As the
election year frenzy whips up, the Federal Reserve is target numero uno for the
emotional base on both sides of the political spectrum as cannon fodder to gain
votes, with the global economy at stake. Adding yet one more headwind for a
fragile recovery and a bug in the margarita of the mostly under rated and
brilliant Central Bank Governor Ben S. Bernanke.
Monetary Policy
The forecast
for interest rates on this blog have been exactly right so far. It is now
become patently clear how long the Gov will keep them low, since he now sets up
a time frame for his policy instead of just language that everyone can debate
to utter oblivion and confusion.
If one wants
to have more than a drive-by understanding of how Ben Bernanke has used his
arsenal of tools up to this point to re-write the text books, one need look not
much further than his speech to the National
Economists Club in Nov. 2002. A speech many would seem correct in saying is
likely the reason he was appointed by a horse smart President from Texas .
While an alphabet soup channel
understanding of the maneuvers of the Federal Reserve Bank both past and in the
future are far more sensational and conducive to ratings and the Cassandras` of
the world; this perspective is not only physically unhealthy since it causes so
much stress, it is fairly ill informed and not a very accurate take on Central
Bank Policy from my position in the drive-by theatre.
This sort of polarization has only
served to elect leaders who are willing to use emotion and omission to gain
constituent favor. With the end result being bubble burst after bubble burst
for decades and a declining standard of living for Americans as collateral
damage.
On the bright side: globally more people have risen
out of poverty in recent history than ever before. If one happens not to believe this fact, one
must use some basic reasoning and math skills and draw a simply obvious
conclusion. An inability to be able to make this kind of judgment is concerning
and dangerous. It not only shows a lack of critical thinking, it demonstrates
in a nutshell how the dumbing down of America has been a resounding
triumph for propaganda monopoly.
Now let’s look inside the mind of Gov. Ben by simply
examining some parts of this speech in the autumn of 2002 that he made. A
speech that outlined every step he has taken up to this point and clearly
explains what he will do next.
In this speech Bernanke said the
following when describing one of the tools he would use in the various steps he
would take to fight deflation that reveals with a fair degree of certainty
exactly what his most recent operation has been, and at what stage we are at in
his series of steps he described in this speech:
“… For the Fed to commit to holding the
overnight rate at zero for some specified period…”
This
is a very easy reference point, a sign post that one can easily recognize as
one of the Gov.’s most recent actions that almost everyone knows about if they
follow interest rates to some degree. These days the number of folks doing this
is quite a few, since many are watching the housing market as either first time
buyers looking to buy that first home, or those who are trying to refinance,
and as an indicator of the economy and confidence.
If
the US
economy is the Professor’s laboratory, the mad scientist must be feeling some
degree of satisfaction at this point. In his speech, the Gov. explains his
theory on the application of agency tools and their effects on deflation and
the steps he would ideally follow to combat it. While quite difficult to grasp
in my opinion, one of the things I pull away from it is the idea that his
theory if executed properly will always stop deflation, but more importantly
that not everyone agrees with this concept despite historic precedent that
seems to support the Gov.’s hypothesis. The current empirical results of real
world applications and executions of the methods modeled in his speech by him
and his predecessors show the evidence is in his favor at this time.
If
one doubts this reality, they just need to put things in perspective, use some
simple reasoning and math skills, and the facts will become clear to an open
mind.
I am not going to take any time out in this
forecast to defend the emotionally unstable notion that the US economy is in a
depression, a double dip, or that it is ,”..Just about to go over the cliff any
day now...”.
I am certainly tired of hearing the partisan
spin from both sides that everything has been done wrong and only made
everything worse. However true that may
be, the fact is we are not contracting as much as one would expect by now. The
fact is there is growth in the economy, and it is enough to keep us with our
head above the water as the economic data flow proves.
But,
if your one who thinks everything about the data is not real, then it is not
possible to believe the data. But then that only leaves you with pretty much
one thing left to believe in which granted is very lucrative; but also
dubiously healthy, which is fear.
So since we know that the Gov. is
going to keep rates fixed for a predetermined amount of time, we can then look
to his next comments for a clue as to his next actions, or even actions he has
taken but may not be widely or easily known by most:
“…For the Fed to begin announcing explicit
ceilings for yields on longer-maturity Treasury debt… “
He has done this in what is widely known as Operation Twist , whereby the FED has been
buying the US debt. As one can imagine, this operation has been the subject of
a great deal of propaganda for the masters of spin and the architects of the
convenient truths who use emotion and omission to keep the politics distracted
and in the gutter, appealing to the worst in everyone.
The fact yields are falling and not rising appears to me to
be the crown jewel of evidence supporting the Professor `s deflation theories.
A fact that would have the Doc getting giddy with excitement as the laboratory
results continue to stack up in support of his thesis. Indeed, if the world was
a fair place in my opinion, the Gov. would be awarded a Nobel Peace Prize for
his contributions in economics not to mention policy. But as I will explain
shortly, it has become very clear to me after reading this speech, why feelings
about him are so polarized.
But lets first take a look at a couple of other steps the
Gov. would take after purchasing shorter term Treasury debt:
“Of course, if operating
in relatively short-dated Treasury debt proved insufficient, the Fed could also
attempt to cap yields of Treasury securities at still longer maturities, say
three to six years.”
This
is just an extension of Operation Twist spun as many disappointed propagandist
and gold bugs claiming the Gov. is out of options as “Shout”. The Gov. is far from out of
options at this point, and here are some of the reasons why as the Gov. goes on
to explain:
“…the Fed has the authority
to buy foreign government debt, as well as domestic government debt… the
quantity of foreign assets eligible for purchase by the Fed is several times
the stock of U.S.
government debt”
This
is the bazooka with a silencer in the FED`s arsenal, and if everyone catches on
to and becomes aware of it, will cause the rabid base to cry foul and every
possible conspiracy under the sun. Even more entertaining to those in the
“know” like traders is the fact this is already being done.
So
what does this mean exactly? I am no expert and my analysis is certainly not
the final insight, but it would appear to me that the FED has the ability to
purchase several times the amount of US debt in foreign securities! This
is truly a mind numbing idea in my opinion. Let’s just say for example that the
US debt is only 4 trillion, this means the FED could be the purchaser of nearly
30 trillion in foreign debt! No wonder the ECB is so resistant to being the
lender of last resort; there already is a global lender of last resort: the
FED.
I wonder about this and its implications. Does
this mean the FED basically has an unlimited balance sheet? Not needing
approval by anyone? Not even the President? Furthermore, that it is not even
transparent so as not even known by anyone outside the FED? I would not even be
surprised if there are built in charters amongst the various Central Banks that
protect the supremacy of the FED. After all they invented this fiat system. It
is also a fact that the ECB charter is very limited, I can`t help but think
this is a hangover from WWII and how fearful the world has been ever since of global
currency denomination domination by the German Central banks. This is not
conjecture, it’s a fact all wars have been fought over the dollar and its
standing vs. other banks in the world; from WWI and Iraq, to Libya.
So
given the fact that QE3 is actually already underway in the form of stealth
operations by the FED and world Central Banks, and is going to continue for
quite some time it is only a wonder why many folks can`t believe the Gov. when
he says the following since he is in fact already doing this by purchasing
securities foreign and domestic:
“…intervening to affect the exchange value of
the dollar is nowhere on the horizon today”
“A striking example from U.S. history is Franklin Roosevelt's
40 percent devaluation of the dollar against gold in 1933-34, enforced by a
program of gold purchases and domestic money creation.”
The Gov. is devaluing the dollar,
and I think he plans to continue this as long as the economy stays in
deflation. According to the quotes
above, the historic precedent for devaluation was 40%. I think that the Gov. is
trying to say that it will likely be the case this time as well.
Next in the speech by the Gov. he
explains what could only be described as QE4 and flies in the face of the
global liberal agenda to hike tax rates across borders and shows how those
waiting on QE4 might be waiting for a long time indeed. But it is beyond the
horizon at some point as the global political gears continue to mesh and churn.
It also explains why he is so polarizing:
“…of course, in lieu of tax cuts or increases in transfers the
government could increase spending on current goods and services or even
acquire existing real or financial assets. If the Treasury issued debt to
purchase private assets and the Fed then purchased an equal amount of Treasury
debt with newly created money, the whole operation would be the economic
equivalent of direct open-market operations in private assets…”
“…policy options I have
discussed so far involves the Fed's acting on its` own. In practice, the
effectiveness of anti-deflation policy could be significantly enhanced by
cooperation between the monetary and fiscal authorities. A broad-based tax cut,
for example, accommodated by a program of open-market purchases to alleviate
any tendency for interest rates to increase, would almost certainly be an
effective stimulant to consumption and hence to prices…”
The
best way to describe all this is “stealth socialism” in my opinion. But to be perfectly honest, it’s a bit over
my head at this point. I think as time goes by these statements will become
easier to understand. It is safe to figure that at this point these policy
maneuvers are not being exercised. If I
understand this part of the speech correctly these policies would be recognized
as a tax cut by the fiscal authorities, and an increase in government spending.
Neither of which has happened yet depending on whom you ask. I happen to be
living in the very real world of Government cut backs and see and hear of the
effects on a daily basis. A trend I expect to see for a long time to come. Not
only would we need to see a very publicized increase in public spending, but
this increase in demand on goods and services by the Government would also be
accompanied by an equal amount of FED purchases in the private sector. But it
has to be pointed out, that all of these measures were in effect taken during
the Great Recession in the form of extending the Bush Tax cuts, TARP and the
American Recovery Act.
GDP
If China is
to overtake the US economy, they will have some Ghost Cities to show
for it. While everybody in 2011 was looking one way across the Atlantic to the
Euro crisis, from behind in the other direction across the Pacific was another
big story of this coming decade: the China charade. Americans know very little
about this great country except that they respect and fear it in many cases.
According to my own writings of the last few years by the year 2012 the
economic recovery would be derailed by bad debt, energy and foreign policy.
This has begun to pan out as the Arab Spring solidifies into a deep freeze
against America and Israel. My take is that if the Super Majority that came in
on the tide with the election of 2008 had not been paralyzed by the health care
heist, we would be on our way to a very certain and prosperous future. However
the US economy continues to resists another downturn according to data releases
in 2011. As a result I expect to see US GDP come in between 1-2% again this
year. Last years forecast was the same and it is turning out that 2011 GDP is
expected to come in right at the middle of the road at 1.5%
Dollar
The reports
out of the Middle East about possible dangers to global oil supply are ongoing,
developing, and gestating into a plethora of ingredients for the perfect storm.
As a result Oil will be supported at 90 a barrel this year. We are very close
to seeing a surge past 120 if policy continues to be so flippant. Gold is in
correction until the market finishes realizing that the fight against deflation
is here for a while, and the Eurozone crisis is dealt with. I think gold is
well supported around the current levels and won’t be surprised to see it be
very volatile with a swing lower to 1150-1350 but still make another run to
2000k this year. I personally am not as confident of the long gold trade this
winter as I have been for the last few, but am pretty sure it will be a good
buy again before next winter. The stock market is technically poised for gains
this year, with valuation placing it around 1350. It will remain volatile and
capped as long as the Eurozone crisis is not satisfactorily resolved.
Politics
The
GOP nomination process will continue to be a thorn in the incumbents` side,
having the potential to derail the longer term strategy the left has to keep
the current President in power. That strategy is one of apparently having a
rhino nominated in the GOP Primary, continued economic improvement, and perhaps
an ace in the hole is another war, then pulling yet another one of the plays
from the Bush playbook: “… stay the course…”.
On the other side for the GOP, the improving economy is diminishing
their chances at unseating the incumbent. It is also becoming clearer that the
assumed GOP nominee will not be able to win the General Election because of a
host of reasons not the least of which is simple stereo types that the majority
of voters will never let go of. The opinions on this good man on the street are
unfair to say the least, and are bigoted at best. The curve ball is still yet
to come, if Rick Santorum gets folks attention we may avoid the fiasco of a
third party candidate and give this nomination something less than a rabble
rousing contest and an actual throwing down of the proverbial conservative
gauntlet at the liberals.
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