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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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The FED is doing a perfect job doing what it does best. They take care of the Banksters from the smallest bank right up to the IMF and BIS. For the Rothchilds, by the Rothchilds. Anything else is B.S.
How about a 'Helicopter Ben' ZIRForever MasterCard with free balance transfers?
Government subsidized 2% mortgage rates would kick-start the housing market.
Not to mention the unemployed masses fleeing the GoM disaster to other areas with no available employment! Aaaaaah! Anyone know anybody working in the moving truck industry? Wonder what the rental activity is down there right now. Might have to hire drivers to take trucks back down there after a while. And those are the people that can afford to more than a few tanks of gas to go north or west.
Great job, Bruce.
heard on the news last week that the recession was over because winnebago sales were way up. i thought , self contained and mobile. W5???
He's basically trying to jump start a car that's out of gas.
Perfect analogy
Agreed.
Great analogy, but let me amend it slightly- trying to start a car whose engine has seized.
Ben's got the gas and the matches, but this baby don't turn.
It has taken a generation to destroy the Middle Class and it will take a generation to rebuild.
Its bread and circuses, lets go down to the Coliseum and watch Ben feed a few more Middle Class familes to Goldman.
HA! Yup, so true.
Negative interest rates...good idea. First, I'll run out and buy the
tar and feathers, if you're up for picking up the torches and pitchforks.
Hammering T-bills is looking very, very likely to me. It has a perverse symbiosis with increased govt. spending.
Since Ben is a puppet of the bankers our tools have been limited by what they will accept.
as stated long time ago. the policiees enacted will do little more than increase or maintain the wealth transfer. the programs were't designed to help the economy. they were deseigned to get money back into the hands of the wealthy and makes usre bankers get their bonus.
If we wanted to solve this issue we would have written of debt. pretending the banks are solvent then distorting the market to try and make it so was doomed to failure. You can only pretend so long. The final collapse will happen because we have spent all our money pretneding to fix the problem instead of actually doing it.
"When a man spends his time appearing to have, he is all the time destroying what he has, and therein the very means of becoming what he desires to seem. If he gains his end, his success is his punishment." George MacDonald
Seems like all of Ben's alternatives listed above will only make the problem worse. It won't even be considered, but they might want to consider a policy of honesty in order to instill confidence in the leadership. The TBTF banks should be forced to mark to market their securitized assets, for starters.
The Swedes have already imposed a negative rate. <.5%> i think.
One split second after they introduce negative interest rates, Gold goes exponential.
Exponential? I don't think so.
They will fight a rear-guard action to keep the price of Gold down for a while... THEN, it goes exponential.
And then, it is highly possible we'll find ourselves in Zimbabwe, or Weimar Germany. I am really looking forward to buying whole blocks of prime real estate with a single ounce of Gold. Well, not really, since I am probably not going to like the rest of the economy, but you get the idea.
The Japanese had negative rates in 2000.
Benny really has no choice but to start inflating, or risk complete disaster. He must inflate quickly, before our dollar loses its reserve status. People have to start getting a return on their money, or they are going to have nothing to spend ,of what little they do have. Inflating would be troublesome, but not disastrous. Deflation is doing nothing but making poor people even more poor and hopeless. Hoenig as been right on this for 4 months now, but Benny can't get the picture of Obama's Alabama black snake up his ass, out of his mind.
There is only one other solution I can think of that is guaranteed to work, and that is LARGE lump sum stimulus to the people in the middle/lower class in the range of 25-50k. Make the bankers pay for part of it since they have so much earnings all of a sudden. The people have to get out of debt, or everything else is about mute. Bawney Fwank has an idea that would work, but he is limiting it to only a select few deadbeats, err, I mean jobless. The stimulus ideas they keep putting forward is allowing people to leave jobs on purpose and sit on their rumps for 2 yrs. This congress needs to wake the f' up. The lump sum stimulus can be issued in govt coupons useable to pay debts down, to free up spending money.
Wait wait wait. So the dollar in your pocket appreciating in value = you becoming poorer? And somehow pseudo-monetization (debt stamps?) DOESN'T equate with spinning the economic wheels without end? Never mind that the structure of production (what little there is in the US) will remain unchanged, geared towards debt-financed consumption and excess...
Pass the spliff dude, I need some of that.
Just another one-off, two-off, or three-off. Artificial solution to a bubble problem. It won't work. In principal I agree that if you are going to send out checks, they should go to the spenders, but it won't stop the deflation train. It's a temporary fix to a debt bubble. The bubble must burst from consumer to corporate to government. Too bad we will be the assholes trying to save the world with a madman at the helm.
I say he needs a trip to the Gulf. Take him out on a boat right near the gusher and have an "accident" where he falls in. Or he could go to Utah and get a Twitter when the firing squad takes him out. Wishful thinking. We are all allowed to dream.
Howard, pray tell, just what does this recently invented phrase "one-off" mean? I NEVER read or heard such a phrase until maybe a year ago, and suddenly it is everywhere. What is it supposed to mean?
Jeez...I just made it up. A one-off is your Bush check, your Obama check, your Chinese voucher for a washing machine. Stimulus Akak. You get one, two, three checks and then more are on the way? I don't think so.
The Right thinks the U/E are lazy. The Left wants to extend benefits but they can't get than done. Those checks are for basics. Do you think that in this gridlock we could get stimuli such as printing a trillion for the people to get the ecomony going? It would be gone in a heartbeat. That's all I was saying. The numbers would look great for a month or six, whatever the grand plan would be, but it wouldn't stop the debt bubble of the US, would it? It would make it worse. Read my post way below at the end on my impression of rate caps on auctions.
Benny really has no choice but to start inflating, or risk complete disaster. He must inflate quickly, before our dollar loses its reserve status.
How will a lump sum stimulus errr dumping money out of a helicopter over the 'burbs cement the USD's reserve status???
At 0% interest, and price deflation, people are getting plenty of return on cash. The problem chiefly is that the returns on cash have been far too high, compared to productive investments. Why invest in building a company and employing people when you can get an inflation-beating return by sticking your cash in a bank?
Problem solved, just like that, simply by making it rain money from the sky. Large sums of money too, all courtesy of Uncle Ben's printing press.
Dollar be damned.
No wonder Rosie sees Gold going to $5,000.
It's raining large sums of money now from the printing press and its going into the bankers' pockets. And people are still stuck not being able to buy anything. Dollar is damned either way we go, but at least we already know giving it to the bankers is not the answer that is going to solve this issue that is now twice as bad. But as people pay their debts down and spend again the dollar would not be damned as long.
There is no solution other than braking up the banks, default the bad paper, legislate REAL financial reform and oh yes, last but not least, abolish the FED. The greatest depression? Yes, may be, but at least we can start to rebuild. Will this ever happen in the construct of the current political system? Of course NOT.
Which means there is no solution until the system totally collapses and you start seeing riots in the streets. Raining fiat money that gets created out of thin air solves nothing.
I pray for it every morning. It's kind of weird praying for something that will bring riots into the streets, but
it does solve a lot of problems.
Why pray? It's going to happen anyway.
When the average Joe Schmoe realizes he has been conned all these years, you will see an unholy alliance of Tea Partiers, extreme left wing, and every nut-case in between to overthrow the whole sickening lot of the obscenely rich & wealthy.
Won't be pretty, but it could be fun nonetheless.
To speed it up and avoid needless financial and emotional harm to people obviously.
I suspect this was always the plan - confiscate the accumulated wealth of the middle class and transfer it to the elites. HELOCs were the last piece of the pie, taking away ownership of the last significant asset owned by many middleclass Americans. Now the banks get made whole by the FED, the people lose their homes and the process is complete.
Why lend people money now, they no longer have any collateral to pledge against it.
Good point. Let's not forget reverse mortgages too... OH! and insurance policy buyouts. All of these are middle class giving away their wealth. Of course, with all of these and HELOCs there had to be 2 sides to the transaction. I can't blame the elites 100% as you had to see you were giving away your family inheritance for your "toys" today.
There's still lots of money in retirement plans and there's also Social Security. Just like oil companies won't let us not be dependant on oil until the last drop is sold, so this heist will continue until the last drop of wealth is squeezed out of the middle class. It's really interesting that this economic mugging is going on at the same time we are losing our liberties.
Nice Observation Bele.
Maybe if he just gave money directly to the people, instead of the banks, he could generate the spending he's so desperately seeking. He's trying to keep the game going without changing the rules - to continue the 'wealth confiscation through debt' game, but what he missed is that giving money to the banks does nothing to increase economic activity if the banks refuse to lend and the consumers refuse to borrow. Fairly significant flaw in his analysis I'd say.
Would not go down with the other players in the global economy -- the USD currently buys stuff from anywhere and everywhere -- if other countries realize that USD is being given away to the American people without any production behind it, they will seek changes to the global financial system.
"Maybe if he just gave money directly to the people..."
Yeah, what happened to the money? Really. Where is it?
The only way out is to create wealth. Giving money away creates the opposite effect, laziness.
this is what happens when you get too much education.
exactly, NONE of the money has reached any entrepreneur or real employer. Thanks to corrupt govt, it goes to fat cat cronies.
Interesting that you would suggest that -- It's exactly the conclusion Steve Keen had based on his simulation models of a credit-driven economy. Mathematically, that was the thing that had the greatest positive impact on the economy going forward. (Ironically, giving money to the banks made it worse, because of the increased public sector debt liabilities going forward for money put to non-productive use.)
Of course, there are two problems:
mikla,
Giving money to everyone is the functional equivalent of forgiving debt, which is the functional equivalent of destroying savers, which is default. Printing money to pay off sovereign debt is the functional equivalent of...default. Persistent deflation results in economic collapse which results in inability to pay off debt which results in...default.
Looks to me like we're gonna default. Since the currency is debt-based, that means it will default, too.
BTW, Bruce, this is an excellent piece, and I am gonna aim some friends at it.
SWRichmond -- I agree. The only way forward is default, and we will merely debate the terms of the default, like you state.
The Keen math merely suggested the debasing-to-consumers accelerated the system correction to restoring economic behavior (production and consumption), as opposed to debasing-to-banks which amplified the problem (which was, "too much debt"). At least cash-to-consumers is based on math and common sense (demonstrably shown in Keen's models), but I wouldn't have been excited about doing that either (it's a MASSIVE perturbation of social contracts with SEVERE public policy implications). The "logic" is that the deflationary unwind would be offset by retiring actual debts: The exact same thing that happens in bankruptcy discharge. Yes, it's a default event, but after discharge, both the creditor and now-defaulted-debtor get on with their lives.
In contrast, what we did was the worst possible thing: The debts were not discharged, and were actually increased (the public owes more than ever). We retired no problems. We massively leveraged up.
That's why I now agree that we're screwed. There's no path forward. We had more wiggle room a few $Trillion ago. While it is *possible* we previously could have saved the system (for whatever that was worth), IMHO it is no longer possible. Darn that math thingie.
Also, I agree with you that, "Bruce, this is an excellent piece"....
Negative tax rates!
OK, this isn't really that hard.
1) Massive tax cuts. If you dislike the injustice of most of the tax cuts going to the people who pay the most tax, then goose the earned income tax credit so the government kicks in two dollars for every dollar earned in a min-wage job. Etc. (Oh, and the deficit? Simple, QE.D.)
2) As to the Fed and the banking system, it depends on how smart they are as parasites: smart parasites do not kill their hosts. Perhaps they are smart enough.
Sorry, but what makes you think they (Fed & TBTFs) are "smart" parasites?
I think they are extremely dumb parasites. Just wait until the rabble arrives with torches and pitchforks when are tired of being bled dry - it's going to be fun.
Why is everyone scared of deflation, it should be expected after the debt fuelled growth of the last decade. USD purchasing power and employment are the real meaningful metrics of economic success. Clean the system and get housing align with income and people will start purchasing again. Inflation targets are poppycock!
Absolutely correct.
Unfortunately for us all, we need to learn to live with a lower standard of living.
That is our first part in this effort.
Our second duty is to mobilise & throw out the moneylenders (moneygrabbers).
Deflation ruins the debtors ... who is the biggest debtor in the world?
sschu