Guest Post: Bernanke's QE^X Box

Tyler Durden's picture

Submitted by Gordon T. Long Of Tipping Points

Bernanke's QEX Box (pdf)

Chairman Bernanke has placed himself in a box. It is not a box of his choosing, but rather the result of his misguided economic beliefs, use of flawed statistical data, geo-political events occurring during his watch, poor decisions and a penchant for political pandering.  Some of these may be requirements for academia success but not for leading global financial markets during turbulent times.

It is time for Professor Bernanke to return to the collegial setting of Princeton University while the world still has time to correct the path he has mistakenly set us on.

I was angry during most of former Chairman Greenspan's tenure because of his persistent use of liquidity pumping to solve every problem from Y2K to the Peso crisis. Greenspan's inability to see a bubble two inches from his nose and yet still pontificate about irrational exuberance, rather than taking the punch bowl away from the party, incited me. Bernanke does not affect me that way. He simply disappoints and leaves a taste like eating dry shredded wheat, with the hope of a child, to eventually get the prize at the bottom of the box.

Character flaws show during times of stress. Honesty, integrity, value systems and beliefs are put to test and are highlighted under the public media microscope. I'm sure Chairman Bernanke is a nice guy, loved by his family but he is missing a backbone. On April 27th, 2011, that will become obvious to all.


On April 27th, 2011 the Federal Open Market Committee (FOMC) issues its next decision and statement regarding the future of Quantitative Easing (QE) II. Though previously announced to officially end June 30th, 2011 there are serious questions if this is still a viable option.

This particular meeting is the 'signal' meeting that the financial community will be looking for to assess risk and strategy. Many (including myself) have already concluded what the outcome will be and are preparing accordingly.

On this date Bernanke will hold the first ever press briefing by the Federal Reserve, in addition to releasing forward forecasts which are usually held another 3 weeks. It is going to be an exciting event.

Unfortunately, Chairman Bernanke is going to disappoint!


Let's summarize the box Bernanke presently finds himself in.


Interest rates have been artificially suppressed for such a long time that no matter what Bernanke does come June, interest rates will likely begin rising. Therein lies the problem for the Fed.  Any further debt monetization by the central bank is now becoming counterproductive. If Bernanke enacts another iteration of Quantitative Easing, the Fed may find itself the only player in the bond market. According to my analysis this is nearly the case already.

The truth is that only a central banker can afford to own bonds that are yielding rates well below inflation, and growing even more so.  The lower real interest rates become, the less participation there will be in the bond market from private sources. If you don’t believe me, ask PIMCO, the world's largest Bond fund who is not only out of US Treasuries but selling short. China  has been a net seller of US Treasuries since October. Besides the Fed, who is willing to buy the $1.65 Trillion in fresh new US debt paper?

So if Bernanke extends QEII we have a collapse in the US$ and a complete lockout of auction buyers. If they stop QE II, interest rates go through the roof immediately and the US government with short duration paper has an immediate and serious fiscal funding gap.

Bernanke is in a Box!


Event Shocks were unleashed on the global economy in a historic manner in Q1 2011. Whether Geo-Political issues throughout North Africa and the Middle East or Physical Natural Disasters like the earthquakes in Japan, a Tsunami, or a nuclear crisis at the Japanese Fukushima Nuclear reactors, they have impacted the global economic recovery.

These shocks are hitting an already unstable economic and financial situation. Whether Europe's worsening debt crisis as evident in Ireland, Portugal and Greece or China's aggressive policy to slow the world's largest economic engine to contain mounting inflationary pressures, we have tenets of instability.

If you couple this with corporate margin compressions due to cost push price pressures and increasing interest rates, it does not bode well for central bank monetary policy planners.  It is definitely not a good recipe for an already over-extended, over-valued and over-bought stock market.

Typically bad things happen when this occurs.

What we need to appreciate is that though Mr. Bernanke is Chairman of the Federal Reserve, his night job is as Board of Director member of the Bank of International Settlements (BIS) in Basel Switzerland. Along with the other major central bankers he meets bi-monthly with them to oversee policy direction for this mysterious institution which is considered the central bank to the central bankers.

They no doubt have been meeting to discuss 'coordinated' policy - coordinated policy efforts to address such global issues as  event shock risks.

They have been meeting to synchronize stopping the Yen

from rising and plunging the Yen Carry Trade into an unwinding spiral. They are highly likely to be meeting to consider policies that address global inflation which is now running rampant, thanks to US Quantitative Easing.

This is a busy group with some 'heady' problems - problems that Chairman Bernanke must additionally address and secede to.

The box Bernanke was in had little wiggle room prior to the crushing disaster in Japan and the historical geo-political events in North Africa and the Middle East. The pressures to increase the value of the US dollar by reducing the money printing operations of Quantitative Easing II is a decision being shoved in Chairman Bernanke's face by other central bankers.

I fully understand that the US dollar is considered the purview of the US Treasury, but there can be little disputing the fact that the US Dollar, as the world's Reserve Currency, has become a central policy lever for the US Federal Reserve's Monetary Policy. The direction of the US dollar is a major consideration for Chairman Bernanke.

  • The potential of forced unwinding of the Yen Carry Trade has trapped the G-7 into having to stop the YEN rising through repatriation pressures to finance reconstruction and recovery. To do this means pressures to increase the US-Yen cross.
  • North Africa and the Middle East geo-political event means the potential of an oil shock hitting America. This additionally puts pressure on the US dollar to be stronger to alleviate some of the pressures on the trepid US recovery or it will be quickly stalled and reversed.
  • The crisis in the EU as seen in Ireland and Portugal tells us the EU issues are unresolved. If Spain and potentially Italy are next, we have major global instability and fallout. Before this happens the Euro needs to be weakened to improve competitiveness. The rising Euro since QE II started must be reversed. This means the US dollar must be strengthened by slowing or stopping QEII.
  • China is clearly slowing in response to public policy. A strengthening US dollar would lighten China's inflation pressures.  Some would argue that QE II is at the root of China's inflation pressures and forced money printing to combat the US' premeditated Monetary Policy attack.

Bernanke is in a Box!


A weakening US dollar has allowed US equity prices to rise and thereby assist in fixing the near terminally ill banking sector with their capital ratios and potential write-offs.  The correlation between the increase in the Fed's balance sheet, the rise in the market, the rise in profits and the weakness in the US dollar is unmistakable. The "R2" fit suggests as close a fit and proof as this writer needs.

US financial institutions still have close to $3 Trillion of Commercial Real Estate not yet reflecting current market valuations, which must be written down. Bank capital ratios are inadequate for this, since the US recovery has not brought back commercial and residential real estate values to anywhere near their still elevated book values.

Bernanke is in a Box!

Whether he continues QE II or stops it, the situation is dire. This is what happens to those who "Extend & Pretend" and "Kick the Can Down the Road".


Inflation in food, energy and consumer staples is now a major issue that Bernanke must be seen to be addressing. This week's headlines says it all:


So what is Chairman Bernanke to do?

I believe he will resort to his old tools. Academic tools like Game Theory is likely being applied and is no doubt a good starting point for his decision making.

He needs to manage both perceptions and expectations. He needs to manage the reaction to the message he will deliver. Deciding on the reaction and degree of reaction is critical.

In the above game board, I have labeled the ordinate "Y" axis to reflect a decision and communications message that would foster increased interest rates. The abscissa "X" axis reflects the same but for a potential increasing value of the US dollar.

The problem for Bernanke is that an either or decision is not optimum to balance the many diverse needs of the decision.  Additionally either decision is prone to an exaggerated and dangerous reactionary move. He cannot allow the communiqué to be potentially destabilizing.

Gradualism dictates trying to move towards a midpoint on the decision game board.



  • The optimum message is one that does not confirm the ending of QE II, nor a message saying QE II it is being extended.
  • The communiqué should leave the existing June termination date stand without annotation.


  • By sending no message the market will migrate towards an 'ending decision' but will be constrained because of the lack of finality.
  • By not being specific the options are left open in case the expected result is unsatisfactory. May and June can be used for further adjustments.


  • It is my opinion that the Fed has no choice but to continue the dramatic expansion of its balance sheet to offset the collapse of the Shadow Banking System.
  • Money supply as measured by M3 is still dramatically shrinking.
  • The Fed needs to take some pressures off financial markets by allowing a corrective/ consolidation to occur via a period of 'risk-off' adjustment.
  • The negative impact of a 'risk-off' event will give the Fed the political cover to resume its QEX policy, in due course.


The reason Central Banks are called upon to 'pump' money into an economy with policies like Quantitative Easing is because an ongoing crisis is draining liquidity in the markets and the Central Bank is the 'lender of last resort'.

We seem to have forgotten this over the last few years. There can be little doubt that the issues we are facing today are not liquidity problems despite the central banks issuing accelerating amounts of money.

What we have is a solvency problem that is presently being hidden by inflating assets or collateral values. Without this occurring, many major financial institutions are legally insolvent from mal-investment and speculative investments gone bad.

The Federal Reserve is now the 'Buyer of First Resort'. This is a completely new dynamic and shift in the structure of the country.

The game that is being played is beyond "Extend & Pretend" and "Kick the Can Down the Road". It is a game that does not allow the capitalist game to work its magic powers. It is a game that protects crony capitalism at the expense of the capitalist system.

Consider the central issue of "too big to fail'. We have laws that specifically address 'too big'. They are called anti-trust or monopoly laws. They are in place to stop unfair competitive advantage of companies using their size, to stop predatory practices from those too big to be effectively legislated and to protect the consumer from being taken advantage of. If we had used the antitrust laws that were outlined in the Sherman Act we would never have got into the predicament in the first place. We have additionally completely ignored the tenets of Control Fraud prosecution.

The second part is ".... to fail". We have bankruptcy laws specifically for the problem of corporate failure. By using government sponsored DIP (Debtor-in-Possession), break-ups, sell-offs, restructured, debt holder haircuts and debt for equity we could have addressed much of our current issues without having plunged the country into near bankruptcy so that less than two years later the banks are making historic profits and the bank owners and debt holders are completely whole and richer off. This is the epitome of crony capitalism.

The government, as represented by the US Treasury if held to the same standards as the private sector, would be criminal on many fronts. The renowned Kenneth Rogoff in a Financial Times Op-Ed referred to the US government as effectively operating a full blown Ponzi Scheme. Bernie Madoff went to prison for 150 years for this. The government calls it PAYGO. Pay as you go and go free.

We do not have a liquidity crisis. We have an Insolvency Crisis as a result of debt saturation built upon mal-investment. The government and Federal Reserve are doing everything in their powers both ethical and other to keep the whole house of cards from coming down on our heads.

Bernanke is in a box. Unfortunately it is a box of cards, cards that when played out will show it was a bad hand even though t was dealt from the bottom!

Do you really believe the Fed will end QE II in the spring? 

NO it won't  - BUT

The market will react differently this time no matter what the Fed does

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baby_BLYTHE's picture

From Ron Paul's latest book, Liberty Defined

We cannot know exactly what tomorrow will bring, nor in  what time the consequences of bad policy  will evolve, so we must strive for truth and the preservation of those values that we are convinced have benefited mankind. We could be successful and preserve the American Republic as it was intended, giving up on the militarism of the American Empire. the odds are slim that that will occur without a bloody reaction from those who wield the power over the military-industrial complex, our political process, the media, our economy, our monetary system and out personal lives. But regardless, since the principles of liberty are based on morally correct ideas, anything we do to preserve them will benefit mankind.

baby_BLYTHE's picture

John Kennedy was a young man yet when he was chosen as the sacrifical lamb by the Global banking cartel and Military Security Complex.

High Plains Drifter's picture

he , and his father and his brother knew the real score. but they played along biding their time.  they miscalculated.  a expensive mistake for all involved. yet to this day, they talk of a conspiracy about his death, like when he died, conspiracies stopped. they did not. they never will until we know our true enemies, as good as the kennedys knew them. after all, they swam in the same water as these pigs. they knew them all too well. but now, our presidents come into office and they already know who they bow the knee too and they do bow the knee. we suffer because of these traitors and the republic dies one day at a time. the old rothschild patriarch in the late 1700's said, i care not who is king, as long as i control the money. he was not talking out his ass, ladies and gentlemen. when are people going to realize they cannot control their government unless they control their money? when????    so we americans think we have freedom?  please, spare me.

I Am Ben's picture


But alot of other things aswell

JFK.4PREZ's picture

i'll die for that cause. 

traderjoe's picture

Sorry to jump right in here, but it's ironic, comic, and sad all at the same time to see an author trying to analyze the actions of the Fed from the lens of what they should or shouldn't do, and what a 'correct' policy would or should be for the benefit of the masses/country. 


The Fed is a privately-held banking cartel designed and created to propagate inflation, lower interest rates (to eliminate competition), and to support the fractional reserve banking system - so money could be created out of thin air and lent at interest (in part to the sovereign). 

The Fed is performing perfectly to plan, robbing and stealing from the American people in plain sight since 1913. 

Any attempt to analyze this fundamentally fraudulent institution is erroneous on its face. We must simply End the Fed. 

CH1's picture

Well said, Joe. And caps warranted, IMO.

SheepDog-One's picture

Furthermore, THIS FED was designed not to improve the economy and rescue toxic assets, Bernanke was chosen to ENSURE that the destruction of this country was complete this time!

thames222's picture

I doubt this was purposeful; i think they all really are just too stupid to understand how fiscal policy works.  That, and they clearly don't give a fuck about any consumer's well-being.  as long as prices keep rising we're doomed.

Hot Piece of Bass's picture

"Any attempt to analyze this fundamentally fraudulent institution is erroneous on its face. We must simply End the Fed. "


Milestones's picture

by Milestones 
on Sun, 11/21/2010 - 14:22


Mr. T., I addressed this issue a couple of times "The Trials and Tribulations of the Federal Reserve Act of 1913" on 6-15-10 and a couple of times later. In fine, let me answer you in brief.

My argument lies in Article 1, Section 8 (5)-Powers of Congress. The Congress SHALL have power: to coin money, REGULATE THE VALUE THEREOF,--". That power was apparently DELEGATED to the Federal Reserve Bank. That DELEGATION of authority to the Federal Reserve is my question. Did Congress have the authority to delegate that authority to "regulate the value thereof"?

Panama Refining Co. v Ryan 293 U.S. 388 1935

"The Constitution provides 'that all legislative powers herein GRANTED SHALL be vested in the Congress of the United States, which shall consist Senate and House of Representatives.'--The Congress MANIFESTLY IS NOT PERMITTED to abdicate or to TRANSFER TO OTHERS the essential legislative functions with which it is vested.---Cannot be allowed  to obscure the limitations of the authority to delegate, if our constitutional system is to be maintained."

Field v Clark 143 U.S. 649 1892

--"The legislative power must REMAIN in the organ where it is lodged by that instrument."

Sovereignty is granted to "We the People" in the first 3 words of the Preamble. As such, under the Constitution, we the people delegate our Sovereign authority to persons to REPRESENT us in day to day dealings. But it is the reserve of the Soverigns to delegate authority not our reperesentatives. John Locke came to the same conclusion.

I would contend that the Federal Reserve Act of 1913 is illegal under the Constitution. Further, if we consider Marbury v Madison of 1803, a decision has stood for over 200 years, the case can be stated in far starker terms:

Marbury v Madison 17 Wall 205 Cranch 2 1803

"Thus the particular phraseology of the Constitution of the United States confirms and strengthens the principal, supposedly to be essential to all written constitutions, that a law repugnant to the constitution is VOID; and the courts AS WELL AS ALL OTHER DEPARTMENTS ARE BOUND BY THAT INSTRUMENT."

Not only did Congress not have the authority to submit such a document as the Federal Reserve Act of 1913; likewise President Wilson had no authority to sign it. See the last sentence of the above.

Yes, I know, the Constitution has been turned into a roll of toilet paper to the 1%ers but that is still the document I still march to as do most others . If that not be the case then we would be far better served now to be comparing an AR-15 to an AK-47.

If those unhappy with the way things are want a change, we must state our concerns and grievances in a fashion that those who are totally uninformed can have a place, a handle so that a nightmare of a 2nd revolution can be avoided. 

To add to that, I would now contend that a peaceful solution is now all but impossible, and with a certain collapse staring us in the face, if we do not take up arms, we had better be acceptable to chains. Drifter wrote an item concerning Japan's "little" atomic problem vis a via a certain semitic nation today in another post which had some extrodinary implications if true.

The finiancial problems are now possibly very directly linked to some overriding political ones and we are truly in a nightmare box. The removal of the Fed would be simple if we had a president who had both balls and brains-but has neither and impeachment is not even a consideration so we are left with only the alternative mentioned earlier which our spineless public would run from in stark terror. We then only have a total collapse of the government as a possibility. Our military is too over extended to be able to be a factor even if it was their desire, which I question. 

I guess our only hope to to ride out the storm and be prepared to pounce once it happens. What a friggin mess you have got us into this time Ollie.     Milestones

medicalstudent's picture

their shitll never work.


n always stink.

High Plains Drifter's picture

ron paul is controlled opposition.  the calvary is not coming to the rescue.

High Plains Drifter's picture

hey i want to make sure everyone understands. i too have been hoodwinked a few times myself. don't get me wrong. but what pisses me off is this constant never ending supply of chumps that come forward saying they can help me. i figured out a long time ago, the calvary is not coming this time. perhaps the calvary never has come at any time in world history.  perhaps the calvary coming to the rescue was always just one big lie based upon a fairytale told in some hollywood movie. we are the calvary. 

by the way, did you read the part about the donald.  i never liked that guy. there is something very flakey about him. there he is sitting there, making his little secret masonic hand signs like he is cool or something.  always was. yet he says the things the tea party wants to hear and suddenly he is their guy. the stupidity of the american people knows no bounds... there are many of these traitors i would like to hear screaming for their lives, as they are being reading for hanging. some of you may say, what a terrible thing to say. i say to it really that terrible for me to think this way? 

NotApplicable's picture

Umm... Dr. Paul is not the truth movement (though I agree that it is an astroturf movement), nor did that article provide anything credible to discredit him.

Why do you attempt to slander him so?

High Plains Drifter's picture

NA, you got to get out of the box and look around simply have to.

thames222's picture

Wow, loving the Ron Paul Esquire swagger.  To think, just four years ago I was laughing at all of my friends' neighbors and people in his wealthy, hippy, San Francisco area with all of their Ron Paul stickers on the car.  I'm actually starting to think I might vote for him.  Paul vs. Trump?  this could get interesting.

hardcleareye's picture

"..preserve the American Republic as it was intended,"

"...since the principles of liberty are based on morally correct ideas..."


Lets see, the founding father's believed that slavery was a "morally correct idea" and acceptable per their definition of "liberty".  

Ever read John Lind's, 1776, "Answer to the Declaration of the American Congress"?   The arguments can be made that the motivation to separate from Britain was not "based" on "morals" but on personnel profit for the founding fathers!!  (Perhaps "liberty" for a certain few to make more profit.....) 

Every study Shay's Rebellion?  When the common man realized that the "founding fathers" had "mislead" them with the "Independence/Liberty" propaganda...

"I have been greatly abused, have been obliged to do more than my part in the war, been loaded with class rates, town rates, province rates, Continental rates and all rates...been pulled and hauled by sheriffs, constables and collectors, and had my cattle sold for less than they were worth...The great men are going to get all we have and I think it is time for us to rise and put a stop to it, and have no more courts, nor sheriffs, nor collectors nor lawyers." a farmer, Plough Jogger

The financial situation leading up to this, repayment of the war debt, were the investors demanded repayment (payment of taxes) in gold and silver from a population that had no gold or silver....   

The more things change, the more they stay the same.......


been there done that's picture

Pardon my reply near the top. I just wanted to point out that Gordon has a podcast chat show with Ty Andross that I think is pretty good at then click the Audio tab. If you want to hear 2 smart guys talking about how totally Phucked we are, then you'll like the show.


TruthInSunshine's picture

I call dibs on The Bernank's liver and backstrap.



The Bernank's greatest quotes (thus far). Be afraid. Be very afraid:


  • (November 15, 2005) "With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."
  • (July, 2005) "We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."
  • (October 31, 2007) "It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."
  • (November 21, 2002) "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."
  • "The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities."
  • "One myth that’s out there is that what we’re doing is printing money. We’re not printing money."
  • (When asked directly during a congressional hearing if the Federal Reserve would monetize U.S. government debt) "The Federal Reserve will not monetize the debt."
Clueless Economist's picture

In times of crisis we must consult Keynes.  What would Keynes do?  I propose a $4 trillion stimulus to create or save ten million shovel ready jobs.  We need to be brave and raise the debt limit to 20$ Trillion and spend the $ on Government works programs.

TruthInSunshine's picture

Paul Krugman,

I have read your op-ed suggesting printing the equivalent number of dollars that matches the U.S. debt, and attempting to pay said debt off with that batch of dollars, and I reject this suggestion's logic for a variety of reasons.

Dr. No's picture

Isnt it funny how even children know printing green pieces of paper to pay of a debt is wrong, but the same children believe printing pieces of paper (of different size, color, and shape) is okay (printing and selling treasury bonds to pay of debt).  The power of a promise!!

NotApplicable's picture

First we're gonna have to build 10M shovels.

Dr. No's picture

make that 20M.  The guys who are going to fill the hole back in need a shovel too.

ihedgemyhedges's picture

You need 20,000,000 shovels?  I'm on it.  The stimulus money must arrive BEFORE I start production.  And by money, I mean the shiny yellow kind.


CEO of a major multi-national corporation

Kitler's picture

Nice but very incomplete compilation.

As for:

(November 15, 2005) "With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."

Bernanke merely failed to add these last words to his thoughts...

 ... "to maximize their own wealth at the expense of all other inhabitants of the planet and their future generations."

Unfortunately Ben can't defend himself against his own comments right now... he's too busy fighting the good fight against deflation.

wandstrasse's picture

the bad Bernank, the evil satan... cannot hear it anymore! I find he has nice eyes, like a child. I call him 'Chairboy'.

thames222's picture

He does look quaintly helpless, with kind eyes that beg for some kind of contact or help.  Poor poor, "chairboy."

TheGoodDoctor's picture

Do they have summer school classes at Princeton? Maybe that is why he is taking the 3 to 6 months off from QE to infinity?

ziggy59's picture

Captain Crunch now has specially marked FRNs in every box.

steveo's picture

With the Market hitting 845 on Russell, that wipes out 90% of all of the traders who went short on Monday.   In other words all of the non- HBB traders that started the sell-off.  

How many had the dakine to hold their puts from last week?   at least one stupid one....that be me.  Long weekend.    

They ramped and boiled, for all we know there is a full on nuclear meltdown in the 2  or 3 largest economy in the world this weekend.  No news is not good news.   Good news would be promoted with zeal, there isn't any.

Easter weekend,  very odd.

hugovanderbubble's picture

Watch out loading Long VIX for May/June Spike

slewie the pi-rat's picture

gotta run!  silver ready for push to $47!  l8r!!

buzzsaw99's picture

the bernank is a pawn, a peon, a pee-on. bernank be a good little corporate n$$$$r.

Escrava Isaura's picture

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve regarding the Great Deppression. You're right, we did. We're very sorry. But we won't do it again" - Ben Bernanke, November 8, 2002.

EvlTheCat's picture

Yea, that has been playing over, and over in my head for the last few months.  As the old saying goes its better to beg for forgiveness then to ask for permission.

cossack55's picture

But The Bernank has a nicely trimmed beard.

JuicyTheAnimal's picture

Or in Laymen's terms.  "We are totally fucked".   

Sudden Debt's picture

If interest rates go up 1 point : KABOOM!!!

If QE 3 is larger than 200 billion : KABOOM!!!

If no QE : KABOOM!!!


Options are so cool :)


carbonmutant's picture

Sounds like you're celebrating the 4th a little early...