Guest Post: Why The Fed's "Silver Bullet" Won't Kill The Beast
Submitted by Lance Roberts of StreetTalkLive.com
Why The Fed's "Silver Bullet" Won't Kill The Beast
Yesterday Fed Chairman Ben Bernanke pulled out the last bullet in his arsenal reaching back almost 50 years in a hope that just maybe this "silver bullet" will kill the vampiric drain of excess debt on the economy. Unfortunately, silver bullets don't kill vampires.
There is more to this analogy than just the approaching Halloween season. Our problem isn't low interest rates - it is excess debt which literally drains the demand for more credit. The recent release of the NFIB Small Business Survey showed this as businesses stated that acces to credit is not an issue. "Poor sales" are their number one concern and the lack of demand on their businesses do not warrant adding on more leverage. The number of businesses currently thinking this is a "good time to expand" is at some of the lowest levels on record. Likewise, consumers, are trying to pay down debt as worries about job security, rising food and energy costs and stagnant wages reduce their desire to consume and make debt reduction a priority. The excess debt that has been accumulated over the last 30 years as interest rates were in a steady decline, lending standards were reduced and massive pools of available credit were supplied has now begun the inevitable unwinding process.
Ben wrongfully believes that by lowering interest rates on longer dated maturities it will cut long-term interest rates boosting investment in both housing and business. The reality is that interest rates are already at levels twice as low as they were the last time "Operation Twist" was implemented and if the lowest rates in 50 years aren't spurring a demand for credit in the economy - it is doubtful that a further decline will do the trick.
During the previous "Operation Twist" the economy was experiencing a increasing trend of growth. Interest rates were also steadily rising as stronger economic growth allowed for higher rates of interest to be charged. Debt, as a function of GDP, remained well constrained at low structurally manageable levels. However, beginning in 1980, and as we have discussed in many past blogs, the economy shifted and interest rates began a very steady descent. This decline of interest rates led to a massive expansion of debt which ultimately sowed the seeds for slowing rate of growth in the economy.
The issue how is that we have entered into the "Japan Syndrome". Almost 30 years ago Japan experienced their own real estate/credit bubble bust. Japan has attempted virtually everything the Fed has tried from lowering interest rates, liquidity injections and currency deflation in order to restart their ailing economy - it has all failed. As a result of these monetary experiments Japan has remained in a protracted economic slump.
The process of attempting to lower interest rates in a highly indebted economy is doomed to failure before it starts. The are only a couple of things that will work to restart the economy at this phase of the game: 1) Significantly lower tax rates and simply the tax code, and; 2) drastically reduce regulations on businesses. Even these steps won't see an immediate return to economic strength as consumers must continue the deleveraging process of their own balance sheets and increase personal savings before they can return to historically stronger consumptive patterns. In turn, higher personal savings rates will lead to productive investment which will foster economic growth. Unfortunately, this isn't being allowed to happen.
Today we are not only watching the Fed duplicate earlier failed policy, we are also witnessing President Obama unveiling another $457 billion "stimulus" that will raise taxes by more than $400 billion and add at least another half-trillion to our nation's already massive $14.5 trillion debt. No one, that has the slightest bit of intelligence, believes that is the real answer to the problems that we face.
In reality, while the Fed still clings to failed Keynesian policies and the White House to failed "spend our way to prosperity" measures - the average American is slowly being sucked dry by declining wages and rising inflation. Those same policies combined with regulatory reform acts that are yet to be written, threats of higher taxes, poor sales and political turmoil have pushed businesses and entrepreneurs into defensive positions. Unfortunately, those entities and individuals also happen to be the only ones that actually have the ability to create jobs - not the government.
It is time to drive a stake into the heart of our problems - debt. The reality that we face today is not one of a monetary nature - it is purely fiscal. A credit induced boom has led to a massive period of malinvestment. We must now begin to realize that this is not a normal economic recession but rather a balance sheet recession. We must now do what is unthinkable for this administration - get out of the way and let the system clear the excesses. The process won't be easy but eventually dawn will come, the vampires will fade into the mist and economic life can and will resume.
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Silver? Bullets?
double check and double check.
Bernanke has lots more bullets left. Abolishing IOER could unleash a $16 trillion inflationary flood. Then there's the global dollar flood — lending to foreign banks at zero interest. Then even more QE.
Then there are the MMT hordes who even Krugman says are too keen on the printing press. Their solution is directly printing money to buy government debt.
And as equity markets tank, Bernanke is loading up the minigun ready to spray, bitchez.
Good news for gold (and silver and canned meat) bugs, bad news for everyone else.
http://azizonomics.com/2011/09/22/bernanke-didnt-pump-equities-get-dumped/
Maybe art will take off now?
Secrets of Art Funds and Art Investing
Silvercorp up today. Glad I held on because that is my only GREEN today. :)
Their solution is directly printing money to buy government debt.
Don't be ridiculous. Directly printing money to buy government would have a half-life of about a week. All private lending would immediately cease. All foreign capital would immediately flee the country. In other words, you would have instant hyperinflation. If they printed money to buy the debt on any meaningful scale, they would very shortly have to buy all the debt. It would be suicide for the Fed and they know it, so they won't do it.
EDog
I know you're smarter than I am on this subject, but I disagree with you and will share some of my ignorance with you.
"All private lending will cease.". And what private lending are you referring to? The only serious lending I see is going for the completion of 9 figure projects that were halted mid stream in 2008 when the first poop hit the fan. The lenders are probably getting a piece of the project in return and a huge tax write off if it doesn't fly.
"All foreign capital would immediately flee the country." Didn't we just see Der Schweiz hang out a sign saying "Foreign Capital Not Welcome?"
G 20 countries are taking their currencies down in lockstep. Foreign capital can run, but it can't hide. So it might as well say here.
When the dust from this volcano of debt settles, exporting will be the name of the game for years to come. And exporting countries have seen the Chinese fortune cookie that says "Get fiat low; get high at nite."
American consumerism will be gone for quite some time. Depending on how much recoverable oil there is left on the planet.
Do you like Ben Bernanke or do you want to bite his ankle?
I've recently started reading Minsky's "Stabilising an unstable economy"
I'm not far into it, and already his explainations of what the Fed did in 1974/5 is strikingly similar to today.
The key difference, I suppose is simple. As the editorial states, debt is a lot, lot higher now.
better sell your silver, and buy real bullets. Gold & Silver crash in the next few weeks.
Some sound analysis here. Please, whenever possible, share with us more of your keen insight.
Paper Gold & Silver crash in the next few weeks. There fixed it for you.
http://firemagick.blogspot.com/
Selling (or shorting) paper silver was indicated when it failed to exceed the August high early this month. I chose to buy FAZ instead. If it turns back, or if i begin to worry about my counterparty or his bank, I'll sell the FAZ and buy physical silver with the profits.
Silver is likely to test the May - June lows in the $32-33 range. It could go lower. But whichever way this crashcade continues, faith in digital and paper instruments is likely to crumble, leaving the field to the PMs.
re bullets: I don't understand the need, presuming you allready have some hunting ammo and a combat pack or two for your rifle(s). Who is after you? Got body armour? Without getting into tactics, how much incoming do you think you can survive? If you do survive, won't there (in most cases) be unused bullets and weapons to acquire from those who did not? If you have watched the reports from conflict areas, there is usually so much ammo around that people blow it off to celebrate whenever something good happens.
Talking about Silver, why is it 7% down today???????????????????
deleveraging of massive paper shorts?
shouldn't it then go UP?
Give it time and it will. PM's are the ONLY thing that is retaining value over time. The idea that a 10 year bull market just ended based on the FOMC proclamations is total bullshit.
Ride this dip out and pick up physical on the cheap. Right now people are shitting themselves in the paper market. Who gives a fuck? Physical is ALWAYS worth something and trades outside the banks just fine.
heard the same line during the real estate bubble: "don't worry. nationally, real estate prices have never gone down in unison. real estate is a great store of wealth".
gold & silver bubble is popping.. get out while you can.
Bah ha ha! Yeah, sure, you heard that from Bernanke of course, among others. The same ones saying that gold isn't money now.
Get out and into what? FRNs? ROTFL
Damn you're fucking stupid. I'm going to abandon a position with 100% yield YoY for a single day's downturn.
Into WHAT? Paper? Yeah right.
FYI, gold at or above $1500/oz by end of year = +8% yearly gain. Meanwhile, the S&P has to hit 1350 for the same gain. Does this seem likely to you? Yeah, that's what I thought.
The ONLY way Gold and Silver "crash" is if we enter a protracted secular DEFLATION period. Which simply wont happen with a fiat US dollar policy.
Tell me this, except for the 1995-2003 Below Fair value in Gold and Silver...show me One...ONE 10-yr period where the price of a gold necklace, or gold coins, or silver jewelry cost less that it did 10 yrs prior....
You CANT. Gold and Silver NATURALLY maintain their Purchasing power of durable goods and real services over any given period of time. in 10 yrs from now when a gallon of milk costs you a $20 bill, Gold will be woth 4-5X as much as now.
1 US dollar now buys you what 3 cents would buy you in 1930. However 1 oz of gold buys you roughly the same amount of stuff, as you could have purchased with i oz of gold in 1930. Look at the history.
perhaps gold and silver came up too fast, and maybe there is a correction, but they are not going back to $400/$8 / oz on ANY ongoing basis.
Look at a chart. SSDD. The twin 4:30, 8:30 AM beatdowns by new shorts, lets the manipulators cover old shorts at a better price. It's JPM. If they can't cover those shorts before 9/27, then they are forced to buy, and they die. It really is that simple.
It's manipulation, and it will not last very much longer.
Liquidation to cover margin calls. Gold and to a lesser extent are money, very liquid, easy to sell. Once again, nothing has really changed as we move from a debt based economy to a savings based economy. Buy the dip, brother.
Silver / commodities sell off? I'd be betting it has something to do with this
CFTC compromises of parts of speculative curbshttp://in.reuters.com/article/2011/09/22/us-financial-regulation-limits-idUSTRE78L11P20110922
They basically gave these crooks the green light to keep stealing.
Paper longs cutting their losses? Automatic stop loss sells? Margin calls? And don't forget trend followers jumping on the down escalator!
Read this and understand: in a climate of aggregate economic contraction, ANY aggregate debt is TOO MUCH DEBT because the credit in the future WILL NOT BE created to pay today's interest.
Understand that. Debt requires growth.
"Vampiric drain." Fine imagery.
Enter the Chairman...
http://www.kino.com/press/nosferatu/nosferatu3.jpg
Density:
Lead: 11.34
Silver: 10.48
Gold: 19.30
Gold makes better bullets. Silver's not even as good as lead (but a percent helps harden lead nicely, though it's an expensive way to do it).
You local gunsmith reminds you, the denser the projectile, the less rifling twist is needed for stabilization and the more efficient the projectile is ballistically. The man with the golden gun had it backwards (which is why I originally looked it up).
yes but it's so dang messy digging those gold bullets out of peoples flesh .......
I blame Dave Ramsey. He is obviously an enemy of the state.
I don't think he or his wife killed their daughter.
For TPTB to admit this is to willingly surrender their (illusion of) power. It - will - never - happen.
"Full speed ahead into the iceberg number one."
Pure bullshit. It's geophysical...oil supply has peaked.
All the money in the world cannot make net production rise past this point. Look, it's been motherfucking TRIED a ZILLION times by oil companies on individual wells, fields, and in entire countries.
You cannot print oil.
The OP's claims about Japan? Horseshit. Japan is FINE. Look, what can you say about them? SLUMP? Ok, they haven't fucking GROWN. That is NOT a slump! Everything they built is still there, there's just not more more more more more.
Our basic premises and assumptions need adjusting for what reality is now. Circumstances have changed; aggregate growth is presently not possible.
I agree with all your posts here.
If oil supply has peaked (and it certainly has), why wouldn't TPTB, who have a lot more riding on this game than you and I, WHY WOULDN'T THEY CRASH THE GLOBAL ECONOMY TO HALT DEMAND FOR OIL?
Or do you think they prefer to go over the lip of the event horizon sooner rather than later?
But Koo says a balance sheet recession means you need to firehose the economy with more and more stimulus?
Koo argues for fiscal stimulus, not monetary stimulus.
ROTFL.
Debt is fatal if you don't grow. Fiscal stimulus will beget monetary stimulus because there WILL BE no growth!
As long as the decline in oil production erodes our economic activity out from underneath us, there is ZERO percent chance that we can grow into the necessary credit creation to pay TODAY's interest!
"Debt is fatal if you don't grow." Yup, one of the better things you've said, trav. And the entire basis of the system is co-dependent on growth and inflation on a finite planet.
GoodLuckWithThat.
No debt of any kind since 1972 - I've learned to live without it. Total cash basis for everything. For the longest time, people asked me how I could live like that, while I thought "How can you live like that? Well, not for long." Seems I was right, not that it makes me specially happy to see others in pain -- even if it is self-inflicted. I just got lucky early, got in trouble with plastic, and said "no more, not ever" once I got out of that. It's only been marginally harder to live that way, which makes me think no bank is TBTF in reality - it will only kill the stupids, who we can more or less do better without.
Yeah, I got my stupid out of the way and cleared up by age 24. I consider myself very lucky, even though my early 20's were REALLY stressful.
Geez, you believe in Peak Oil? Don't tell me; An Inconvient Truth is also your favorite movie, right?
Peak Oil Production happened. Not from lack of reserves, but because of Peak Debt causing demand destruction. It was inevitable that it happen in some way. Sure, the Powez That Were wanted to "manage" an early Peak, to milk for profit, that's why refinery capacity was limited. Looks like they outsmarted themselves.
the bernank is only concerned with diminishing banker bonuses.
Starve the Beast.
Starve the Taxpayer
uh.. It's because FISCAL stimulus is the remedy. Monetary stimulus works during inventory-cycle recessions. But not during a deflationary death spiral.
It'd some kind of wonderhurt how the Republicans will not pass any fiscal stimulus bill, which will likely mean more suffering for millions of American.
But heck, if you're a youth/independent disenfranchised with the sytem, you wont' come out to vote, like you did in '08, helping Obama win. Republican win. The Union loses.
The Union was lost way back in the 1860s. Replaced by the corporate United States Of America, per the act of 1871.
pods
Then there was also the 'Emergency Banking Act' cant remember the exact date but late 1930's, where the US Corporation was declared insolvent and in receivership...most americans have no idea what they live under today.
http://en.wikipedia.org/wiki/Emergency_Banking_Act
From Wikipedia link below:
The sense of urgency was such that the act was passed with only a single copy available on the floor and most legislators voted on it without reading it.[1]
Sounds familiar.
Actually, I favor the Frankenstein analogy. The Fed and the Administration keep trying to stitch together failed iniatives from the past and hope that the patient will somehow come to life. If their ideas didn't work in the past, how can you reanimate anything other than a monster?
America has become Frankenstein's monster.
+10 Bernanke as the reanimator...lol
You know I can see him in a darkened room muttering to himself about "freshness".
Starring Ben Shalom Bernanke as the Bernaminator!
Stimulus? Somebody else said it here earlier. This is just The Bernank's way to transfer more shitty mortgages from the banks' balance sheets to the taxpayers'...at par FTMFW!!!
I still predict QE3 early 2012. It will come about around the same time Greece officially defaults. As many around here including TD have hypothesized, the FED needs a really good excuse to expand its balance sheet again. A clean hard drop in equities, not down to the 666 low but somewhere well south of 1000 (800 sounds good ). The amount of QE will most likely exceed the amount printed during QE2 but fall short of what they undertook during QE1. Anything over one trillion would risk the bottom falling out from the dollar, even if we get well north of 80 on DXY before the next round commences
January 2012 is also when the Bush Tax Cuts expire and might even be the time the Buffett Tax is implemented (pending the legislation is passed). Benocide and the FOMC no doubt figure this into their calculations hoping the tax increases will yield more tax revenue for the government from the money they print and also soften the blow of the double-digit inflation QE3 would produce. It won't work as intend of course just as the other QEs but it has never stopped them.
"(800 sounds good )"
So you know, S&P 500 yields now about 4%, lower it's goes higher
the div are. Compare Today Div to 2008 (almost none), and comeback with more realistic number than 800.
Also Buffet Tax will not be implemented.
500.
"S&P 500 now yields about 4%", wonderful! It was never about that. QE is all about the attempt to protect asset prices and keep the banks solvent... as per Ben's thesis 'the FED failed to act during the Great Depression allowing cascading banking failures...'. They are not about to let three years go to waste and let it all crumble now. It doesn't matter whether it hasn't worked so far they have never cared about the real economy.
4%??
What are you smoking? Some of those tasty 'forward yields'?
The current dividend yield of the S&P 500 is 2.15%
But don't let easily locatable facts get in the way of your delusions. Carry on.
yeah, that 4% didn't sound right to me either
Because dividends always stay the same, even in market crashes.
They have to do QE3 now, if they want it to have any momentary effect. The real economy is already grinding down and accelerating worldwide. The overall consumer/investor psychology of the current situation is devastating and certain to kill all interest in both sectors, if allowed to fester. We are going over the lip of the Event Horizon right now. They won't be able to pull it back this time, if they wait for further market reaction and the inevitable bankruptcies/failures.
If you look at the absolute destruction of the Bovespa and the stunning moves in the BRIC-related FX crosses, you can deduce that there will be widespread acceptance of such a QE.
The unwind of dollar carry is doing more destruction to foreign economies than a weaker USD ever could.
I like the way you think, babe. Of course, rationality seems not to do as well as snark around here.
I thought they'd print this time around. You come up with some good reasons why they decided to wait, but can they wait as long as you say? (I tend to think not just because of the condition of the banks, here and abroad.) Ben said The Fed can't do it alone...maybe this "controlled" mini crash is his way of pressuring Congress for some fiscal stim. If that happens, will we get coordinated fiscal/monetary actions?
My only question to the FED, why they use WORDS like
"Significant downside risk", knowing only those few words will
cost trillions to world-wide markets? Is this is political sh*t
to put pressure on Congress or they intentionally flash the Markets
so everyone start to begging the FED for additional Stimulus?
Usually FED is more optimistic than a wall street or the main street.. Trying to figure out what's this all about?
It's about fsck the fed, fdisk. You need to upgrade opsys.
Gov still says there is no inflation.....
When every asset class declining in value that calls Deflation,
friend.
Bought any food or fuel lately? BTW...U.S. Treasuries are through the roof in price.
The best yielding treasury bond you can buy directly matures 8/15/41 with a 3.75% coupon at a price of $120.285, for a net yield to maturity of 2.75%. Meanwhile, Discover Bank is offering a 10 year CD at 2.96%. Treasuries = full retard.
Completely agree PF. However, my response was not to treasuries being a good or bad asset; only that they have increased in price/value. The bond you reference, cusip endingQS0, is up about 8 points in 3 days ($80.00 per thousand) and $20 points since issuance last month (as you point out). DXY is also up but is another asset I have no desire to own. I was merely pointing out that not 'all assets are down' as the previous poster had lamented.
Right, I think I wasn't clear as far as intent in adding that information, it was merely to support your point that treasuries are through the roof. Just to further the conversation, the fact that 30 year is this far out of whack suggests to me a sharp pullback in the near future that can only be achieved through further easing. Put more simply, I think this is a manufactured dip to be resolved shortly after the initial reporting of 3Q GDP in late October.
Thanks for you response. I don't want to own stocks or bonds at these levels. You are likely correct that this is a dip but as usual the question is how high will it bounce and when. I'm happy mostly on the sideline except PM's and a few muni's. Best of luck to you.
I've been liking long dated municipal zeroes as of late for the bond portion of my holdings. Other than that I've been doing some option trading on the weeklies selling deep OTM puts and flipping anything that comes due to into covered calls. Boring but it's helped me stay slighty in the green YTD even as of today.
"The decline in debt/GDP from this level is a signal that we are headed for another period of apprehension about investing, apprehension about borrowing, apprehension about the markets and apprehension about the direction of the country.
Extended periods of apprehension, disinvestment and caution lead to deflation and deflation is much worse than inflation or disinflation because the economy, if history is our guide, will enter a severe recession or depression. Prices going down and the consumers waiting to buy is treacherous for the economy."
Read more: http://www.comstockfunds.com/default.aspx?act=newsletter.aspx&category=marketcommentary&newsletterid=1610&AspxAutoDetectCookieSupport=1#ixzz1YhFpAQsHI dont agree that theres any risk we'll enter a severe recession or even depression, because we're already in it.
Incorrect. Under the gold standard, steady increases in productivity led to slow steady deflation, the most democratic way to share the benefits if increased productivity. The FED was created to bleed off that benefit through lending money into existence, siphoning off the productivity increases into private banks. But this led to the enevitable debt revulsion, where people don't borrow at any cost.
We are living in a transition period where the debt based economy evolves back into a savings based economy. Very painful but un-stoppable.
So you expect Obama to announce that he will not be running for a second term? LOL
No, I think we'll see Obama as the C.O.G. Continuity of Govt/martial law perpetual president.
Petreaus 2012
All 535 Members of Congress + the Supremes + 50 Governors must be removed from office With Prejudice and be replaced by recent graduates from the High School of Music and Art.
Well, there you have it. Time's up, checkmate, zero hour...time to print our way to the promised land.
Silver...physical, guns...shot variety, food...canned/MRE.
Yea its only a matter of time...days weeks months who knows but this is all going down we're at the endgame.
No endgame. Typical Christian perspective, deeply rooted in our culture. Life has no beginning or ending, just cycles. Just change, the natural structure remains, the human illusion changes. Don't borrow, don't worry.
Not hours. It's good to know that. Thanks.
I would say that it is collapsing NOW. Unknown is how long till average person catches on. My guess: weeks.
Further guesses:
Chance they can revive and restore "system that was": ~ 0%.
Chance they can "put off the evil day" six months to a year or longer ~10% Take with a grain of salt, they have surprised me before!
Chance they establish a "sucsessfull" replacement Command Economy that can last more than a year or so: ~ 15%. Such a beast might include labor camps, "employment works" collective farms etc.
Chance we are headed somewhere new : ~ 85% Chance we can get there peacefully (ie without significant violence in or between current nations) ~2%
Good luck!
Very Nice Analogy....