Guest Post: QE2 - The Bernanke Chronicles

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From Jim Quinn of The Burning Platform

QE2 - The Bernanke Chronicles

Our self proclaimed “expert” on the Great Depression, Ben Bernanke,
seems to be feeling the pressure. His theories worked so well when he
modeled them in his posh corner office at Princeton. He could saunter
down the hallway and get his buddy Krugman to confirm his belief that
the Federal Reserve was just too darn restrictive between 1929 and 1932,
resulting in the first Great Depression. I wonder if there will be a
future Federal Reserve Chairman, 80 years from now, studying how the
worst Federal Reserve Chairman in history (not an easy feat) created the
Greatest Depression that finally put an end to the Great American
Military Empire. Bernanke spent half of his speech earlier this
week trying to convince himself and the rest of the world that his
extremist monetary policy of keeping interest rates at 0% for the last
two years, printing money at an astounding rate, and purposely trying to
devalue the US currency, had absolutely nothing to do with the surge in
oil and food prices in the last year. Based on his scribbling since
November of last year, it seems that Ben is trying to win his own Nobel
Prize – for fiction.

His argument was that simple supply and demand has accounted for all
of the price increases that have spread revolution across the world. His
argument centered around growth in emerging markets that have driven
demand for oil and commodities higher, resulting in higher prices. As
usual, a dollop of truth is overwhelmed by the Big Lie. Here is
Bernanke’s outlook for inflation:

“Let me turn to the outlook for inflation. As you all know, over
the past year, prices for many commodities have risen sharply, resulting
in significantly higher consumer prices for gasoline and other energy
products and, to a somewhat lesser extent, for food. Overall inflation
measures reflect these price increases: For example, over the six months
through April, the price index for personal consumption expenditures
has risen at an annual rate of about 3.5%, compared with an average of
less than 1% over the preceding two years. Although the recent increase
in inflation is a concern, the appropriate diagnosis and policy response
depend on whether the rise in inflation is likely to persist. So far at
least, there is not much evidence that inflation is becoming
broad-based or ingrained in our economy; indeed, increases in the price
of a single product–gasoline–account for the bulk of the recent increase
in consumer price inflation. An important implication is that if the
prices of energy and other commodities stabilize in ranges near current
levels, as futures markets and many forecasters predict, the upward
impetus to overall price inflation will wane and the recent increase in
inflation will prove transitory.”

So our Federal Reserve Chairman, with a supposedly Mensa level IQ,
declares that prices have risen due to demand from emerging markets. He
also declares that US economic growth will pick up in the 2nd half of
this year. He then declares that inflation will only prove transitory as
energy and food prices will stop rising. I know I’m not a Princeton
economics professor, but if US demand increases due to a recovering
economy, along with continued high demand in emerging markets, wouldn’t
the demand curve for oil and commodities move to the right, resulting in
even higher prices?

 

Ben Bernanke wants it both ways. He is trapped in a web of his own
making and he will lie, obfuscate, hold press conferences, write
editorials, seek interviews on 60 Minutes, and sacrifice the US dollar
in order to prove that his economic theories are sound. They are not
sound. They are reckless, crazy, and will eventually destroy the US
economic system. You cannot solve a crisis caused by excessive debt by
creating twice as much debt. The man must be judged by his words,
actions and results.

November 4, 2010

With the U.S. economy faltering last summer, Ben Bernanke decided to
launch a desperate attempt to re-inflate the stock market bubble.
The S&P 500 had peaked at 1,217 in April 2010 and had fallen 16% by
July. This was unacceptable to Bernanke’s chief clientele – Wall Street
and the richest 1% in the country. At Jackson Hole in August he gave a
wink and nod to his peeps, letting them know he had their backs. It was
safe to gamble again. He’d ante up the $600 billion needed to revive
Wall Street. It worked wonders. By April 2011, the S&P 500 had risen
to 1,361, a 33% increase. Mission accomplished on a Bush-like scale.

Past Federal Reserve Chairmen have kept silent about their thoughts
and plans. Not Bernanke. He writes editorials, appears regularly on 60
Minutes, and now holds press conferences. Does it seem like he is trying
too hard trying to convince the public that he has not lost control of
the situation? QE2 was officially launched on November 4, 2010 with his
Op-Ed in the Washington Post. He described the situation, what he was
going to do, and what he was going to accomplish. Let’s assess his
success.

“The Federal Reserve’s objectives – its dual mandate, set by
Congress – are to promote a high level of employment and low, stable
inflation. Unfortunately, the job market remains quite weak; the
national unemployment rate is nearly 10 percent, a large number of
people can find only part-time work, and a substantial fraction of the
unemployed have been out of work six months or longer. The heavy costs
of unemployment include intense strains on family finances, more
foreclosures and the loss of job skills.” -
Ben Bernanke – Washington Post Editorial – November 4, 2010

Ben understands his dual mandate of high employment and low
inflation, but he seems to have a little trouble accomplishing it.
Things were so much easier at Princeton. Since August 2010 when Ben let
Wall Street know he was coming to the rescue, the working age population
has gone up by 991,000, while the number of employed Americans has
risen by 401,000, and another 1,422,000 people decided to kick back and
leave the workforce. That is only $1.5 million per job created. This
should get him a spot in the Keynesian Hall of Shame.

The official unemployment rate is rising after Ben has spent $600
billion and stands at 9.1% today. A true measurement of unemployment as
provided by John Williams reveals a true rate of 22%.

Any reasonable assessment of Ben’s success regarding part one of his
dual mandate, would conclude that he has failed miserably. He must have
focused his attention on mandate number two – low inflation. Bernanke
likes to call inflation transitory. Inflationistas like Bernanke will
always call inflation transitory. His latest proclamations reference
year over year inflation of 3.5%. This is disingenuous as the true
measurement should be since he implemented QE2. The official annualized
inflation since December 2010 is 5.3%. The real inflation rate as
calculated exactly as it was in 1980 now exceeds 10%.

  

Mr. Dual Mandate seems to have slipped up. As he stated in his editorial, he wanted to fend off that dreaded deflation:  

“Today, most measures of underlying inflation are running
somewhat below 2 percent, or a bit lower than the rate most Fed
policymakers see as being most consistent with healthy economic growth
in the long run. Although low inflation is generally good, inflation
that is too low can pose risks to the economy – especially when the
economy is struggling. In the most extreme case, very low inflation can
morph into deflation (falling prices and wages), which can contribute to
long periods of economic stagnation.”

He certainly has succeeded in fighting off deflation. Let’s list his anti-deflation accomplishments:

  • Oil prices have risen 35% since September 2010.
  • Unleaded gas has risen 50% since September 2010.
  • Gold has risen 24% since September 2010.
  • Silver has risen 85% since September 2010.
  • Copper has risen 20% since September 2010.
  • Corn has risen 67% since September 2010.
  • Soybeans have risen 40% since September 2010.
  • Coffee has risen by 44% since September 2010.
  • Cotton has risen 88% since September 2010.

Amazing how supply and demand got out of balance at the exact moment
that Bernanke unleashed a tsunami of speculation by giving the all clear
to Wall Street, handing them $20 billion per week for the last seven
months. Another coincidence seemed to strike across the Middle East
where the poor, who spend more than 50% of their meager income on
food, began to revolt as Bernanke’s master plan to enrich Wall Street
destroyed the lives of millions around the globe. Revolutions in
Tunisia, Egypt, Libya, Yemen, Bahrain, and Syria were spurred by
economic distress among the masses. Here in the U.S., Bernanke has only
thrown savers and senior citizens under the bus with his zero interest
rate policy and dollar destruction.

Bernanke’s Virtuous Circle

“This approach eased financial conditions in the past and, so
far, looks to be effective again. Stock prices rose and long-term
interest rates fell when investors began to anticipate the most recent
action. Easier financial conditions will promote economic growth. For
example, lower mortgage rates will make housing more affordable and
allow more homeowners to refinance. Lower corporate bond rates will
encourage investment. And higher stock prices will boost consumer wealth
and help increase confidence, which can also spur spending. Increased
spending will lead to higher incomes and profits that, in a virtuous
circle, will further support economic expansion.”
  Ben Bernanke – Washington Post Editorial – November 4, 2010

Ben Bernanke could not have been any clearer in his true purpose for
QE2. He wanted to create a stock market rally which would convince the
public the economy had recovered. As suckers poured back into the
market, the wealth effect would convince people to spend money they
didn’t have, again. This is considered a virtuous cycle to bankers. He
declared that buying $600 billion of Treasuries would drive down
long-term interest rates and revive the housing market. His unspoken
goal was to drive the value of the dollar lower, thereby enriching the
multinational conglomerates like GE, who had shipped good US jobs
overseas for the last two decades. Bernanke succeeded in driving the
dollar 15% lower since last July. Corporate profits soared and Wall
Street cheered. Here is a picture of Bernanke’s virtuous cycle:

Chart forTiffany & Co. (TIF)

Whenever a talking head in Washington DC spouts off about a new
policy or program, I always try to figure out who benefits in order to
judge their true motives. Since August 2010, the stock price of the high
end retailer Tiffany & Company has gone up 88% as its profits in
the last six months exceeded its annual income from the prior two years.
Over this same time frame, 2.2 million more Americans were forced into
the Food Stamp program, bringing the total to a record 44.6 million
people, or 14.4% of the population. But don’t fret, Wall Street paid out
$21 billion in bonuses to themselves for a job well done. This has done
wonders for real estate values in NYC and the Hamptons. See – a
virtuous cycle.

Do you think Bernanke mingles with Joe Sixpack on the weekends at the
cocktail parties in DC? Considering that 90% of the US population owns
virtually no stocks, Bernanke’s virtuous cycle only applied to his
friends and benefactors on Wall Street.

stock-markets

But surely his promise of lower interest rates and higher home
prices benefitted the masses. The largest asset for the vast majority of
Americans is their home. Let’s examine the success of this part of his
master plan. Ten year Treasury rates bottomed at 2.4% in October 2010,
just prior to the launching of QE2. Rates then rose steadily to 3.7% by
February 2011. I’m not a Princeton professor, but I think rising rates
are not normally good for the housing market. Today, rates sit at 2.9%,
higher than they were prior to the launch of QE2.

One-Year Chart for US Generic Govt 10 Year Yield (USGG10YR:IND)

I’m sure Ben would argue that interest rates rose because the economy
is recovering and the virtuous cycle is lifting all boats (or at least
the yachts on Long Island Sound). Surely, housing must be booming again.
Well, it appears that since Ben fired up his helicopters in November,
national home prices have fallen 5% and are accelerating downward at an
annual rate of 10%. There are 10.9 million home occupiers underwater on
their mortgage, or 22.7% of all homes with a mortgage. There are over 6
million homeowners either delinquent on their mortgage or already in the
foreclosure process. It certainly looks like another Bernanke success
story.

Bernanke’s conclusion at the end of his Op-Ed in November 2010 was
that his critics were wrong and his expertise regarding the Great
Depression trumped rational economic theory. By enriching Wall Street
and creating inflation, his virtuous cycle theory would lead to job
creation and a chicken in every pot.

“Although asset purchases are relatively unfamiliar as a tool of
monetary policy, some concerns about this approach are overstated.
Critics have, for example, worried that it will lead to excessive
increases in the money supply and ultimately to significant increases in
inflation.
But the Federal Reserve has a particular obligation
to help promote increased employment and sustain price stability. Steps
taken this week should help us fulfill that obligation.” Ben Bernanke – Washington Post Editorial – November 4, 2010

Anyone impartially assessing the success of QE2 would have to
conclude that it has been an unmitigated failure and has put the country
on the road to perdition. In three weeks, the Federal Reserve will stop
pumping heroin into the veins of Wall Street. The markets are already
reacting negatively, as the S&P 500 has fallen 6% and interest rates
have begun to fall. As soon as Bernanke takes his foot off the
accelerator, the US economy stalls out because we never cleaned the gunk
(debt) out of the fuel line. Jesse puts it as simply as possible.

“The Banks must be restrained, and the financial system reformed,
with balance restored to the economy, before there can be any sustained
recovery.” – http://jessescrossroadscafe.blogspot.com/

Bernanke and his Wall Street masters want to obscure the truth so
they don’t have to accept the consequences of their actions. The economy
and the markets will decline over the summer. Bernanke is a one trick
pony. His solution will be QE3, but it will be marketed as something
different. He will appear on 60 Minutes and write another Op-Ed. Ben
Bernanke will go down in history as the Federal Reserve Chairman that
brought about the Greatest Depression and hammered the final nails into
the coffin of the Great American Empire.