Evergreen

Bruce Krasting's picture

 

 

I live not too far from a 100 year-old dam that’s part of NYC’s water supply. There’s a roadway that runs over the top. For years, the locals used the dam as the quick-way to town.

 

That ended a few days after 911 when some SWAT guys showed up. The thinking was that maybe the terrorists would hit the water supply next. That lasted a few months; then the SWAT guys left, and were replaced with NYS prison guards (a nasty lot). The guard guys hung out in a hut, smoked cigarettes and talked on cell phones.

 

Two years of guard duty (and a ton of OT) went by with no attack, so the Home Land Security folks brought in a few big rocks, and a heavy cable to keep things safe, sort of.

 

 

Things stayed like that for another five years, all the time people complaining that they had to drive miles out of the way, and the kids were stuck on buses for hours and it wasn’t safe as fire, police and ambulance had to go up the side road.

 

So finally push came to shove, and there was a big meeting, and the folks at the DHLS worked out a deal with the County. The dam roadway would be reopened; but only after the national threat alert went to green.

 

Green?

 

 

 

American won’t see a “Green” alert level for another fifty years. What kind of answer is that? It’s a lie.

 

I thought of this story after reading the comments from the Swiss National Bank’s Vice-Chair, Danthine. He set a time frame for how long the SNB would maintain the 1.2000 peg against the Euro. His words:

 

SNB can keep 1.20 cap as long as needed

 

As long as needed? That's about as open-ended as it can get. This language could be interpreted as meaning 1-2 years, it could just as easily mean ten-years (forever). Danthine is describing an inflexible policy that has no defined ending. I think of this as "Evergreen" monetary policy.

 

Evergreen policies are evident at all of the big CBs today. The ECB's, Mario Draghi, has used the word "Unlimited" when describing the scope of his willingness to intervene in the capital markets. He has also used the word "Forever" when describing the duration of the fixed exchange rate regime in the EU.

 

Forever + Unlimited = Evergreen

 

Japan has been Evergreen for years. Is it ten rounds of QE that the BOJ has done so far? And today, in what I find to be an extraordinary development, there is a promise that Evergreen will be taken to the next level. In less than a month, Japan will have an election, the outcome will mark the end of the concept of an "Independent Central Bank". The leading candidate, Abe, has promised that if elected, he will force the BOJ to conduct money printing monetary policies that would have no bounds.

I think of this as if the government was handing out cyanide pills. The markets disagree. The Nikkei has been on a tear ever since the national elections were called:

 

 

Why is it that the promise of more printing always brings with it a ramp up in equity prices? After ten failed attempts, one would think that investors finally "get it". QE does not work, it just distorts.

 

 

The Mother of all Central Banks is, of course, the Federal Reserve. Ben Bernanke, his cohorts at the Fed and the usual suspects in the press have been preparing the markets for the coming QE4.

Janet Yellen spoke a week ago, she talked Evergreen:

 

The three elements of forward guidance that were adopted by the FOMC in September 2012 would have been unthinkable in 1992 and greatly surprising in 2002, but they have, in my view, become a centerpiece of appropriate monetary policy.

 

Right. What was, not so long ago, "unthinkable", is now the "centerpiece". These people are actually proud of this "accomplishment".

 

Then Bernanke spoke, Evergreen was his message too:

 

we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

 

In other words, there is no scenario for an end to printing.

 

And finally, today, the WSJ's ace reporter, Jon Hilsenrath, has an interview with Federal Reserve President John Williams. The message? More Evergreen talk.

 

Conceptually you could imagine some upper limit to this but I don't think we're getting anywhere near it.

 

On whether the Fed could stop monetizing any time soon?

 

Stopping or scaling back would be "counterproductive" for the economy.

 

The US is at a tipping point on monetary policy. Operation Twist ends in December. The mind numbing reality is that if the Fed were to allow Twist to just end, it would be contractionary.

Traditionally, monetary policy could be either Restrictive, Accommodative, or Neutral. In 2012, Neutral is equal to Contraction. There is no longer a middle ground. Either the Fed adds more to the system every month for eternity, or else.

And that is exactly what will happen in December. The Fed will do QE#4, it will result in an additional $40+B per month of Fed buys. Along with QE#3, that means the Fed will be monetizing debt to the tune of $85B a month ($2mm a minute, 24/7). When QE#3 and #4 is ending, we will have QE#s 5 and 6.

Bernanke has said many times that all of his efforts are just temporary. That the big balance sheet of the Fed can be reduced with no problems at all when ever it might be needed. Ben's lying. He's fibbing in the same way as suggesting my roadway might reopen someday soon. America is never going to have a Green Terror Alert status again. The answer to the question, "When's the shortcut gonna open again?" is, "Never". The Fed is no different. They are committed to an Evergreen approach. They have no other alternative.

The major economies of the world are faced with Print or Die. So print it will be. I do wish the monetary overlords would acknowledge that what is being done is irreversible, and that the consequences will be felt for years. What was once unthinkable, is now permanent.