminded that Ben Bernanke is the foremost expert on the Great Depression. And he told 60 Minutes, the Depression was an incredibly dramatic episode, an era of stock market crashes, breadlines, bank runs and wild currency speculation.

22:58With the storm clouds of war gathering ominously in the background. For my money, he said, few periods are so replete with human interest. Bernanke believes that the Federal Reserve was too tight back then with monetary policy, making matters worse. Create more money and save failing banks. That's his prescription. Bernanke's counterpart in Zimbabwe has studied the same history, and guess what? He's come to the same conclusion. I am a student of economic histories of countries and I can tell you that what we are doing is not unique, Gono told New Africa. If you study carefully the history of the American economy, if you look at Chinese history, if you look at Russian history, British history and others, you will find that at some point they had to rely on their central banks.

23:51Bill Bonner wrote recently in The Daily Reckoning, Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Kenneth Rogoff and Carmen Reinhart show that when external debt passes 73% of GDP and 239% of exports, the result is default, hyperinflation, or both. IMF data shows the U.S. already too far gone on both scores, with external debt of 96% GDP, 748% of exports.

24:41To ensure that my people survive, I had to print money, Gono told Newsweek. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. The whole world is now practicing what they have been saying I should not. I decided that God has been on my side and had come to vindicate me. Well, Governor Gono may have God on his side while doing extraordinary things, but Chairman Bernanke has President Obama on his. When announcing the Fed Chairman's reappointment, the President cited Bernanke's background, temperament, courage, and creativity.

25:32So you might ask, what is Zimbabwe's inflation rate these days? Well, it's hard to know. But Steve Hanke, Professor of Applied Economics at the Johns Hopkins University, Senior Fellow at the Cato Institute, reports that as of November 14th, 2008, Zimbabwe's annual inflation rate was 89.7 sextillion percent. That's a daily rate of 98% with prices doubling every 24.7 hours. Since then, Hanke's not been able to update his index because the price data from Zimbabwe has deteriorated and it's unreliable.

26:23But imagine for a second, you save your whole life, you delay consumption, you save money to send your kids to college, your grandkids to college, live a comfortable life and have the government inflated away in 24 hours, cut it in half in 24 hours, cut it in half again in the next 24 hours. It's extraordinary what's going on. So Helicopter Ben's policies haven't yet produced the kind of price inflation numbers that Mr. Gono's policy have, but there's still time. According to our government's numbers, prices are going nowhere. But John Williams' numbers at shadowstats.com reveal that prices are rising at a 9.4% annual clip, despite the recession.

27:14Well, Mr. Gono's quotes, of course, are laughable, but hopefully the point is made that inflation is no laughing matter and hyperinflation is downright tragic. No other tool other than war can completely destroy an economy like inflation. Zimbabwe is living proof, happening right here, right now, in our lifetimes. and yet it's America's central bank that in many ways has served as the inspiration for Zimbabwean policies. The great Henry Hazlitt wrote, inflation is a twisted magnifying lens through which everything is confused, distorted and out of focus so that few men are any longer able to see realities in their true proportions.

28:06No two men are more confused and out of focus than Chairman Bernanke and Governor Gono.