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Ben motors at 60mph – In reverse!

Bruce Krasting's picture




 

Senator Shelby asked Bernanke to explain how he came to the $600b QE2 program. The answer came at minute 32 of this C-SPAN
clip. Ben explained that he felt that a monetary ease equivalent to a
75 BP reduction in the Fed Funds rate was in order to avoid deflation.
He equated $150-200 billion of QE as being equivalent to a 25BP
reduction in short term rates. The justification for QE all along has
been that monetary policy is range bound by zero interest rates. QE
brings us below “0” in equivalent policy.

The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion.
Using Bernanke’s formula you get a range of 4% to 5% as the approximate
interest rate consequence of QE. (2.35/.15 or 2.35/.2)

That is an extraordinary number. The Fed’ ZIRP policy set interest rates
at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.

I don’t think that this has ever happened before in the USA. The
examples I can think of in history outside of the US all ended badly.
Ben has set monetary policy so that interest rates are 5-6 % below
inflation. There can be only one possible result.
Inflation of everything we use is going to explode. Food, clothes,
energy, transportation, ball bearing, plastics, you name it. The only
thing that is not going to get inflated is wages and residential real
estate. Cheap money will not fix structural problems.

I was glad that Ben put a number on what he has done. I didn't think it
would be as big as it is. It’s so big that it is irreversible. That’s
not what Ben has been contending. We are going to find out before the
year is up. Mean time if you think there is a connection between rising
commodities prices and global political turmoil, get your seat belts on.
Inflation is just now rearing its ugly head. This boat could not be
turned around in less than a year even if all engines were in reverse.
And Ben has it on Full Speed Ahead.

 

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Tue, 03/01/2011 - 19:10 | 1009297 Bob
Bob's picture

Nice, Bruce! 

Tue, 03/01/2011 - 17:47 | 1009030 monopoly
monopoly's picture

Well done Bruce, as usual, and spot on.

Tue, 03/01/2011 - 17:41 | 1008995 aerial view
aerial view's picture

nice review Bruce. I wonder if Benny remembers what stagflation is? Maybe we should ask his brilliant Princeton economic professors.

Tue, 03/01/2011 - 17:36 | 1008969 What_Me_Worry
What_Me_Worry's picture

He is on a level so far above double-speak now.

So, using his logic, does the effect of 25bps/$200B stay until that money would be retired?

Tue, 03/01/2011 - 19:52 | 1008930 malek
malek's picture

Thanks for pointing this out, BK!

Tue, 03/01/2011 - 17:11 | 1008824 max2205
max2205's picture

my balls need bearing

Tue, 03/01/2011 - 17:07 | 1008803 artinlight
artinlight's picture

Anyone hear Ben's answer to DeMint about using Gold Bonds as a form of standard or boundries for the currency? 

Ben:

"There is not enough gold for the current amount of money supply"

WHY WAS NOT THE NEXT QUESTION:

"What if Gold was $100,000 an ounce?"

 

Tue, 03/01/2011 - 16:49 | 1008682 GOSPLAN HERO
GOSPLAN HERO's picture
"Stripped of all its covering, the naked question is, whether ours is a federal or consolidated government; a constitutional or absolute one; a government resting solidly on the basis of the sovereignty of the States, or on the unrestrained will of a majority; a form of government, as in all other unlimited ones, in which injustice, violence, and force must ultimately prevail." -- JCC
Tue, 03/01/2011 - 16:44 | 1008662 GOSPLAN HERO
GOSPLAN HERO's picture

The USA is living on borrowed time.  THE UNION IS DISSOLVED!  Sounded good in 1860.  Sounds even better today.

Tue, 03/01/2011 - 16:41 | 1008628 Racer
Racer's picture

Welcome to Weimar World Genocidal Benron style

Tue, 03/01/2011 - 15:55 | 1008320 kaiserhoff
kaiserhoff's picture

Nice catch, Bruce, and a good analogy.  The world doesn't have much experience with sharply negative interest rates, but Japan Inc. is not encouraging.

We may get sharp inflation, as most here suspect, but watch the delta.  What happens when Ben eases just a little on the accelerator?  That, I think, will be the tell.

Tue, 03/01/2011 - 16:34 | 1008585 Common_Cents22
Common_Cents22's picture

This is the problem w/ the current strategy.   Bernanks is a noose around our neck slowly pulling us up off the ground, but meanwhile there is a trap door beneath our feet that could open at any time.  Both will be trouble.

 

the inflation we are experiencing is that of monetary debasement and lack of confidence in paper.   It is not inflation which is getting to banks that are lending to businesses and growing via fractional reserve.  It is getting horded and piled up with the big elite banks.  People are not bidding up commoddities because their is growing demand but rather they are seen as alternate store of wealth.

 

We have stagflation and hollowing out of incomes and the ability for the average American to get credit and create a job or two.   that is the trap door in the floor that will open at some point ushering in great recessions.

 

that is what makes investing tough in this scenario.  Potential for great whipsaws of inflation and depressions.

Tue, 03/01/2011 - 17:39 | 1008992 JimS
JimS's picture

Well stated concept.

Tue, 03/01/2011 - 16:27 | 1008544 Amish Hacker
Amish Hacker's picture

Did Thelma and Louise ease off the accelerator?

Neither will Spanky, with the same results.

Tue, 03/01/2011 - 16:40 | 1008619 Milestones
Milestones's picture

Excellent analogy!!          Milestones

Tue, 03/01/2011 - 15:46 | 1008283 Greater Fool
Greater Fool's picture

Looks like Stimpy has not been guarding the History Eraser Button very well.

Tue, 03/01/2011 - 15:40 | 1008251 nathandegraaf
nathandegraaf's picture

Thanks for turning his BS into real numbers.  I had asked that question earlier today on ZH and now I get an answer.  This site is awesome.   

Tue, 03/01/2011 - 15:20 | 1008170 Common_Cents22
Common_Cents22's picture

Slimey Schumer interviewed the Bernank like a lawyer questioning his own witness.

 

Schumer got The Bernank to say not raising the debt limit will be "CHAOS".  Immediately CNBS blurbed the sound byte "not raising debt limit will be CHAOS!"  

 

Next. Schumer got the Bernank to say any cutting of govt spending will hurt GDP.

 

so now, we will be unpatriotic if we mess with growing government. 

 

What nobody asked the Bernank, nor did he, the scholar, mention anything about Thomas Sowells important question.    "at what cost?"

 

I'd only think this conspiracy would be made up in hollyweird.  truth is stranger than fiction.

 

Hey, but no worries, the Bernank is smart!  Just like Obama!   A handful of smart people telling us how to live our lives because they know better.    ummm Fail.

 

Chilling stuff, truly.

Tue, 03/01/2011 - 16:14 | 1008449 Problem Is
Problem Is's picture

Big Fan of Schmucky Schumer...
Any guy who goes direct to the Lipstick Building to give a rousing speech to Bernard L Madoff Investment Securities and then collect beaucoup campaign bribes...

Is my kind of bought and sold Congressional PIMP.

Tue, 03/01/2011 - 15:42 | 1008262 Captain Willard
Captain Willard's picture

++1000! You nailed it.

If it were common stupidity, I think I could accept it. But it's the hubris he displays! And the Senate goes right along.

"Living within our means..." : CHAOS

"Accepting the limits of monetary policy.....": FAIL

"Managing the withdrawal of liquidity.....": 100% Certain 

etc. etc. etc.

Bruce nails it too, although it's more like 100 MPH and it's going to be an ugly wreck.......

Tue, 03/01/2011 - 15:16 | 1008152 AN0NYM0US
AN0NYM0US's picture

why 60mph?

Tue, 03/01/2011 - 17:46 | 1009027 JimS
JimS's picture

A mile in one minute's time. A hell-of-a-lot can happen in one minute's time. Although a crash at 100mph is really ugly.

Tue, 03/01/2011 - 15:14 | 1008148 HitTheFan
HitTheFan's picture

I like the way Bruce ignores the rise in yields over the past 6 months. Why doesn't he add that into his little equation?

Also, we've seen this before in 2008, a bubble that bursts violently, and then we're back into deflation again.

Scaremongering nonsense, sadly.

Tue, 03/01/2011 - 18:30 | 1009185 Assetman
Assetman's picture

Actually, I think Bruce is closer to the truth here...

While ZIRP is clearly a policy closer at the short end of the curve, it makes little sense for the Fed to directly press the short rates below zero-- that would be too direct a subsidy to the financial sector. 

And it does absolutely nothing to subsidize irresponsible fiscal (government)spending, anyway.

So it is true that the Fed has effectively intervened in the longer end of the curve.  Otherwise, I agree that yields would be even higher.  Primary dealers (banks) get the benefit of flipping the spread (which should be pretty good, knowing that the Fed isn't concerned about price).  And since banks know the game being played by the Fed, can front run the equity market and compressed quality spreads in corporate bond market.  Still a sweet way to make money off the backs of others.

Actually, I thnk it's a very stealthy (and clever) way of getting effective rates well below zero, as a bank can still borrow near zero and get paid to front-run risk in a manipulated market.

I agree with the point that bubble SHOULD burst, but why should higher inflation stop Ben this time around?  There's a huge financing need (the remaining budget deficit) staring Ben straight in the face.  Do you think he will bother to quit monetizing, just to see interest rates spike to the moon, and the stock market crash as a nasty consequence???

Not on your life... these bozos actually think that gunning higher equity prices with ES purchases is a sign of the economy getting better.  As long as distorted economic stats point to tame inflation expectations, all is good-- and policy can stay effectively below zero for a little while longer.

The inflation the rest of us are seeing is simply a series of taxes we are all paying to compensate for the sins of the corrupt.  Prices go up.  Middle class wages don't.  The employment situation looks incrementally better, but we are either effectively making less-- or are getting supplemented with government subsidies.  Since so many of us are on financial morphine, Ben should probably keep on doing the QE illusion trick until there are protests in the streets.

Tue, 03/01/2011 - 17:10 | 1008822 Panafrican Funk...
Panafrican Funktron Robot's picture

A rise in yields in the secondary market, in Uncle Benz's world, doesn't fucking matter.

Tue, 03/01/2011 - 15:50 | 1008302 Bruce Krasting
Bruce Krasting's picture

My equation? These are Ben's words. Fresh from today. If you're afraid of those words don't blame me. Blame Ben.

Tue, 03/01/2011 - 16:11 | 1008428 Problem Is
Problem Is's picture

Ben's Equation:

"I know what I am doing..."

<Lip Quivers Here>

Tue, 03/01/2011 - 15:10 | 1008133 economessed
economessed's picture

Nice ending with the Banksy monkey!

Tue, 03/01/2011 - 15:44 | 1008271 Bruce Krasting
Bruce Krasting's picture

Love Banksy. This probably 1mm worth of art.

Tue, 03/01/2011 - 15:02 | 1008102 piceridu
piceridu's picture

Janet Yellen...  "If it were possible to take interest rates into negative territory I would be voting for that." I guess she got her wish.

Thanks Bruce again for great analysis!

Tue, 03/01/2011 - 15:00 | 1008089 USGrant
USGrant's picture

The one good thing about the initial stages of a currency collapse: it makes picking the right investments like shooting fish in a barrel.

Tue, 03/01/2011 - 14:53 | 1008057 Hedgetard55
Hedgetard55's picture

I levelled the MAC 10 at his head and said "Don't move, Professor". The filth encrusted man in front of me looked up for a second from his meal of boiled rat and then back down. I was glad to be wearing the Level 2 bio/chem warfare suit in this environment.

 

"You know me?" he said.

 

"I know you, Professor, despite the fact that you have spent the last year here in the sewer system of New York, on the lam, and are barely recognizable. Professor Benjamin Shalom Bernanke, former Chairman of the Federal Reserve System. Missing since 2012, tried in absentia and sentenced to death for crimes against humanity, 2013, architect of the greatest boom and bust cycle in market history, the "Bernanke Crash" of 2012."

 

"Are you going to kill me"?

 

"Far from it Professor. I am here to rescue you. Our new government has need of your talents".

 

"New government?" He looked surprised.

 

"Yes. All of the states from New York north to New England have been handed over to the Chinese in lieu of Treasury payments. I suppose you don't get much news down here. Your sentence has been commuted, and President Madoff is looking to hire you to run the new colony's financial system".

Tue, 03/01/2011 - 19:24 | 1009345 pslater
pslater's picture

I levelled the MAC 10 at his head and said "Don't move, Professor".

"Are you going to kill me"?

Yes.

Tue, 03/01/2011 - 17:03 | 1008765 WaterWings
WaterWings's picture

WillBSe7en:

Fallout 3 meets Genocide Ben!

Tue, 03/01/2011 - 15:26 | 1008186 johny2
johny2's picture

Brilliant.

Tue, 03/01/2011 - 15:02 | 1008100 newworldorder
newworldorder's picture

Love it. Perhaps humor will get the sheeples attention!!! Then again - maybe Not?

Tue, 03/01/2011 - 14:50 | 1008044 lieutenantjohnchard
lieutenantjohnchard's picture

good job, bruce. you're really good at extracting academic minutia from ben's commentary, that really nails him. my eyes glaze over sometimes when he mumbles.

Tue, 03/01/2011 - 14:49 | 1008031 lizzy36
lizzy36's picture

Someone should show the Kernak the latest ISM report listing 29 commodities up in price and NONE down. However,  only THREE are in short supply:capacitors, cocoa powder and electric components

Tue, 03/01/2011 - 16:08 | 1008409 Problem Is
Problem Is's picture

A cocoa powder shortage would worry me...

Capacitors?
We can have the unemployed make those out of cheap Chinese plastic import items in the land fills and the homeless people's collection of recycled cans...

Tue, 03/01/2011 - 17:01 | 1008754 WaterWings
WaterWings's picture

NO! The dollar can collapse for all I care as long as I can have my Cocoa Puffs. I've already got my picks for next season NFL. Bieber got a haircut!

*sucks in drool*

Tue, 03/01/2011 - 18:30 | 1009188 Agent P
Agent P's picture

"I've already got my picks for next season NFL"

I predict all teams will go 0 & 0.

Tue, 03/01/2011 - 19:03 | 1009280 Bob
Bob's picture

+1 Rah!

Tue, 03/01/2011 - 14:55 | 1008029 USGrant
USGrant's picture

Austrian economists would say that the lag time between an increased money supply (inflation)  and price inflation is 36 months. So we are now seeing with gold and silver only the initial slope of the first QE.

Tue, 03/01/2011 - 16:33 | 1008578 I am more equal...
I am more equal than others's picture

36 months?  wow, I believe them correct.  Two questions:

1.  Is there a multiplier effect?  $1 trillion x 2.00 = $2.00 trillion effect

2.  Since QE has been a continuous program is there a compounding effect (assuming a closed system) on the multiplier? $1 trillion x 2.0^2 = $4.00 trillion effect

 

Tue, 03/01/2011 - 14:47 | 1008023 jointhewave
jointhewave's picture

 

Watch the video 'BERNIE MADOFF PONZI SCHEME & TRILLION DOLLAR MORTGAGE TIME BOMB' at (http://www.youtube.com/watch?v=LOPu8V6qdeA). 

Anonymous -

I could not believe the testimony from Ben Bernanke this morning! He literally admits we are headed for a systemic crash! This is unbelievable!

 

 

 

Tue, 03/01/2011 - 14:45 | 1008014 Stares straight...
Stares straight ahead's picture

Why do you think the fed is buying up every asset and equity including, but not limited to "Food, clothes, energy, transportation, ball bearing, plastics...."

Tue, 03/01/2011 - 16:14 | 1008441 DoChenRollingBearing
DoChenRollingBearing's picture

Yo, Fed, keep your hands off the ball bearings!

Tue, 03/01/2011 - 17:35 | 1008957 chopper read
chopper read's picture

+1

Tue, 03/01/2011 - 14:42 | 1007997 disabledvet
disabledvet's picture

briefly listened.  i have no understanding of what is going on.  honestly.  at one point i felt like someone should have asked "if we told you we are about to engage the world in a policy of saving humanity could you execute?"  and i imagined our CB responding "absolutely, of course."  Of course in the...frontal Loeb i guess i could call it...the voice cries out "save yourself, save yourself!"

Tue, 03/01/2011 - 14:36 | 1007972 Shameful
Shameful's picture

Sounds about right. The chilling thing is projecting this out into the future. As you point out it would be difficult to stop the ship even if moved all in to stop it, but instead it's full speed ahead. So where does that leave inflation this year? Next rear? The year after? Can it even be stopped?

A Volker like rise would put the interest expense of the US National debt above revenue, to say nothing of other debts that must be rolled. Default by printing or default by open default.

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