"He's not kidding about printing money"

Fed Chief Ben Bernanke's appearance on 60 Minutes last night was notable for a number of reasons, the most important of which, in my view, was the rather casual commentary about "printing money" and "inflation" that may come back to haunt him. Here's the video:

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It's a generally positive piece in which Bernanke goes a long way in "demystifying" the Fed and, of course, the headlines that were generated as a result all had something to do with his predictions for the end of the recession (probably this year).

But, it was the money printing sequence that captured my attention.

From the handy transcript (at about the eight minute mark in the video above) comes the following interchange with Scott Pelley:

Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

He's not kidding about printing money: the Fed issues U.S. currency, which is why it says "Federal Reserve Note" on all the bills in your wallet. The Treasury Department's Bureau of Engraving and Printing is just a few blocks from Bernanke's office. It prints the money at the Fed's request.

The Fed's mandate from Congress is to put enough money in the system for maximum employment, but not so much that it sets off inflation.

While few are giving much thought to what might happen when the actions taken by the Fed over the last year or so are reversed, at some point, that will become a critical issue.

Mindful of the "baby-steps" by his predecessor in 2004-2006 and aware of past precedent where too eager a response during a nascent economic recovery had snuffed out that recovery (such as in 1937), it is not likely that the central bank will err on the side of reining in their excesses too quickly due to inflation concerns.

That's when things will get really interesting.