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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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Bingo! The bigger the bank, the harder they fall.
What 'growth' last decade? There was no growth.
exactly there was no real growth or innovation, just inflation of assets from debt.
something's got to give, either SPX or DXY or XAU......If they prop up SPX, then DXY's going <70, just initially.........We all know how they'll fix it though. Israel. Iran. Enough said.
They could do what P-Krug wants them to and nationalize the banks, forcing them to lend.
We could have one final grand party before the end.
Uncle Sam sits at the kitchen counter, late at night. His friends have left him behind, alone.
His head wobbles back and forth as he looks down at the empty Tequila bottles scattered in front of him.
He shifts his vision to the handgun in his lap. Sam grasps the grip, suddenly invigorated by a sense of conviction that he hasn't felt for centuries.
He raises the gun to his lips. The old man closes his eyes and inserts the barrel into the cavity until it bumps against the roof of his mouth.
His hands shaking, he unlatches the safety, and closes his eyes.
"...His hands shaking, he unlatches the safety, and closes his eyes."
He pulls the trigger and misses!
Or he just stumbles out of the house, firing wildly around at anything moving.
Cops respond.
WWIII
HA! Yeah, that's probably what will happen too.
sheeeeeeeeeeeeeeeeeiiiiiiiiiiiiiiit! that is what has been happening--since about 9 11.
true enough and it's sad. we are demigods in technology with reptile emotional brains. we should have married ron paul's military and foreign policy with a nordic countries' type banking policy and a major investment in, say, green technology/environmental cleanup (insert favorite relatively benign, somewhat useful employment improver with add on productivity benefits project) using the money/debt capacity we built up by not having the reagan/bush/bush deficits. oh well. if wishes were horses....
+1
HAHAHAHAAAAA!
Holy crap!
I keep going back and forth between "imminent danger" and several years of downward stairstep crashes.
This confirms my gut feeling that we are already falling off the cliff. So strange that most of the people around me are unaware that there is the potential for massive change on all fronts right now.
I'm glad I listened to all of you here (not Bravo) and bought gold and put it away somewhere safe.
Gold schmold piece of crap
Guys, you are just helping few miners to make good of your time and labour for something that's available sparsely in southafrica and Australia
Metals are so 19th century
All we need is the discipline of a Gold standard
a sensible money supply system that follows true Keynesianism [saving during Goodtimes and spending during bad times to smoothen the greed-fear Sine-waves]
No need for big innovation there
All we need to do is bell the cat and hit the reset button! But who can do it?
Humans aren't like computers, they don't come with a reset button which erases all their memories, when those who've saved forget they had any savings and those who are indebted forget they had any debt.
So which reset button are you suggesting we hit? Be precise.
Bennie B, how many times do we have to tell you that you are not welcome here?
Yes, "True Keynesianism" is the answer to all our economic woes! And we can pair it up with pure Marxism, along with the appropriate number of angels to administer both, and all live happily ever after.
actually maddy has a good point, however apparently impractical. what is casually referred to as "keynesianism" here and elsewhere would be far more accurately termed "deficit spending in good times and bad". which, as maddy notes, is NOT (sorry) keynes at all. he recommended, as noted, saving/building reserves/taxing more than spending in good times so as to be able to spend/use reserves in bad times. however politicians are apparently unable to do this (example: history of the world in the last fifty years). so what's a citizen to do? that, maddy et. al., is the question.
With a debt based monetary system, we need to increase public debt in order to increase the money supply.
The fact is that money is a form of public utility we treat as private property. This encourages and legalizes hoarding above the needs of the economy and that destroys the system. If we treated it as the publicly supported commonwealth it is, people would be far more careful what value they converted into money and this would preserve value in resources and stronger communities, rather than handing over such enormous power to the banks and government.
It doesn't need to be debt-based. For example, the money supply could be increased by the fed offering newly-printed cash for all automobiles over 4 years old (for example). Just sayin is all.
Gee, Bruce, are you trying to cheer me up?
Bruce
I know this is very late on the ZH moving target thread, but...
1. Isn't Ben's fatal flaw the concept of "no cost for the production of USD" ?
2. And do we not have a problem with Stocks (not the NYSE kind) and Flows with expansion of the money supply simply filling in the unrecognized writedowns of past macro economic asset mistakes ? Isn't this being reflected in the decline in the velocity of money as liquidity is used to shore up the past squanderings ??
Thank you.
Kayman
the problem is actually fairly simple. Ben printed money and gave it to the banks, who have used it to game the markets, lobby for "reforms" that will allow them to steal more, and .....give their managements multi-generational wealth generating bonuses....
ben forgot the peasants. ... cause, well, i guess he figured they don't count....well, surprise, Bennie Boy.......you spent well over a trillion dollars and forgot to strengthen the backbone of this economy....
and while you ignored them...hell, ignored, no, loaded them with several generations worth of debt in your money printing orgy for the banks....
they have wilted and died.
died, as in, it is over for.. how many people do we have on food stamps now? forty million? How many out of work? over 17% of the population?
they died Bennie. they lost their jobs...they lost their houses.....and can barely feed their families...
and so...
hey babe, they ain't going to the stores to lift that ol' retail spending any more. they don't have down payments for homes....nope.
but....Jamie Dimon's great grandchildren, hey they are gonna have swell lives, aren't they, Ben?
"He bet the farm to save the economy in 2009."
He will continue to spend our last penny to implement his policies.
Yes, Ben did give the monetary stimulus to the banks, for that by definition is the transmission mechanism for monetary policy.
The trouble which I have transcends standard monetary policy, reaching into the fiscal side of the ledger. Can reasonably be argued that the Maiden Lane deals were in effect liquidations, thus fiscal policy decisions and should have been booked underTreasury. Likewise, the actions which should have been taken with AIGFP alone, but extended to AIG in entirety, was fiscal policy. Just as extensions of credit to FNMA/Freddie, et al, are fiscal policy
Bank bonuses, profits and tax policy, once again are fiscal policy and thus the province of Treasury and Congressional Acts.
Little other than the absurdly gracious ZIRP and extension of credit via commercial banks down to and through any and all operating subsidiaries is Ben's doing. The expansion of eligible collateral to all forms, character and qualities is Ben's doing.
I neither here mean to assail or defend Ben but simply to point out that much of that which is being pursued is of a fiscal policy nature and thus should have been housed elsewhere (other than the Fed) and anger or concerns directed appropriately. However, the actions as taken have badly politicized the Fed, leading to further intrusive actions of Congress and the Administration. And we all know what the history of monetary policies has been when overtly managed by politicians. Dismal and ultimately, highly inflationary.
Think of it. Congress and/or the President will henceforth appoint the Presidents of the Regional Federal Reserve Banks. Political appointees. These folks comprise, along with the Governors, already appointed by the President and confirmed by the Senate, the Board of Governors of the FR System.
Which is worse? The current appointment structure (which can be argued is sub optimal) or pure political control?. Once again, history across the globe already for-tells the outcome. And it is Not Good.
Invest safely, my friends.
Mr. Bernanke is widely recognized as an expert. That is to say, he learned more and more about less and less until he knew everything about nothing. I wish this was a joke; but of course it isn't.
Do you know the definition of an "expert"?
X: is an unknown quantity
Spurt: is a drip under pressure
An "expert" is therefore an unknown drip under pressure.