WHAT’S RATTLING the financial markets? The US dollar appears to be collapsing, the gold price has soared to its highest levels since the great inflation of the 1980s and stockmarkets all over the world are in a swoon.

For once, this question is fairly easy to answer. Two things are worrying investors and both are “made in America”. But no, they are not the dreaded “twin deficits” — the $800 billion US trade deficit and the $600 billion government deficit. America’s national debt is smaller, relative to national income, than any other leading economy’s apart from Britain, so government borrowing has nothing to do with the weakness of the dollar. Neither does the trade deficit, for reasons that can be summarised in a single observation: the US trade deficit has been consistently denounced as “unsustainable” since 1980, yet it has been sustained since then without any trouble and without impeding America’s world-beating economic performance or diminishing the dollar’s long-term value at all.

What, then, is the real trouble? The answer is much less abstract. In fact, it can be reduced to just two names: Ben Bernanke and George W. Bush. President Bush is a familiar villain, so I will deal with him in a few words. Mr Bush’s diplomatic incompetence and his myopic energy policies have hugely boosted oil prices, enriching and empowering anti-American regimes in Iran, Venezuela, Bolivia and Peru. As a result huge sums of money are flowing out of the dollar into the euro and the pound — and this process will probably continue until Mr Bush leaves the scene or the value of the dollar falls so far that it becomes an irresistible bargain to other investors.

I suspect that this point is not far away, but it will depend on my second scapegoat — Professor Ben Bernanke, the newly appointed chairman of the US Federal Reserve. Mr Bernanke is one of the world’s most prominent academic economists and he was the worthiest successor imaginable for Alan Greenspan, the truly irreplaceable Fed chairman, who had steered the US economy throughout the two glorious decades from 1987 to 2006. But Professor Bernanke turns out to have had a character flaw that should probably have been expected in such a brilliant academic: he is not just clever; he is too clever by half.

Soon after taking the helm at the Fed three months ago, Mr Bernanke decided he would improve on Mr Greenspan’s notoriously convoluted and Delphic statements on monetary policy — a verbal technique epitomised by Mr Greenspan’s celebrated response to a politician who thanked him for being so clear in explaining the economic outlook: “If that was your impression, Senator, then I’m afraid you must have misunderstood me.” Mr Bernanke, by contrast, has tried to dispense with such obfuscation and offer clear guidance on the future direction of interest rates.

He started off by emphasising, quite rightly, his strong belief in the Fed’s dual mandate: to maintain price stability and achieve the highest possible rate of economic growth. He then promised to call a halt to monetary tightening and do everything to keep the economy growing, even if inflation continued to accelerate “temporarily” in the months ahead. When currency and bond investors, whose wealth is decimated by inflation, quite predictably took umbrage and started selling their dollar holdings, Mr Bernanke quickly changed his tune and started presenting himself as an aggressive inflation-foe. He then “clarified” this apparently hawkish message by repeating that he might call a “pause” in the Fed’s rate hikes if that was what the economic statistics dictated.

The revelation that future monetary decisions would depend on economic data should have come as no great shock to the financial markets, since this is what the Fed has always done. But by making his intentions so explicit, Mr Bernanke thought he could simultaneously please inflation vigilantes on Wall Street and Washington politicians who are demanding faster growth and more jobs. The culmination of this Janus-faced approach came last Wednesday in the carefully crafted communiqué after the Fed’s monthly meeting. By adding the single word “yet” to the previous communiqué — “some further tightening may yet be needed” — Mr Bernanke seemed to think he could convey the dual message that the Fed would pause in its rate rises to avoid any danger of an economic slowdown, but simultaneously that it would do whatever was needed to keep inflation under control.

In the event, this approach achieved exactly the opposite result — undermining confidence in the dollar and US financial markets, while intensifying the political pressure on the Fed to refrain from any further increase in interest rates. The trouble with such ambiguity is that it could deliver the worst of both worlds: an economic slowdown and an inflation scare. US inflation is now at its highest level for a generation and is creeping steadily upwards, while gold prices are soaring, bond prices are falling and the dollar is weakening against every other currency in the world.

In other words, investors seem to be losing faith in the Fed’s willingness to maintain the value of the dollar. If Mr Bernanke decides to stop tightening while inflation is still moving upwards, we could well see financial markets decide to test the new Fed Chairman’s mettle — just as they tested Mr Greenspan with the stockmarket crash of 1987 and Paul Volcker with the collapse of the dollar and explosion of gold prices in 1981.

I am convinced that the Fed will eventually pass this test, that any US inflation scare will turn out to be a minor hiccup and that the dollar will, in time, re-establish itself as the most trusted currency in the world. A year from now the dollar will almost certainly be stronger than it is today against the euro and the pound and gold will be valued again for its usefulness in dental fillings, rather than its monetary magic. But first, investors will have to be persuaded of the Fed’s ability to control US inflation — and of Professor Bernanke’s ability to control his words.

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