Guest Post: Bernanke Employs a Modified 'Pump and Dump'

Tyler Durden's picture

From Jeffrey Snider first posted at RealClearMarkets

Bernanke Employs a Modified 'Pump and Dump'

Gold is not money, according to Federal Reserve Chairman Bernanke.
When pressed on the subject, he demurred that banks, including, I
presume, central banks, continue to hold gold due to nothing more than
"tradition". Thus, he feels there is a vast difference between dollars
and gold. It is curious word for him to choose because Mr. Bernanke is
actually correct, but probably not in the way he intended with his
unspoken pejorative connotation, politely dismissing any value for the
precious metal.

Value itself is nothing more than the outward expression of
individual faith. The traditional value of money is really just an
outgrowth of its historical reputation, earned through so many actions
and consequences. Money may seem to add a level of objectivity into the
discussion of value, but that is only because of a more universal
"faith" in the transactional price discovery process it allows.

This discussion of "tradition" in the context of "value" is the
central problem of our financial age. The question of faith in
valuations is at the very heart of the ongoing crisis, infecting all
facets of finance and economics. Almost three years after a major
banking panic, we are still wrestling with the idea of valuations, and
more innately, value itself. Economic and financial unease and
uncertainty trace their roots to the shaky valuations that have been
provided or interjected into every marketplace, keeping up with the
grand tradition of fiat currencies and centralized policy.

For example, U.S. treasuries are supposed to be, pardon the pun, the
gold standard of riskless assets. Yet they are increasingly questioned
(ask Bill Gross and China). The value of the paper is a derivative
function of the ability to tax, as in full faith and credit of the
United States. But the same is also true of Greek paper, as sovereign
Greek debt derives its value from the Greek government's ability to tax.
Yet U.S. debt is more "valuable", in money terms, than Greek debt
solely because the Greeks have a "tradition" of default while the U.S.
does not. Tradition matters.

By engaging in quantitative easing, the Fed is creating cash for
primary dealers that, it hopes, will be used to fund the purchases of
"riskier" assets. But those additional purchases only push up the
momentary price of the asset, so this flow needs to be ongoing otherwise
it is supremely susceptible to reversal. This means a constant state of
interference. After establishing such a flow and the follow-on
"favorable" price trend, the ensuing faith that higher prices are
supposed to generate is thought to lead directly to spending "velocity",
which yields economic flow and a healthy economy. That is the theory of
the "wealth effect". It is being practiced on both sides of the
Atlantic with equal fervor, though with slightly different mechanics.

If prices are the independent variable in the economic equation, that
is, the x-factor that needs to be manipulated, then why not just remove
the marketplace and mandate specific valuations? Why go through the
charade of "managing" a market-based price discovery process? Greece
would not need restructuring if the European Central Bank simply decreed
that it would convert all Greek debt at par, setting the universal
price. After all, Greek principal and interest payments are denominated
in euros, so the ECB can easily supply them.

The answer here is that value in any human economic system cannot be
directed by diktat or fiat order. If it could, central banks would have
done it by now. Instead, value is conferred by scarcity . In engaging in
market manipulations to create the appearance of monetary values for
financial and derivative financial assets, central banks have turned
value on its head by making money plentiful. Plentiful money has always
been problematic.

Anyone with the means, and that includes those that hold the power of
money printing, can pay $1 million for a stick of gum, but that only
establishes a price, not a wider acceptance of value. But that is what
central bank intervention is, the establishment of price in a narrow
way. Greek debt scarcity and its attendant real value are governed by
the perceived ability to repay, a direct link to the quantity of debt
for a given tax base. If the market perceives a stable or declining tax
base but the Greeks issue twice as much debt at a consistent price, the
level of scarcity falls in relation to repayment probabilities,
affecting the larger question of value.

It does not matter if the ECB buys a substantial portion at par; the
larger system is not fooled into blindly believing in scarcity, or that
price action equals true value. The marketplace will instead buy on the
foolishness and irresponsibility of the central bank, buying up all
Greek debt solely on the ability to pawn it off on taxpayers at an
unearned profit. But even here, it only works as far as faith in the ECB
and the euro is maintained, since value has not really changed. The
central bank interference is nothing more than a game of musical chairs,
with risk investors willing to play as long as they believe the music
will keep playing. The second the music stops, that entire intervention
and managed price discovery becomes irrelevant as the assets suddenly
become bidless.

This is the essence of central bank liquidity management: ensuring
that marketplace actors have enough money to prop up prices. But all
that liquidity fails if there is no implicit, sometimes explicit,
backstop of central bank guarantees. Moral hazard is fully acceptable
because without it many more markets will find themselves bidless. This
is the opposite of what investing is supposed to be - buying assets with
the hope that the rest of the world never finds out what they are truly
worth.

In fact, successful investment is predicated on buying something
valuable before the wider world recognizes that value, with the greatest
hope that the rest of the world will see that value. Investment scams
work because they get a small audience to believe that they are
discovering something valuable just before the rest of the world makes
the same realization, meaning the subject of the scam is presented as
undervalued by current prices.

In a way, central banks are engaged in nothing more than a modified
"pump and dump". They are attempting to create the illusion of value
through price action. By maintaining high valuations due almost solely
to their own purchases, they hope to "attract" additional investors into
the process. Whereas the exit plan of the traditional version seeks a
higher price to disgorge the schemer's original holdings, the legal,
central bank version is trying to buy public faith in order to disgorge a
larger acceptance of a return to normalcy. In both cases, the public
gets abused - suckered investors in the first, taxpayers in the second.

Contrary to Chairman Bernanke's meaning, in this vital respect
tradition and reputation are far more important, not less. The more
central banks fool investors into placing money into investments of ill
repute through these legal confidence schemes, the less faith about the
wider marketplace they will engender. There is already considerable
damage to reputation after the great pains the ECB took in 2010 to
repeatedly assure investors that Greek, Portuguese, Irish, Spanish, and
Italian debt were safe and secure. Any investors that committed to
purchasing such debt as a result of these assurances have fallen prey in
the same way stock investors are taken in by illegal "pump and dump"
schemes.

Considering the potential losses that the ECB, now heavily assisted
by China, continues to create as all the PIIGS persist in issuing
billions of euros in new debt, central banks are building on their own
tradition of dishonor. Now the debate is about what kind of default
should be employed by Greece; essentially who should be identified as
the Greatest Fool.

The Federal Reserve, for its part, has added to its own fine
tradition. Before the crisis, the Fed used much of its credibility to
"assure" markets that everything was fine, right up and into a
full-blown panic. After the panic, the Fed lost still more credibility
on assurances of monetary efficacy with regard to the recovery, yet no
recovery exists. It proclaims a job well done in "saving" millions of
jobs, to the amazement of any impartial observer.

Trillions of dollars have been used on price discovery, especially in
the stock market, but 45 million people continue on food stamps and the
average duration of unemployment is now twice the previous record.
Banks are enjoying healthy profitability, assisted by loan loss
accounting, at the same time withholding credit from all but the largest
obligors. Individual American savers who are doing everything right are
bearing the brunt of all this monetary success, as zero interest rates
transfer money from them to the very banks that colluded in creating
this disaster in the first place.

Those that have the means will always dilute currencies. It is the
greatest temptation of any fiat regime - the easy answer to all the hard
problems. No one has to lose money if it can be created out of nothing.
It sounds like the path to financial and economic paradise but it is
the devil's bargain. No matter how much money they print, it will never
be circulated fairly enough.

Market discipline, no matter how brutal, is at least objective and
often meritorious, an acceptable condition to free people - free to
succeed, free to fail, all regardless of size or stature. General
interference, including fiscal interjections such as General Motors and
Chrysler, breeds distrust. Fiat is simply an invitation to chaos and
discord, so three years of ongoing uncertainty is wholly unsurprising.
Price discovery due to interference is not really price discovery at
all, meaning the larger class of investors will never fully commit or
regain faith. If the game is rigged, fewer and fewer will play.

The interbank money markets are now, invisible to the broader public,
tightly in the grips of amplifying turmoil because banks simply do not
believe in each other's prices. Banking rules allow German and French
banks, among others, to hold PIIGS debt at par on their books,
establishing a price for their credit portfolios that no one actually
believes (the very same problem as 2008, so much for progress).

Instead of transforming these artificial prices into increased faith
within the intercontinental banking system, especially the eurodollar
market, they have unleashed nothing but havoc. The mass of overnight
lending activity has shifted out of unsecured transactions into
collateralized loans whereby U.S. treasury bills are now the only
accepted collateral - fewer and fewer institutions are willing to play
the unsecured lending game. So we see the general collateral rate, for
the first time in history, fall below zero. Inspiring confidence is not
how I would describe this action.

For Mr. Bernanke and his contemporaries, gold's traditional value is
not in question, which is probably what Congressman Paul's query was
driving at. Rather, it was the value of fiat in light of its well-earned
and sordid reputation that was being indirectly questioned.

Ironically, it is the ongoing tradition of central bank intervention
and currency devaluation that is shining the brightest light on gold's
intrinsic value. You may not be able to eat gold, but it is a constant
reminder of the constraints that it places, even in our modern times, on
central bankers - earning their scorn and pejorative dismissal. There
is a reason that Americans' private gold holdings were confiscated by
executive decree in 1933; they offered actual protection against the
currency devaluation that was being planned. Gold is the foil, the
opt-out, of every central bank confidence scheme.

Central banks are betting the financial health of their constituents
on the theory that they can buy prosperity. Just like the eccentric art
collector that vastly overpays for some obscure artist's original work,
the Fed and its global counterparts are hoping that the rest of the
world comes to see what they see, to value what they have valued. They
are hoping that the prices they establish through narrow transactions
become universally accepted as true value. If not, then the central
banks will once again transfer to the rest of us the cost of eating
their art.

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caerus's picture

Don't lie to me shit head...I will short the shit out of you when the time is right...

Fox Moulder's picture

The time will be right when the Fed runs out of money.

 

 

Wait, what?

Quintus's picture

No, the time will be right when people begin to laugh at the idea of exchanging valuable goods and services for the Fed's pretty paper oblongs and binary digits created out of nothing and backed by nothing.

Bicycle Repairman's picture

Forget about shorting the shit out of anything.  When the SHTF, the financial markets will be closed.  Permanently.  You may think markets are sacrosanct.  Markets may be sacrosanct.  But in the lofty world of think tanks and foundations, they have a better idea.  What's the idea?  It isn't in the constitution.

caerus's picture

the time will be right when the neckline is broken at ES 1260 confirming the reversal and yes I will short it please excuse the earlier whiskey addled posts...I tend to get over excited

Thomas's picture

Indeed, but I seem to be sitting in the minority by believing that Bernanke, because of his capacity to answer literally, was correct: Gold is not money and they are not printing money. To clarify, gold is not broadly accepted for goods and services, it really has to be sold (as an asset if you will) before it can be used in the market place. When he says he is not printing money, he is simply relying on the fact that the amount of actual physical currency in circulation is stable. If those who opposed him face-to-face had half a brain, they would ask the questions so as to not offer these relatively trivial escape routes. Ron Paul ought to know better; his rhetoric is getting the best of him.

LawsofPhysics's picture

Funny thing about that.  I just gave some silver coins to a plumber to sign off on some sewer lines I recently ran.  He also helped with some of the plumbing.  Pretty sure he would have taken some of my gold coins if the value of the services were more and I agreed to that payment. He also took pictures and sent them to the county and city inspector.  Gold and silver still remain a safer store of value until we figure out what the next "fiat du jour" is going to be and as long as people who are capable of added real fucking value to your life will take it for services rendered, don't fucking kid yourself about Mr. Paul's rhetoric.  Just like the post crash U.S.S.R. there will be many bribes to be paid shortly.  Either way, compensation for those who add REAL value to your life is about to find it's way back to these folks, pronto.

sellstop's picture

did he give you a receipt?

If he did, what did it say?

gh

 

Dan Alter's picture

We have not known what thing all life forms use to measure value with.

Discovering what that thing is and how we use it is the oldest moral and economic question of all. I discovered what it was in 1985. Since we all use the same "thing" the same way all the time to measure how anything affects our personal welfare, that implies we can know the right way to issue money and credit which we most obviously are not doing now.

The title of the article is "The Objective Measure Of The General Welfare". http://www.no1stcostlist.com/News/article/sid=30.html

This discovery of what we use and how we use it to measure personal value necessarily led to deducing an even bigger danger that the oncoming catastrophic financial collapse we feel coming. You can not run money and credit honestly without consciously and publicly agreeing we are all own time cost minimizers. You each up to now have unconsciously tried to spend as little of your time alive as possible to get what you need or want. Unconscious gets you dead.

http://www.no1stcostlist.com/index.php

Re-Discovery's picture

Don't piss on my head and tell me it's raining!

 

(Not sure this comment applies in any way  to this post, but I've wanted to write it for some time.)

cosmictrainwreck's picture

LOL. Kudos.... and yes, it could be applicable here, as most anywhere - could say it has veritible universal application

JW n FL's picture

Good Ideas

http://www.youtube.com/watch?v=NugRZGDbPFU&feature=related

our Piss Umbrellas need to discourage The Government from pissing on "We the People without a Billion Dollar Lobby" heads as well.

wsmith's picture

This obviously presents us all with another great buying opportunity.

Well, since I don't have a dollar to my name, I can't afford to enjoy the stock market.

Instead, I'll just stay home and masturbate while dreaming of the lovely Becky Quick.

http://geraldcelente.proboards.com

 

caerus's picture

She is cute isn't she... Fuck in buffet!

wsmith's picture

Listen, you dirty motherfuckers.

I've spent far too many nights having hot sweaty dreams about Becky Quick and Erin Burnett.

At this moment, I've got my prick in my hand while thinking about the sexy Asian chick who hosts Fast Money.

This, of course, begs a fundamental economic question:

Which CNBC girl would you most like to vandalize with your proletarian farm tool?

http://geraldcelente.proboards.com

 

TheForgottenMan's picture

You sick bastards, CNBC?

I think Jenna Lee from Fox (who just got married)

TSA agent quits:

http://thewashingtonfancy.com/2011/06/man-takes-viagra-wears-sweatpants-...

 

wsmith's picture

Just answer the fucking question, Mr. Fancy Pants!

Becky?

Erin?

Or the hot Chinese Fast Money chick.

Jeeez!  You motherfuckers are complicated.

Your psychiatrists need psychiatrists.

So long for now.

And God bless all you rotten cocksuckers.

http://geraldcelente.proboards.com

Fish Gone Bad's picture

I can't believe you left off the Godzilla queen herself, Maria Bartaromo.  At one time, before the invention of the make-up gun by Homer Simpson, I thought Playboy courted her.

I don't watch CNBC, or any TV for that matter.  Put me down for whichever one is the LEAST whiny one who does not get orange pulp stuck in her front teeth.

 

TheForgottenMan's picture

Ok, we will put you down for Rachel Maddow.

The Shootist's picture

yeah, Fox has the foxes... I kinda like that Megan Kelly.

slewie the pi-rat's picture

heluva 2nd & 3rd post, ws_ith.  might as well go for it!  is this the universe's response to what barney frank suffered at the hands of zHeroes?

jack stephan's picture

I find it ironic that the henchman president studied constitutional law and is doing everything to ruin it.  The master money printer has knowledge of the Great Depression in and out, but sending us farther down towards a Greater Depression intentionally.

The US got sold queer giraffes.

 

caerus's picture

errr... Are we still talking about Becky here? Nvm we're screwed see you after the crash

Big Ben's picture

With all the US budget problems, it is funny that no one has suggested selling the US gov's gold. I would love to get my hands on some of it (if there actually still is any). But I think that no matter how much economists and central bankers may denounce gold as a "barbarous relic", they deep-down realize that it is actually very valuable. So they will even sell off the strategic petroleum reserve, but they just won't let go of the gold.

Libertarian777's picture

Actually Ron Paul has suggested this multiple times.

Sell the gold back to that people. Not to pay off the debt, since it won't come close, but to call Bernake's bluff about the traditional barbarous relic being of not much value.

UP4Liberty's picture

Gold isn't the barbarous relic to which Keynes referred - he was talking about the gold standard.

 

But then again, according to Ben, when asked if Gold is money, he replied, "No."

TuesdayBen's picture

Was Ben also asked if Au is a store of wealth?

snowball777's picture

Does your argument not also apply equally well to say....a water tank?

 

LawsofPhysics's picture

Potable or non-potable water?

NervousRex's picture

For just a minute there I thought he was going to blurt out "Ya canna eat it now, can ya?

Just a fantasy.

 

Caviar Emptor's picture

There's a reason why nobody has suggested selling US gold reserves. As the article mentions, that reason is faith. Because, after all the BS has been said and done, the country with the biggest gold reserves commands the highest rung in the global economic food chain. That country's currency is considered "Gold Standard" and "reserve currency". That was the position of Pound Sterling in the early 20th century when the British economy was pre-eminent and larger than that of the US, and the Pound was reserve currency. The British used their gold reserve, the largest,  to pay for their vast empire (which was unprofitable in many locations) and for wars in Europe. And when the US began accumulating the largest reserve of gold, the dollar became reserve currency. 

Gold and power have always gone hand and hand. Everyone in power knows it, but tries to keep it quiet. So when the US could no longer pay for it's debts through trade and was running an ever larger trade deficit, the gold window was urgently slammed shut in 1971 because the gold reserve was being drawn down. And we've been trying to hold our reserve status with IOUs ever since. 

Never forget that currency is simply an IOU. For what? For gold. That was the original intent. IOUs can be traded for other things like food as long as there is gold supplying value. Otherwise it's just swapping food for paper. If the US ever sold off the gold reserve, the dollar would lose reserve status immediately and would play second fiddle to the next dominant currency. 

oldman's picture

Hey Cav,

In spite of what I posted below----I really hope that you are correct. I like your thought better.

thanks            om

Dr. Eldon Tyrell's picture

I'd like to dedicate this song to Barry, Boner, and Bernanke...

"Were in the basement, learning to print.....All of it's hot!

10-20-30 Trillion ready to be spent...

Were stackin' em against the wall...those gangster presidents..."


http://www.youtube.com/watch?v=7oPuVAdGkk8

LMAO's picture

"There's a reason why nobody has suggested selling US gold reserves. As the article mentions, that reason is faith"

 

That dear Sir is the reason why "extend and pretend" policy still works and this is at the heart of the issue why there is never going to be a decent Gold reserve audit.

 

"Because, after all the BS has been said and done, the country with the biggest gold reserves commands the highest rung in the global economic food chain"

 

In which lies the real twist of faith; it's not about having the biggest gold reserves, it's all about pretending to have the biggest gold reserves. It's not about you proving you have all this gold, it's all about counterpart interest having to prove you don't have it.

LMAO

 

Bicycle Repairman's picture

"Because, after all the BS has been said and done, the country with the biggest gold reserves commands the highest rung in the global economic food chain"

The US has attempted to change this rule i.e. the country with the biggest military commands the highest rung in the global economic food chain.  Yet oddly even with all this military action the US sinks deeper into the economic morass.

As for US gold, even if it is in Fort Knox, it is probably encumbered in any number of ways.

equity_momo's picture

Most gold - most powerful military. The 2 have generally gone hand in hand.

The Brits built their Empire through naval power remember. They put France and Spain in their place when needed. But Prussia became a risk by the 19th century and when Bismarck put good relations with Russia and Austria at the heart of his foreign policy ,  the British saw the writing on the wall. Cue an Alliance with the US to undermine the eastern powers and create World War 1 through diplomatic chicanery.

Have no doubt who was behind WW1.  As have no doubt who will behind WW3 (some say WW3 started on 9/11 or when the US invaded Iraq)

Crumbling Empires under threat start more and more and bigger and bigger wars.

Caviar Emptor's picture

Well said. That 'back to the wall' feeling is growing. It started in the 1970s. Hence the need for more and more military. Gold is needed to pay for it all, or in or case, the belief in our gold reserves. We survived off the gold standard for this long because China needed access to our markets, and Europe/Japan were still completing their post-war build out and also wanted access. But the dynamic has changed. 

Marco's picture

OPEC could start demanding gold for oil and empty government coffers in a couple of months unless it triggered an invasion, but then again ... an invasion would prove it's still not gold which puts you on the top rung, but your military and willingness to use it.

Bicycle Repairman's picture

"OPEC could start demanding...."

LOL.

oldman's picture

There is no gold.

Otherwise. we could just back the treasuries we need to sell externally at some outrageous rate of exchange for the foreign buyers----we the people don't require gold backed anything or we would have said something before.

iI dreamt that the gold went to bush1----just a dream five or six years ago

 

Manthong's picture

Selling of any gold that may be left, emptying the SPR and selling of a trillion or so of federal property would go a long way towards "fundamentally transforming the United States".

Can you say "Hope and Change" in Mandarin?

KTV Escort's picture

One of the best articles I've ever read, period.

static's picture

Agree ,  a well articulated epistle.

Raymond Reason's picture

Excellent.  And is Ben really so dumb?   ....or is he like many habitual liars, eventually losing the ability to perceive truth.