Ben Bernanke's 2 a.m. phone call.

• Author: Smick, David
• Position: FROM THE FOUNDER

BERNANKE: Who is this? It's two in the morning! Oh, Mr. President. Congratulations on killing bin Laden.

OBAMA: Yeah, but I'm really worried about the economy. QE2's worked; market's up nearly 15 percent, but ...

BERNANKE: Don't bank too much on further help from the Fed, Mr. President. The era of free money is almost over. In the first quarter, we printed $504 billion new dollars. Got a miserable $34 billion jump in GDP. We'll keep interest rates low for a while longer, but that's killing the dollar and helping commodity prices soar. In a speech, the New York Fed president tried to argue that core inflation's still low--the price of an iPad's dropped. Someone in the crowd yelled: "We can't eat iPads."

OBAMA: So our long bond's in trouble?

BERNANKE: Here's the thing: The world's public and private debt's a whopping 300 percent of GDP. We hold a lot of it. Central banks can't prop up debt markets forever. The risk is a downward worldwide adjustment--a global mark-to-market--in living standards and a crashing dollar.

OBAMA: Whoa, let's back up. Isn't the weak dollar helping our exporters?

BERNANKE: Sure, for a while, and some dollar weakening allows foreigners to buy lots of our stuff here--hotels, stocks, land, even Park Avenue apartments--at attractive valuations. But if investors conclude the weak dollar will lead to higher inflation, watch out. They'll fear their dollars could lose both global and domestic purchasing power. The greenback could go into freefall. Assuming we don't have a double dip, our interest rates could soar.

OBAMA: Aren't you exaggerating?

BERNANKE: Some analysts think the dollar has already crossed the Rubicon. When the financial crisis hit, global investors poured into U.S. Treasuries as a safe haven. The dollar strengthened. But since then, look at the response to Libya, Tunisia, and Egypt. All the traditional safe-haven assets strengthened: oil, gold, the yen, the Swiss franc, even the euro, but not the dollar.

OBAMA: What's this mean?

BERNANKE: It means at least two things--the world suspects I don't have the guts to preemptively fight inflation (they're wrong)--and that you have no strategy for getting our GDP out of the basement. Ultimately, the world thinks we're going to let inflation eat up our debt and sell out our creditors.

OBAMA: That's ridiculous.

BERNANKE: Look at the numbers. As a result of the financial crisis, U.S. median household net wealth dropped by 20 percent to $98,000. Median household income...