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What's Ben Gonna Do?
Every day the deflation story gets stronger. Almost all of the numbers
in the US are pointing in that direction. A slowdown in the EU is a sure
thing. Japan is going nowhere. China is a question mark, but even if
they do continue growing it will not result in enough Eco. Juice
to offset the global deflationary forces.
I was anticipating a slowdown in the 4th Q. It is now looking more
likely that we will fall of a cliff starting July 1st. Extended benefits
will be ending. Most states start a new fiscal year and they are all
dead dead dead on revenue. Any benefit we got from the census will be in
reverse gear. By August 1st approximately 1mm temporary workers will
again be out of a job. Housing is falling off a cliff.
The market sees this. The ten-year is at an incredible 3.1%. The last
few days of trading in gold has a smell of deflation as well.
Bernanke must be beside himself. He bet the farm to save the economy in
2009. He has done things that no other Fed head as ever contemplated. As
betting goes, he is “all in” on this one. He bet the economy, our
future solvency and his reputation. In my opinion there is no way he is
going to throw in the towel and accept that deflation is inevitable.
Ben spelled out what he would do in the “unlikely” event that deflation
became a real threat in his famous 2002 “Helicopter” speech. The full
speech is here.
This speech has been hashed many times before. Given the news of late
it is worth relooking at what Ben had to say. Some excerpts:
Under a
fiat money system, a government should always be able to generate
increased nominal spending and inflation, even when the short-term
nominal interest rate is at zero.
Well Ben, we have had ZIRP for two years now. It has made a difference.
But zero interest rates have just bought time, not a recovery.
The U.S. government has a technology, called a
printing press that allows it to produce as many U.S. dollars as it
wishes at essentially no cost. We conclude that, under a paper-money
system, a determined government can always generate higher spending and
hence positive inflation.
Ben has been running that printing press. QE created $1.75t. It has not
had a lasting benefit.
The
Fed could stimulate spending by lowering rates further out along the
Treasury term structure. There are at least two ways of bringing down
longer-term rates:(I) Fed
could commit to holding the overnight rate at zero for some specified
period.(II)
A more direct method, which I personally prefer, would be for the Fed
to begin announcing explicit ceilings for yields on longer-maturity
Treasury debt. The Fed could enforce these interest-rate ceilings by
committing to make unlimited purchases of securities.
Ben has done (I). As of yet we have not seen (II). For me it is scary
that this is his “favorite” approach. That makes this one a sure thing
if evidence mounts that we are rolling over. But this does not
accomplish much in today’s markets. The 2-year is at 75bp. What is
Bernanke going to do? Push that to zero also? He might.
The
Fed could also attempt to cap yields of Treasury securities at still
longer maturities, say three to six years.
Why stop at 6 years Ben? To make a dent he would have to have the
10-year at 1%. Is that what he has in mind? I think it is a real
possibility.
An option would be for the Fed to use its existing
authority to operate in the markets for agency debt.
We have done that already in a biblical manner. $1.25 trillion. Three
months after the program ended the housing market is falling off a
cliff. I would not be surprised if Ben re-established this program.
Buying another $1 trillion would not accomplish anything but make the
primary dealers rich. But a desperate Ben would do this again in a NY
minute.
The Fed might next consider attempting to influence
directly the yields on privately issued securities.
Oh boy, this is the beginning of the end. Ben would buy corporate debt.
GE would be high on the list; the rest of corporate America would
follow. Ben could buy BP bonds. That would solve our problems, wouldn’t
it?
The
Fed might make 90-day or 180-day zero-interest loans to banks.
Lights out when this happens. Ben will stop at nothing. This option is
not far from reality. That said, if this happens the public backlash is
going to be vicious.
The Fed has the authority to buy foreign government
debt. Potentially, this class of assets offers huge scope for Fed
operations, as the quantity of foreign assets eligible for purchase by
the Fed is several times the stock of U.S. government debt.
The “nuclear option” is to buy up the sovereign debts of other
countries. This would extend QE globally. In a way we just did this with
the opening of $100b in swaps lines to the European central banks. This
gives them the wherewithal to buy their debt. The ultimate is when the
Fed starts doing it for their own account. I doubt this option is
realistic. It would require the approval of the other CB’s. That said,
should you see this headline buy lots of canned food and rice. If this
step is implemented bread lines will follow.
It's
worth noting that there have been times when exchange rate policy has
been an effective weapon against deflation.
In this case the Fed would attempt to devalue the dollar in order
achieve its goals. This of course would just destabilize everything else
in the world and would insure a downward spiral in economic activity.
Most of the things Ben spoke of back in 2002 have already been tried (or
are now in place) and have not worked. The remaining options do not
appear to have much chance of working either. But that does not mean
that we will not see these steps.
Ben has already destroyed savers. This is the consequence of his steps.
It was not his goal, but he understood fully that savings would have to
be penalized. He is in so deep at this point that I believe he will
consider anything to protect his reputation in history. The one thing
that he did not bring up in the 2002 speech was negative interest rates.
While this option sounds ridiculous it can’t be excluded as a
possibility. The SF Fed had a paper
on this recently. A graph of the “proper” Fed funds rate:
John Hilsenrath at the WSJ
also put the idea of negative interest rates on the table in a
recent piece. I think the article was from Ben’s lips, into John’s ear
and then onto the front page of the Journal. If Ben has something to
say on this matter he should address us all. He should not use a beard
to influence public/market thinking.
How could something as crazy as negative interest rates work? Consider
this from none other that Harvard
economist Greg Mankiw. He had this to say on the subject back
in March of 2009:
I can now state
the proposed solution: Reduce the return to holding money below zero.
Imagine that the Fed were to announce that it would pick a digit from 0
to 9 out of a hat. All currency with a serial number ending in that
digit would no longer be legal tender. Suddenly, the expected return to
holding currency would become negative 10 percent.
This bit of lunacy comes from one of our best and brightest economists.
Should this (or any other negative % plan) be implemented it would mean
that a depression is just a few months away. The last desperate acts
would insure that we would fall into a very big hole. We will hear more
on these “emergency” measures in the coming months. Should any of them
come to pass, be guided accordingly. These steps will only agonize what
must come.
Black Hole, NASA photo
»
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"Bet THE farm?" He bet OUR farm. These politicians (I consider Ben one of them) remind me of that Danny Devito film, Other People's Money.
*deleted*
If you picked a number between 1 and 9 and made it no longer legal tender, wouldnt that to some degree be self defeating? If you are trying to inflate, wouldnt that be a contraction of the money supply and be somnewhat deflationary?
A better idea would be to start printing expiration dates on the currency, just like milk cartons.
GS and JPM would know the # ahead of time and dump all said # bills prior to being made no longer legal tender...maintaining their 100% trading profit streak.
Hey Bruce,
I don't hear a lot about "escape velocity" or "debt escape horizon". The longer the non-recovery goes on w/ continued debt induced stimulus...the greater the subsequent recovery must be to overcome the drag of higher debt repayments.
For instance, for every trillion added to the nat debt, it's something like approx. $40-$80billion/yr (assuming average interest rates...big assumption) in interest payments for, well, forever (increasing as T rates increase on the roll over).
The longer the "recovery" takes to unfold, the greater it must be to undue the spending while paradoxically the weaker it will be due to interest flowing out of the country (lower GDP).
Seems if we aren't in "recovery" now, the added stimulus will create a impenetrable barrier to positive GDP's for the foreseeable future?
...and what about folks that believe we are going to inflate our way out of this - seems all gov debt and most biz debt is indexed to inflation through short maturity T's (4.5yrs average), indexed unfunded liabilities, and arm's for biz loans.
The notion of "debt escape horizon" makes the picture of the black hole such a good analogy -- once you're at the event horizon of a black hole, there's no escape and no observer can see you anymore since even light is getting sucked into the hole.
Interesting post, Bruce. Your point about the Fed buying foreign securities dovetails nicely with Tyler's post last night about the July 1 rollover of the ECB's 422 billion euro liquidity facility that it provided the European banks. The Fed could certainly go beyond the FX lines to directly subsidizing the rollover t a maturity greater than Tyler's expected 90 days in return for some favor from the ECB.
Didn't they already do 180-day loans back in 2008 to the banks at 0%? I forgot the acronym, but I believe it was something like Extended Discount Window Loan Program
And wouldn't eliminating 10% of all currency be extremely deflationary? The average American might finally wake up then if they found out that 10% of their currency is toast. Or could I still pay my mortgage with that non-legal tender?
I still offer my solution to the Federal Reserve. Print $10 trillion and divide it up to give to tax-paying Americans. That'll be about $100k per household, enough to dig them out of debt, or buy a ton of iPads.
The theory is that the money will certainly be spent rather than be destroyed. This goofy. It only addresses cash money. The real money is in banks, money funds ect. How they would charge negative rates is beyond me. Think of it as a tax on a checking acount ballance. If your average balance for the month is $10,000 you would get hit with a $100 charge. What would you do? Spend it or invest it. This drives consumption and asset prices. So it achieves the objectives. But it is an "unnatural act" it defies some basic laws. It will not work for long. Confidence would collapse if this were to happen.
Like I said, when they do stuff like this, get some rice....
I agree with you Bruce. Creating negative interest rates would create chaos.
But this all goes back to Bernanke panicking in the Fall of 08.
Until the trillion dollar write-downs occur on all the used toilet paper contained in the TBTF and the Fed, we will continue on this slow grind into oblivion.
We reward the arsonists and penalize the victims. What a great and putrid system.
In the real economy, the rubber don't hit the road....
I would make sure to pay-off all positive interest loans and keep as little cash in my bank account. That and wads of cash/gold. Now THAT WOULD BE DEFLATIONARY!
Negative rates on cash would create a vacuum in the banks as little people would pull their money and stuff the mattresses (unless capitol controls or the like are in place to stop this) or invest in bonds/mm/equities/gold/whatever.
Would seem one of the most counterproductive actions possible when banks are already insolvent and see a huge cash outflow?
Bruce, imo the situation you describe would create the moment when debt deflation flipped to hyperinflation: a tax-induced need for consumers to exchange FRNs for iStuff before taking a 10% hit on their capital, coupled with an utter lack of confidence in any government that would hatch such an outrageous scheme.
Note to self: buy some AAPL July 400 calls and BIG bag of rice.
Bennie and the gang just completed an experiment that did not work....
Something that many knew from the beginning....
Just another academic trying out their experiment in real life....
At the expense OF OTHERS....of course....
Bruce - shouldn't Ben consider dropping paying interest on the +1 trillion in reserves banks are holding at the FED. Try his negative interest rate there and 3 month LIBOR will be at 10pips in a eye blink.....
This was not on Ben's 2002 list because the whole business of paying banks interest on excess reserves was not yet invented. They could drop this rate to -2%. And yes this would flow through to libor and other rates. But I don't know that the real holders of money are going to "pay" to hold it. That is unless there is something new that I don't see. You can force we to accept a .001% return on my money. But you can't force me to give it to you at -2%. You need a big club to get me to do that.
Today money has little value. But if you said that money has a negative value I think you are inviting chaos. It would be very destructive to go down this road in my opinion.
Mathematics/reality has no need to enforce limits because Humanity has no way to violate them!
Kind of OT, but that is not a "NASA photo" or any other kind of photo of a black hole.
At best, it's a NASA artist's rendition of a black hole. More likely, it's some chump's Photoshop job.
While we have excellent evidence for black holes, we have not directly observed one.
Ok. I am no expert in black holes. But the picture comes from NASA. A rendition as you say.
This file is in the public domain because it was created by NASA. NASA copyright policy states that "NASA material is not protected by copyright unless noted". (See Template:PD-USGov, NASA copyright policy page or JPL Image Use Policy.)
"He must inflate quickly, before our dollar loses its reserve status."
Hmm, seems to me that if Helicopter Ben really started inflating quickly, that would be what would make the dollar lose its reserve status. After all, who would want a financial reserve that's quickly declining in value due to inflation?
Best and brightest?
NO
The smartest amoral scumbags? Yes. They wouldn't be there otherwise. Neither would any other society.
This bit of lunacy comes from one of our best and brightest economists.
S/b "bought and paid for economists'"
He'll be in the 1st deck of fin ter cards
What's Bubble Ben going to do? With massively underfunded public pensions, he's going to make sure banks keep printing money trading and bidding up risk assets. Reflate and inflate! Wait, the fun hasn't even begun yet...
Yeah, what could possibly go wrong with a bubble that size? LOL
It's funny that you think people are some kind of mechanical beasts that can be inclined to buy more assets on credit simply because Ben pulls the "MOAR CREDIT" lever a little harder, though.
Leo,
You see what is the cards. Same as me and many others. I look at it and say,"All I see is horse shit!" You look at the same pile of crap and say, "With all this horse shit there must be a pony someplace!"
You say: "the fun has yet to come". I think you were serious with that. You think this is fun? If we keep up the ZIRP and all the other silly stuff like 10% deficits it will end all that we now (or used to) think is good. It will happen faster than you think. Less than a decade. You really want that?
Naw Bruce, he sees the Mushrooms.
And what is the option? Bruce, seriously, if you were at the helm of the Federal Reserve, would you be hiking up rates to kill the economy fast? You have openly stated that you're against QE (not sure why), and yet your alternative is even more painful...quick death! I prefer perpetual bubbles over your quick 'fix'.
Leo, STFU.
....
Leo
Killing savers is the problem. Raise interest rates and let savings fund asset expansion.
I don't think it was possible for John Maynard to conceive of what we call "banks" today.
Keynes' banks actually lent money for productive activity in the real economy.
Just saying....
Raise interest rates to help savers while you kill trhe rest of the economy? Sounds like a great plan. Higher rates will mostly help the ultra rich with tons of cash in the bank.
Leo -How's ZIRP going for you ?
As my favorite ZH'r has already told you- ZIRP has done ZIP.
Just as long as you can quit while you're ahead...what a scumbag!
BURN THE FED!!!!! BURN IT TO THE GROUND!!!!!!!!
leo, the dentist is a week by canoe or you can use the pliers. better to use the pliers.
Sounds like debate on euthanasia or Keeping on a ventilator for 40 years
Not all questions have answers!!!!! Hmm...
Capitalism is a game! winners and losers! There will be waves of greed and fear ;a sine wave with crests and troughs; nothing is linear here
All it needs is a fair platform meant for everyone
But can we expect such a thing from present day humans? I doubt that
We are still hunters and gatherers in a different jungle
You prefer perpetual bubbles?? Come on, that is not a reasonable position. You are not in this world alone Leo. There are plenty of people who will suffer from the bubbles you enjoy. This aint champagne we are drinking. It is hemlock.
You have no children? Some worry about the environment and what it will look like in 10 or 20 years. Hard not to do that with the GoM blowing up. That is beyond me. I can only influence the financial equation. (maybe a little?) I am convinced that we will suffer much more from the financial excesses of this decade then we will suffer the consequences of global polution. Nothing good will come from a plan that is built around repeating the mistakes of the past.
Just a question. Why do we need growth of 3% (after inflation). We don't. That is lie that economists have been telling for years. We do not have the population growth to support that.
All your pension pals need 8% asset growth per annum to have any chance of surviving. That is why you are so pro growth at any cost. That is a busted concept. It is not in the collective best interest. Take the damn "Pro Pension" hat off leo. That hat is no longer in style. People who continue to wear it will be treated like they are wearing a mink coat. "They" will throw paint on it.
b
Ben Bernanke, evil genius, too bad he's up against five or six decades of return- free US consumption. This (gigantic) chicken has indeed come home to roost.There are few if any bubbles left to inflate.
You want to know what the cause of our problems is? It's out in your driveway. All that hunk of steel and rubber does is suck money out of your wallet. For what? Unless you are using your car as an ambulance to transport sick babies to hospitals, you are simply wasting what you earn for 'fun', 'convenience' and false, TV-derived 'status'. Every day, 300,000,000 Americans throw their money away! It adds up after awhile.
Bernanke is at odds with physical reality, that of input depletion. He has no real - as in ''REAL World' monetary tools left, he cannot create a bubble even if he wanted to. (He does.) Only public participation on a large scale can create bubbles. The Fed buying/selling bad checks to itself is not public participation.
The bubble that has just ended is the 'cheap fuel' bubble.
Bernanke wants to trash the dollar, (a declining currency represents the increase in business activity). He cannot because priced in oil, the dollar is worth something. At the same time, even if successful at cheapening the dollar, rising nominal energy prices will kill the world economy all by themselves.
In 2008, $147 did the trick. Now? It looks as if $87 does the same trick. The world has gotten that much poorer in two lousy, stinkin' years!
Bernanke is caught in the tiny and shrinking space where the upper bound meets the lower bound - the upper represented by the oil price level that kills economic activity with the lower being the zero- bound of interest rates. The upper bound makes credit at any price unaffordable. The zero- bound is effectively unreachable.
Tricks: QE (which is taking place by the payment of interest on reserves held at the Fed.) FX swaps (can only be done in small amounts relative to the private FX swaps market and cannot therefore be meaningful.) Buying gold and anti- dollar propaganda (smart traders watch the crude/dollar trade now and ignore gold.)
Bernanke could buy BP (by proxy) and sell dollars against it (going with the bard dollar flow) but that would put him in the business of being a swing producer competitor aganist Saudi Arabia.
Bernanke would win his war by going in front of Congress and demanding a $5 per gallon gas tax this year and another $5 gallon tax added next year. This is a national security issue.
It's conserve or die ...
Leo isn't talking about what should be done he is simply saying (in a sarcastic way) that there is ONLY one thing TPTB can do. The states are broke, give them money. The pensions are broke give them money. The local governments - them too.
Nobody that runs the fed will do what is "morally" right. The system wasn't built on morals, it was built by assholes.
Ben - and the rest of the cronies - are themselves creatures of the society. That means eternal frat-boy male optimism.
Dude, this stimulus iz gonna work, dude. You got the gas man? Dude, gas and a match. Dude, let's see what happens dude. Dude, totally.
(I don't agree, but it is THE ONLY thing they know to do)
When all ya got is a hammer (printing press), everything looks like a nail!
Pro pension? Pension plans are dying...read my last comment. They are being slashed, cut to the bones. Contribution rates going up, benefits down. Pension funds will need to adjust to the new reality of low growth, high debt, low inflation.
No one is advocating "death," you clod. An unstoppable downward spiral in the economy is the stuff of science fiction and Keynesian disaster porn, not the real world. The economy will recovery once the mis-priced assets are appropriately revalued and their holders (like you, for instance) are properly punished for embracing moral hazard and buying them in the expectation savers would be screwed to make them go higher.
Withdrawal symptoms are always painful, but they're less painful that the catastrophe that strikes if they are deferred and the systemic weakness and damage is thus allowed to accumulate further.
Clod. Excellent word choice.
I think "Keynesian disaster porn" is an excellent coinage.
Just one thing: civilizations _do_ end. The disagreement between the Austrians and the Survivalists is where the bottom is, and how many possible stable equalibria we bust through on the way there.
In particular, if we (as a civilization) can no longer martial enough energy in the pursuit of energy (with positive return), then it is game over.
All this inflating, deflating. Sounds kind of Freudian to me. Do you suppose that Ben might see the economy as a sexually demanding woman who is getting harder to please as he ages?
"Oh boy, this is the beginning of the end. Ben would buy corporate debt. GE would be high on the list; the rest of corporate America would follow. Ben could buy BP bonds."
I know this is a dumb thing to say, but do you all realize that this is illegal under the FEDs own rules?
That is unless they used 3(13) emergency powers indefinetly.
...
Oh..., never mind.
___
Be careful Bruce, Leo is roaming the threads tonight and he has not taken his meds in several days. Have you flame suit on!
Crazy thing is I work for a multinational corporation, a leader in it's field for the athletic industry. The leaders of the company (and our competitors from what my friends tell me) are plunging into inventories for a consumer rebound. Retailers have also bought into this. We are outstripping our factories to build all the product.
Trouble is, if as appears we are heading into a double dip (or akin) w/ high inventories we are starting the cycle over again...aaaak.