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Bernanke - I'm Slowing Down the Ship

Bruce Krasting's picture




 

A full trading day after the release of the Fed minutes has brought us some reasonably significant changes in market levels. S&P –1.5%, Gold – 3.5%, Crude –1.5%. Apparently, the confirmation that it is on hold surprised the market. (link)

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I’m not surprised. Bernanke understands that  upping the anti with more QE would send the price of crude through the roof. The deflationary effect on the consumer economy of another dollar increase for gas would far outweigh any positive consequences that another LSAP would have produced.

Some random thoughts: (Warning, I stray from side to side on this.)

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-I see that the Fed has been put in check by the global price of crude. While this is not checkmate, it forces the Fed to move to the defense. The language from the Fed meeting confirms it. For the past four years, the Fed has been on the offense. It has had no opposition from the markets. The subtle change in the Fed’s position is a major change in its strategic advantage. To me, this represents a significant change of events.

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-While this represents an important strategic change, the reality is that the short-term monetary consequences are negligible. ZIRP will linger on for at least another year. As as a monetary stimulus, ZIRP has much greater consequences to the global economy than do QEs, TWISTS etc. It's as if the Fed has shifted from fifth gear down to fourth. It's still speeding ahead. The shift to fourth is more about gaining some additional traction over a rough spot, not about a change in velocity.

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-Bernanke has said that if there were to be a new TWIST, the operation would be “sterilized” by reducing very short-term cash liquidity (2-14 days). The Fed would have to do that because they have no more medium term paper to swap against long-dated paper. It is faced with an operational constraint to extending TWIST. The result is the necessity to drain short-term liquidity to complete the swap.

I think the sterilized swap is a stupid terrible idea. Yes there is a lot of cash around.  But if Ben thinks he can suck up $800b of cash and not have a consequence, he is mistaken. The financial markets have been running on dirt cheap money (0.1%) the past few years.

I wonder if some folks with white spats haven’t whispered to Bernanke, “If you quit on QE we will be okay. But whatever you do, don't give up on the high-octane liquidity!”

 

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-IMHO if the US economy is buying up 15m cars (annually) it is not in crisis, and does not need emergency monetary measures. I’m not ignoring high unemployment. I’m saying the problem is structural. Hot money can't fix this problem and hot money is causing other problems. The question is, “Is the Fed thinking like this too?”

The Fed has a dual mandate: Price Stability (PS) and Maximum Employment (ME). If Bernanke had been asked the question at any time over the past three years,

 
“Between the two mandates, how are you allocating your efforts?”

Bernanke would have answered:

 
“99% to ME and 1% to PS.”

 

What would Bernanke’s answer to this question be today? Would he say:

 
“95% to ME and 5% to PS.”

 

Or would he say:

 
“We’re back to 60 - 40”.
 

Answer:  It isn’t 99 - 1 any longer, and we’re still a long way from 50 – 50. But the needle has moved on this measure. This too is very subtle, but not insignificant.

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-As Bernanke withdrew one card from the deck, he has inserted two jokers. These jokers can be played by Ben anytime he likes it.  He just needs an excuse. I wholeheartedly agree with the sentiment that all it would take was a 20% correction in the S&P and we would have QE3 in a NY minute. 

Think about that. It’s insane, but it’s also true. The economy can’t expand unless the S&P steadily rises. What was once cause and effect is now effect and cause.

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-Bernanke has a bad sense of timing. He iniated QE2 in response to an “invisible wall”. He launched Operation Twist in response to a slowdown he (and others) thought was coming last summer. Neither of those “slowdowns”  actually happened. It was just the New Normal ebb and flow of the economy. Bernanke missed the signs.

I wonder if Ben is suffering another bout of bad timing. He is sailing a big ship and it is on fast forward. He is sending out signals that he going to slow the ship down. Definitive evidence that the ship is slowing will come when/if the Fed announces that it will not extend Operation Twist. (The White Spats folks are insisting it’s coming in June).

If the Fed does not renew TWIST, then the history books will say that this was the turning point of a move away from monetary accommodation. Those books may compare the timing of the Fed's transition to the fateful tightening steps the Fed made in 1936 that precipitated the second leg of the Great Depression. Funny thing about those history books.

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-Absent a blow up in the stock market, I don’t think that Operation Twist will be renewed. That will be a big surprise to the folks with the spats. The likes of Morgan Stanley and PIMCO are loaded up for a new MBS TWIST. I believe that the deep thinkers on Wall Street are missing the political angle on this. Bernanke’s hands are tied by the election. If he comes forward in May with a New Twist program that will last through November 15th, the Republicans will (rightly) call foul. Bernanke does not want to take the resulting flack. It would tarnish his and the Fed’s image.

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-There will be no more QEing or TWISTING until after Christmas. By then, the fiscal time bombs that are set to go off on Jan. 1 will make any steps the Fed takes irrelevant.

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Thu, 04/05/2012 - 11:59 | 2319629 Widowmaker
Widowmaker's picture

You bet, a dynamic "standard" for fucking retards and economists "in da klub" of asymmetric information racketeering.

Oh, and don't forget to exclude anything that moves.

Thu, 04/05/2012 - 09:21 | 2319066 gwar5
gwar5's picture

The Fed has painted itself into a corner and can't raise rates. That is the morbid fascination of watching what the FED is doing, and why this is a one way trip for the USD.

 

If the FED jacked up rates Volcker style, the 30 year bond bubble will burst and the FED and current monetary system would not survive. The value of all those existing bonds out there would tank and all the banks holding those (former) "Tier 1" capital reserves would become insolvent, way worse than the housing crises. More, the FED is the biggest bond holder and would itself be solvent as they are already leveraged to MF Global levels.

The FED could not even print their way out because nobody would want the USD at that point, as they are backed by said UST bonds which would be increasingly worthless. The UST bonds underpin everything in the global financial world since the USD is the reserve currency. Jacking up rates by the FED will just blow up the world sooner rather than later.

This Catch-22 effect of the FED is well noted by Rickards and others, who also point out that this effect is also enormously magnified at these current historic low rates. Example, if rates on a bond is now 1.5% and Bernanke has to jack up rates to 3%, the face value of the existing bonds might get cut in half right away. The FED, banks, and pension funds holding the bonds would get killed -- especially if they are leveraged -- and set off the daisy chain of Derivatives and USD collapse. All the banks would instantly be MF Global and money would disappear. TEOTWAWKI.

Moreover, even if higher rates did strengthen the USD, and the FED managed to survive, it would kill housing, jobs, the rest of the economy, and tax revenues, and still have the same result in the end.  

Plan B to kick the can a little further down the road?:  As a last resort, governments use financial repression and confiscations to force their citizen's money into their bonds, ala Argentina, to be the bag holders funding insolvent banks and government. Repression is already underway and confiscations ("Transfers") of US private pensions (401Ks, IRAs) has already been discussed in congress as a way to fund USTs.

It's the end of times.

 

 

 

Thu, 04/05/2012 - 08:08 | 2318897 BeetleBailey
BeetleBailey's picture

barliman...you need to do a 5 minute piece on a financial news network daily. well stated.

 

shit pie. LMAO

Thu, 04/05/2012 - 06:59 | 2318819 BandGap
BandGap's picture

For the life of me, and I did some of the same pharmaceuticlas in the 70s, I can't see how this hasn't happened already.

 

Thu, 04/05/2012 - 05:34 | 2318756 spinone
spinone's picture

High interest rates can't happen because of the national debt.  Those kind of interest rates would ruin the country in months.

As far as stagflation, we've got that already.  And I think its going to last awhile.

Thu, 04/05/2012 - 05:32 | 2318755 Freegolder
Freegolder's picture

I concur with your line of thinking. It is inevitable that the huge increases in the money supply and the deficits over the past 30 years will start an inflationary crisis.

Taking your view to its natural conclusion, it is inevitable that we will have full blown currency collapses and crises around the globe: America, Japan, the UK, maybe Europe too.

I think you would benefit from confirming your hunch with some research over at Fofoa's blog. Maybe see you there (I am a reader there, not Fofoa!).

Thu, 04/05/2012 - 10:57 | 2319420 mess nonster
mess nonster's picture

Let's imagine for a second that the Tooth Fairy waves a magic wand and the economy is "fixed", but we must still service all debt accumulated up to the present moment.

There is a number out there that represents the annual economic growth percentage rate needed to pay interest on all that debt. I don't know what that number is. Maybe no-one does. Is it 3%  annual global growth? 5%? 7%? Where does the energy come from that literally fuels all that economic growth, growth I might add that is needed simply to pay the interest on the present global debt levels?

The only source of energy input that can solve our need for this level of annual economic growth is over-unity devices, which like UFO's, "MIGHT" exist, except no-one has any concrete evidence. The reality is, without the mythical over-unity device, our current fossil-fuel dependent economy is caught in a negative-input cycle.

First, capital is tending to freeze up, (and will freeze up, instantly, as soon as the different breeds of QE stop) and capital is what is needed to fund the levels of exploration and extraction for fossil fuels needed to sustain the growth needed to service current debt levels. So, in other words, we must go deeper and deeper into debt in order to capitalize an ever expensive extraction of fossil fuels. The planet may (or may not) be lousy with hydrocarbons, but the reserves are more difficult and more expensive to get out of the ground.

We're literally behind the curve. Globallly, our system is generating more debt than it is finding the energy needed to service that debt, or even the debt we already have.

We may have inflation or hyperinflation in the short term, but it will be temporary, kind of like the surge in adrenalin and blood pressure that is experienced when someone is in the process of dying. Death, one needs to remeber, is a type of deflatinary event. After the pulse of hyperinfllation is over, a Peak Oil (whether triggered by an actual depletion of fossil fuels, or a virtual depletion based on the mechanics outlined above) deflationary global death of the economy is inevitable.

Peak Oil bitchez!

 

Thu, 04/05/2012 - 10:26 | 2319311 DaveyJones
DaveyJones's picture

fofoa does great work

Thu, 04/05/2012 - 05:38 | 2318761 spinone
spinone's picture

I think we will suffer along for many years without a crisis, with higher prices, high unemployment, a decreasing standard of living, some street protests, zombie banks, and elite that profits from the disfunctional statis quo

Thu, 04/05/2012 - 08:55 | 2319003 Vince Clortho
Vince Clortho's picture

How do you define crisis?

Where do you think the U.S. is right now?

Thu, 04/05/2012 - 02:27 | 2318683 Cthonic
Cthonic's picture

The rate of price inflation has become too great to go unnoticed. No one needs access to A.C. Nielsen data to see that the basics (i.e. non-substitutable consumables) are going through the roof at a double digit rate.  Obama isn't going to take the heat from this, and Mr. B knows it.  His whole term as been a long drawn out slow play to the endgame that everyone involved knew was unavoidable.  The Fed's unstated mandate isn't about price stability or employment levels, it's solely about surviving as an institution.  I'd hate to be sitting in 30 yr Treasuries here.

 

http://research.stlouisfed.org/fred2/series/USGSEC

http://www.forbes.com/sites/merrillmatthews/2012/03/22/obamas-love-hate-...

Thu, 04/05/2012 - 01:36 | 2318647 akak
akak's picture

Yeah, sure, Bernanke is going to stop the printing presses, and the not-so-covert monetization of US federal debt.

Just like the typical alcoholic "quits" drinking .... today .... and tomorrow .... and the next day .... yep, I'm really quitting this time!

Thu, 04/05/2012 - 01:43 | 2318651 SilverIsKing
SilverIsKing's picture

Hey Bruce, have you considered how they're going to fund the deficit this year, next year, and every year after that?

No? I didn't think so.

Thu, 04/05/2012 - 01:33 | 2318641 Indrid Cold
Indrid Cold's picture

Bernanke - I'm sinking the ship.

FIFY.

Thu, 04/05/2012 - 01:37 | 2318610 DeadFred
DeadFred's picture

My BS alarm has been going on overdrive ever since the "minutes crisis" started. No one can really be surprised by the minutes, they say pretty much what the announcement said. People are surprised because the minutes of a meeting said the same thing as the press announcement about the meeting? Really? No one who believed the Fed was covertly planning QEwhatever thought they would say so in the minutes, be real. The markets tanked because people with enough resources to matter were ready to start the tanking two nanoseconds after the minutes were released, next cue the MSM stories (also penned in advance) explaining the reaction. The only question is what is their plan. Most likely in my mind is a trap to catch anyone who has a bearish bone left in their bodies by ripping their faces off when they go short. Do this once or twice and they will have a much easier time keeping the ramp job going until BO gets re-elected. Choice number two is they are using the same rally/crash technique they've been using since God was a corporal. My preference is slightly toward #1 because of all of the MBS purchases. In my mind there is NO WAY they made all those purchases without knowing the profit was coming. Possibly some of the FOMC members had a spine and Ben wasn't able to deliver, explaining his recent lunch with the boys ("please guys, I tried, don't make me sleep with the fishes!". The banks have always had plan B waiting if it was needed. Tried and true Plan B.

Thu, 04/05/2012 - 01:51 | 2318657 SilverIsKing
SilverIsKing's picture

The market didn't react to the minutes but rather the minutes are used as cover to kick equities and commodities lower. It's all orchestrated to achieve the desired result.

These same minutes could have been released and the market could have ignored it just the same. They drive prices lower on the heels of the minutes and then spin it in the media to alter perception so funds sell to in order to help them get things down.

There will be a point when these games have little effect and the dip will be quickly bought by those who fully understand what's transpired.

Thu, 04/05/2012 - 10:35 | 2319336 mess nonster
mess nonster's picture

Somebody with more computer literacy please correct me, (because I am making up my own terminology),

But an HFT algorhythm is just a logic circuit desgined to extrapolate into the future. If I look at ZH, a gogole algorhythm guesses I may want to date rich men or restructure my debts, and I get ads for that. (I'm debt free and heterosexual male). So, considering the stellar track record of google's algos, how good are the HFT algos, especially when trying to decipher Fed language in the nanoseconds after a speech, or minutes release?

Or, if algos simply respond to market movements, then the prime movers are insider humans, and the market is rigged so that the insiders make their trades first, the HFT trades get sloppy seconds, and everyone else is upside down in the tent.

I'm sure I'm not making sense of it all, but at least I'm trying.

Thu, 04/05/2012 - 15:10 | 2320133 jayman21
jayman21's picture

+1 - google's algos are a bit off latly.

Thu, 04/05/2012 - 11:49 | 2319601 Cthonic
Cthonic's picture

HFT is all about knowing about incoming orders and responding to them before anyone else.  So they don't extrapolate the future, they merely get there a timestep more quickly than the next guy. Whether that timestep is a tenth of a second, a millisecond, or a microsecond is immaterial so long as the matching algorithm operates in a first-in first-out serial fashion. In effect, HFT is a front-running mechanism that exploits the tiered temporal access structure of existing markets.   There are several ways an exchange could render HFT irrelevant, however that would be financially detrimental to the exchange itself (they sell faster access and faster feeds at steep premia to prole access).

Thu, 04/05/2012 - 01:01 | 2318599 barliman
barliman's picture

 

Bruce,

Let me throw another log on this speculative line of reasoning fire you've built. There has been MSM coverage today of the expected acceleration of mortgage foreclosures and the continued drop in housing prices  that will result as the banks start to clear their shadow inventories now that they have bought off the 49 state AG's.

How does Bernanke initiate LSAP's (i.e. QE3) even in the face of a 20% drop in the S&P given the public acknowledgement that the assets being purchased are being continuously devalued after purchase?

(Yes, Bruce. I know he already HAS done precisely that BUT the MSM was in full out "green shoots" mode covering his tracks while he was doing it and Europe was a year away from being in the headlines of the MSM at the time.)

barliman

Thu, 04/05/2012 - 00:59 | 2318598 chump666
chump666's picture

Bernanke is crazy.  No doubt there at all.  Oil inflation hit hard three mths ago, interest rates are nothing = savers got ripped some more 

I think we get one last gasp on money printing in whatever form he chooses, there are still a lot of USD's in circulation.  Look at the charts now.  Dow/S&P tank on Bernanke trying to slow down inflation directly linked to the oil price, but Asia sells USDs and equities stay somewhat supported, that an the oil price is bid again.  Sounds like?  Losing control of inflation outbreaks. 

So the Bernanke Fed wealth destruction is now on auto-pilot.  If the f*cker was serious, he will need to break the equity market by at least 5% neg, smash down the oil price back to 80.  I think equities will tank anyway on HFT/algos losing the plot (due major flash crash at some-point in 2012).  But oil will stay bid over 100.

The central bank/s induced endgame is 2012.

Thu, 04/05/2012 - 01:52 | 2318658 LowProfile
LowProfile's picture

Don't think he's crazy, just deluded and desperate.  It's all on the line for him.

I wonder how much gold he owns...  Hmm...  : /

Thu, 04/05/2012 - 02:26 | 2318682 chump666
chump666's picture

Same thing.

Thu, 04/05/2012 - 00:52 | 2318590 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Bernanke becomes what he always fought against - someone who gave up fighting a depression.  I don't know if Bernanke is going to give into politics.  Economics is a science, remember?  And science doesn't have opinions, just facts.  If Bernanke needs to print, his calculations will tell him so.

Thu, 04/05/2012 - 00:35 | 2318570 q99x2
q99x2's picture

I smell a Bernanke. I have to take a Bernanke. I have to wash my Bernanke. I fell on my Bernanke. I feel like a Bernanke. My Bernanke is bothering me today.

Thu, 04/05/2012 - 11:02 | 2319444 rosiescenario
rosiescenario's picture

My proctologist said the bleeding from my Bernanke is normal....

Thu, 04/05/2012 - 18:01 | 2320654 DaveyJones
DaveyJones's picture

I think we have the same proctologist. Is his name Goldfinger? 

Thu, 04/05/2012 - 10:20 | 2319291 DaveyJones
DaveyJones's picture

unfortunately, your biopsy revealed a Bernanke, and he's growing 

Thu, 04/05/2012 - 06:19 | 2318789 onthesquare
onthesquare's picture

...my Bernanke has a rash.  My Bernanke hurts.  Did anyone see my Bernanke.  You have been Bernanked....

Thu, 04/05/2012 - 10:14 | 2319281 Straw Dog
Straw Dog's picture

The dingo ate your Bernanke

Thu, 04/05/2012 - 00:50 | 2318588 Eireann go Brach
Eireann go Brach's picture

Bernanke just rearranged the deck chairs on the Titanic! Now as dear Rose noted to the captain, there are not enough lifeboats to carry all the passengers! So now It is time to rewrite history and throw all the fucking aristocrats overboard while we sail off into the sunset in our lifeboats full of gold and silver!

Thu, 04/05/2012 - 00:29 | 2318560 hotkarlandthecl...
hotkarlandtheclevelandsteamers's picture

bruce,

 

who else will take down the treasury supply coming if not the fed.

Thu, 04/05/2012 - 01:33 | 2318645 DeadFred
DeadFred's picture

Primary dealers borrow 100 billion from the discount window and use it to buy 10 and 30 year treasuries. The Fed repos the bonds in the new 12 year UltraLTRO program. Remember, even Germany says the LTRO isn't printing, it's just a loan. Most of the 30yrs are ending up at the Fed now but they're running out of short term treasuries to sell. I'm sure no one will see through the plan and call it monetization. I'm sure the dollar will remain strong.

Thu, 04/05/2012 - 04:34 | 2318734 barliman
barliman's picture

 

I'm sure you are being sardonic

Thu, 04/05/2012 - 00:22 | 2318551 XitSam
XitSam's picture

"Think about that. It’s insane, but it’s also true. The economy can’t expand unless the S&P steadily rises. What was once cause and effect is now effect and cause."

OK, I've been thinking about it. Are we talking about fake growth as if that's all that matters now? Something along the line of, "If I cut an orange in four pieces, I have four oranges!" that a three year old could see was false?

Thu, 04/05/2012 - 01:05 | 2318605 LowProfile
LowProfile's picture

I'm amazed that an obviously smart guy like Bruce has been bamboozeled by this.

Someone send him this video please and then smack him upside his head.

Thu, 04/05/2012 - 02:05 | 2318669 OldPhart
OldPhart's picture

I can only dream of having my money increase at the same pace as inflation.

Thu, 04/05/2012 - 09:00 | 2319017 Vince Clortho
Vince Clortho's picture

Just put your money in a savings account at your local bank.  Think long term.

Thu, 04/05/2012 - 13:39 | 2319941 OldPhart
OldPhart's picture

Our bank pays 1/10 of a percent interest.  Plus they have that money available for making loans, hypothecation and rehypothecation...who in their right mind would leave ANY money in a bank?!

My liquid money is under my mattress.  My long term money is stacked in a file cabinet.  Every once in a while I feel like Scrooge McDuck.

Thu, 04/05/2012 - 01:48 | 2318655 LowProfile
LowProfile's picture

Huh, they junk me, but not XitSam...  Even thought we said the same thing...

...I have a frenemy!

Fri, 04/06/2012 - 21:20 | 2323873 XitSam
XitSam's picture

Great video! I gave myself a downmod so you don't feel so bad.

Thu, 04/05/2012 - 11:36 | 2319563 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1, yeah I have one too....

Thu, 04/05/2012 - 15:17 | 2320156 LowProfile
LowProfile's picture

Friends may come, and friends may go...  But a good enemy will stick with you to the bitter end.

Thu, 04/05/2012 - 00:02 | 2318511 disabledvet
disabledvet's picture

"we know...and yet we do not know." Sphinxering. in other words "we know he must keep interest rates at or near zero" (so that government can function: indeed he has even said so and given a time/date certain!) and yet..."the market agrees that he's not going far enough." huh?http://www.youtube.com/watch?feature=player_detailpage&v=LQqq3e03EBQ

Wed, 04/04/2012 - 23:56 | 2318483 Hansel
Hansel's picture

All of this mental masturbation over Fed semantics...  The Fed left its "cover-my-ass" clause in the minutes and they can act whenever they feel like it.

Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity. Recent monthly readings on inflation had been subdued, and longer-term inflation expectations remained stable. Against that backdrop, members generally anticipated that the recent increase in oil and gasoline prices would push up inflation temporarily, but that subsequently inflation would run at or below the rate that the Committee judges most consistent with its mandate.
...
The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

There's also no way the deficit gets funded without the Fed.  There was nothing revealing in this week's minutes.

Thu, 04/05/2012 - 10:25 | 2319307 GeezerGeek
GeezerGeek's picture

There's also no way the deficit gets funded without the Fed. That's true, but isn't the flip side just as true? Would the Fed be able to create unlimited amounts of fiat if the Federal government did not run a deficit each year? It strikes me that the FR and central government are just two sides of the same coin, and to blame Ben ignores the part people like Barack and Timmah! have to play. I grant that the Fed does stuff with/for the big banks, but how detrimental an effect could the FR have if DC wasn't borrowing all that money?.

Thu, 04/05/2012 - 14:42 | 2320066 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

That's their game, duh. That's why bankers love wars, they make their best clients (governments) borrow lots of money. The whole fraudlent system is set up so bankers can loan us the money we need, the more the better. Constitution says we are only allowed to print it ourselves, but the bankers bamboozled us into agreeing to create a private central bank cartel so they could loan it to us. Read The Creature From Jekyll Island.

Wed, 04/04/2012 - 23:45 | 2318474 tomRapheal
tomRapheal's picture

60% of US deficit in 2011 funded by Fed.  ZIRP and twist is essentially the same as QE.  If the Fed isn't buying US debt, who will?

Lots of new demand to be found, with a trillion or so more of fresh debt in 2012 to be purchased...

Thu, 04/05/2012 - 10:06 | 2319255 Hedgetard55
Hedgetard55's picture

Martians will buy the debt. Or reptilians from the 7th dimension. Or the Annunaki with all their gold will buy it.

Wed, 04/04/2012 - 23:44 | 2318470 Big Ben
Big Ben's picture

Speaking of slowing down the ship, it seems to me that Ben Bernanke bears a curious resemblance to Captain Smith of the Titanic:

http://www.nationalarchives.gov.uk/titanic/stories/edward-john-smith.htm

Captain Smith decided to sail at full speed through iceberg-infested waters on a moonless night with no waves (which deflect around icebergs and help make them easier to see), no binoculars for the lookouts, no searchlight, and with lifeboats for only two thirds of the passengers.

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