By Monty Pelerin, on February 27th, 2010 Tough Guy Bernanke Blows Smoke
Fed Chairman Ben Bernanke appeared before Congress this week wearing his “bad guy” face. I did not watch his testimony either day. Apparently, based on news reports and blogs, nothing of significance happened on the second day.
The Washington Times reported on Bernanke’s Wednesday testimony:
With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.
“We’re not going to monetize the debt,” Mr. Bernanke declared flatly …
These statements are unequivocal. It will be interesting to see how Bernanke rationalizes his way out of this testimony. I don’t believe he can stop and pointed the reasons out in an AT post, Obama’s Ides-of-March Moment is Near on 2/24.
My guess is that Bernanke’s wiggle room will turn on something akin to what the definition of “is” is. It is likely to turn on a narrow definition of Quantitative Easing (QE) or “monetizing the debt.” The Fed considers monetizing the debt a direct purchase of newly-issued Treasuries. But QE, as monetizing the debt is known, can be performed indirectly and, I suppose, claimed to be not QE
Here is a simple example illustrating both direct and indirect methods that show their equivalence. First the direct example: Suppose the Treasury was to issue another $50 billion of debt and the Fed
Continue reading Tough Guy Bernanke Blows Smoke
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By Monty Pelerin, on February 25th, 2010 A Wall Street Journal article reported: “The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.” I had to read that sentence several times to try and understand what it said. I still have no idea what it means.
You see, if the Treasury were able to borrow money, we would not have QE (quantitative easing). QE is when the Fed, directly or indirectly purchases Treasury Bonds because others won’t. Furthermore, I cannot see anyway that setting this fund up will “make it easier for the Fed to raise interest rates when the time comes.” What has this fund to do with raising interest rates? Is raising interest rates a difficult thing? Does the Fed need help doing so. Possibly, but only because they are so out of practice. Isn’t raising interest rates so simple a Caveman could do it, without help from the Treasury?
I read through the entire article several times. There is no way to make any sense of this move unless you believe the Fed intends to continue its machinations of adding more questionable assets to its balance sheet. After all, that was what the program was originally intended for. If the Fed is truly done with stimulating, there is no need for this fund.
It is likely this is merely Fed “smoke” or duplicity. I do
Continue reading FED Bunkum
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By Monty Pelerin, on February 24th, 2010
In Jimmy Carter’s reign, the Wall Street Journal editorialized about “Ratcheting to Ruin.” The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. “Stagflation” was coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.
Thirty years later Keynes is back in vogue, Obama has ascended to the White House and times are again reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference – Carter did not face an “ides of March” event.
In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the Ides of March.” The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.
Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.
Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this year
Continue reading Obama’s “Ides-of-March” Moment is Near
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By Monty Pelerin, on February 20th, 2010 Great hoopla over the Federal Reserve’s surprise decision to raise the discount rate 0.25 % fills the media and the markets. Pundits discuss earnestly the spice has been added to the tea leaves. Barry Ritholtz lists three possible motivations behind the Fed’s move:
Response to political pressures;
Proof the Economy is improving;
Inevitable ending of extraordinary accommodation.
The relevance of number 1 can be discounted rather quickly. Where could the “political pressure” come from? Other than lip service around election time, Congress never demands fiscal or monetary responsibility. It could refer to “hawks” on the Fed board, but they would not overrule Bernanke on anything substantive, which this move wasn’t. Thus points 2 and 3 appear to be possible motivations.
The rate move was miniscule. Its size precluded it from having any meaningful economic effect. Thus, it must be interpreted as a “signal.” But was it a signal meant to deceive? That is, was the move a “feint?”
The Fed traditionally sends a signal in advance of taking more serious economic measures. The rationale for a warning is to prepare markets for what is coming. It is believed that markets then adapt somewhat in advance of the future, stronger actions. This move was not a signal. As stated by John Williams of Shadowstats.com:
… the Fed has virtually no room to tighten credit in a system where the real (inflation-adjusted) broad money supply is in severe annual contraction, and where general bank lending into the flow of commerce is not adequate to maintain economic growth.
Continue reading The Fed Feints
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By Monty Pelerin, on December 28th, 2009 Our ability to fund our deficits and fixed income needs ended last year. The Treasury market is perhaps the biggest bubble yet to burst. It is highly probable that this bubble reached its zenith and started to deflate 2009, propped up only by extensive and surreptitious quantitative easing.
It is nearly certain that it bursts in 2010. When it does, our economy stops functioning, at least in what most would consider a normal manner.
Zerohedge provides an excellent analysis of the situation (red emboldening added by me):
Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold… Or Else
Submitted by Tyler Durden on 12/25/2009 17:31 -0500
As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our ‘intellectual superiors’ and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 – the biggest ever bonus season (forget record bonuses in 2010… in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).
If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the
Continue reading Treasury Bubbles About To Burst
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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