The Bernanke Rally?

Bravo Bernanke for telling the screaming markets to go to bed without their supper.

There can be no justification for QE3 at a time when core inflation is creeping up to 2pc.

Nor when the M2 money supply is growing at 10pc, or M1 growing at 20pc, or credit is at last returning from the dead and turning positive again. Credit has accelerated to an 8pc annual compound growth rate over the last three months. And remember, Bernanke is a “creditist”. Lending is his lodestar.

Quite why markets seemed so assured that he would intervene to prop up Wall Street is beyond me. It shows how deranged this game has become.

Bernanke looks at fundamentals, which include the wealth effects of Wall Street as just one variable. His real enemy is deflation and the Japan syndrome, though he has been remarkably bad at articulating this.

As he said in Jackson Hole, the economy is very slowing healing itself in spite of fiscal tightening (some might even say because of it). Indeed it is. US corporations are sitting on $2 trillion. Households are chipping away at their debts (admittedly by defaulting on mortgages in many cases, but that too is debt clearance).

I have a hunch that Bernanke’s first hints of cautious optimism may prove better rocket fuel for a durable rally than the Fed’s body-language of despair, whatever the markets say over coming days.

Nobel laureate Edmund Phelps advised the Fed should keep its “finger on the trigger” just in case the deflation threat returns, or Euroland blows up, or the world takes another nasty turn.

Europe may indeed blow up. The German constitutional court will rule on Sept 7 on the legality of the EU bail-outs, and that might be a moment to fasten your seatbelts.

What is ever clearer to me after spending a few days in Germany again is that the Bundestag is in no mood to increase the EFSF rescue fund by one pfennig beyond €440bn, let alone contemplate the €2 trillion figure deemed necessary by City banks. Which means Italy and Spain will be left to their fate once the ECB’s bond buying hits the limit (October?).

But the Fed cannot set policy on the basis of EMU contingencies. It sets policy for America, and America is not as sick as it looks.