Ben Bernanke

So, the Fed has failed to improve the economy… but it has unleashed inflation. This is called STAGFLATION folks. And the fact the Fed thinks the answer to it is printing more money tells us point blank: things are going to be getting a lot worse in the coming months.

Congratulations Mario Draghi and Ben Bernanke, you’ve unleashed "unlimited" and "open-ended" programs and the bond markets are still imploding.

If the Federal Reserve’s nightmare comes true and deflation occurs, something else happens that the banks fear and loathe: marginal borrowers default on all their debts. Rather than being easier to pay, the debts become more difficult to pay as money gains value. Marginal borrowers no longer get the “boost” of inflation, so they increasingly default on their loans. How is it bad for hopelessly over-indebted, overleveraged households to default on all their debt and get a fresh start? Exactly why is that bad? What is the over-indebted household losing other than a lifetime of debt-serfdom, stress and poverty? The banks have to absorb the losses, and since they are so highly leveraged, the losses drive the banks into insolvency. They are bankrupt and must close their doors. Note that 99.9% of the people benefit when bad banks absorb losses and close their doors. Only the bank managers, owners and bond holders lose, and everyone else gains as an unproductive, poorly managed bank no longer burdens the economy with its malinvestments and risky bets. The Federal Reserve’s policy of protecting the wealth and power of the banks while stealing from wage earners via inflation is a catastrophe for the nation and the 99.9% who are not financiers, politicians and lobbyists.

If you want to do something for the poor and middle class, encourage deflation.

Pump it up, until you can feel it, Pump it up, when you don't really need it...

Connecting the dots between my anecdotal observations of suburbia and a critical review of the true non-manipulated data bestows me with a not optimistic outlook for the coming decade. Is what I’m seeing just the view of a pessimist, or are you seeing the same thing? A few powerful men have hijacked our economic, financial and political structure. They aren’t socialists or capitalists. They’re criminals. They created the culture of materialism, greed and debt, sustained by prodigious levels of media propaganda. Our culture has been led to believe that debt financed consumption over morality and justice is the path to success. In reality, we’ve condemned ourselves to a slow painful death spiral of debasement and despair.

“A culture that does not grasp the vital interplay between morality and power, which mistakes management techniques for wisdom, and fails to understand that the measure of a civilization is its compassion, not its speed or ability to consume, condemns itself to death.” – Chris Hedges

While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do. The government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. In Koo's words: "the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).

Wait a minute, investors can't expect more QE because we already have too much of it already.

To the vast majority of the US citizenry, the Dow Jones Industrial Average is an odd number that flashes on the new 42" plasma-screen during dinner; wedged between a news story about a panda sneezing and some well-endowed weather-girl saying "hot, damn hot". This is why the behavior of Ben Bernanke this week might go unnoticed by most of the great unwashed. That is, of course, if they do not drive or eat food. For those that do eat or use vehicles; for the first time in history, national average gas prices for the 2nd week of September were over $4.00. Of course, this is mere transitory market speculators - and is not real money leaving their EBT card.

Did we say Arab Fall? We meant global fall. From the Star Tribune: "Thousands of Kashmiri Muslims protested Friday against an anti-Islam film, burning U.S. flags and calling President Barack Obama a "terrorist," while the top government cleric here reportedly demanded Americans leave the volatile Indian-controlled region immediately. In the southern Indian city of Chennai, protesters threw stones at the U.S. Consulate, shattering some windows and burning Obama in effigy. Police quickly cleared the area, arresting more than 100 protesters. U.S. Embassy officials in Delhi did not immediately comment." And elsewhere: "In Bangladesh, about 5,000 hardline Muslims marched in Dhaka's streets after Friday prayers, burning U.S. and Israeli flags and calling for the death of the filmmaker. Police prevented them from marching toward the U.S. Embassy several miles away." And elsewhere: "In Indonesia, the world's most populous Muslim nation, about 200 protesters chanted slogans and held up signs in a largely peaceful protest outside the heavily guarded U.S. Embassy in Jakarta. American diplomatic outposts increased security worldwide this week after clips of the film went viral online and sparked violent protests in the Middle East. About 20 protesters outside the U.S. Embassy in Kuala Lumpur, Malaysia, shouted "Allahu akbar!" and handed reporters a letter addressed to the U.S. ambassador expressing their anger over the movie and calling for greater respect for religions."

The acquisition of CRBC by FMER provides a stark illustration of the fundamental conflict between the Fed’s “dual mandate” and its legal responsibility to supervise the nation’s banks. 

"Yellow journalism" – which seems almost the only kind we have these days dominates our newsflow, but the truth is out there. As with everything else though, it's subject to Pareto's Law. So, 80% of what's out there is crap, and 80% of what's left is merely okay. But that remaining 4% of quality, uncensored, free information flow is extremely valuable. The terminal corruption of the major news corporations and the lack of interest in seeking the truth among the general population augurs very poorly for the prospects of the US and the current world order. This creates speculative opportunities, but prospects for mainstream investments are not good. Western civilization is truly in decline and far down the slippery slope.

What took Ben Bernanke sixty minutes of mumbling about tools, word-twisting, and data-manipulating to kinda-sorta admit - that in fact he is lost; Ron Paul eloquently expresses in 25 seconds in this Bloomberg TV clip. Noting that "we are creating money out of thin air," Paul sums up Bernanke's position perfectly "We've Lost Control!" From mal-investment to Bernanke's frustration and the unintended consequences, the full 5-minute interview is a must-watch.

There is one last irony in Bernanke's constant promotion of his powers to unleash QE. Having talked up the market for years with his promises/threats of QE, the market has priced in ever higher doses of QE, in effect bidding expectations of QE's effectiveness to the sky. Bernanke has lost the power to surprise the market. Having raised expectations to the sky, he must deliver something beyond the stratosphere to surprise the market. But he doesn't have anything capable of matching the absurd expectations he's inflated, never mind exceed them. The only surprise left is a negative one. Chairman Bernanke and his fellow doves will soon realize the consequences of over-promising and under-delivering. It works better the other way around, but now it's too late.

Once upon a time we thought that literally throwing cash out of rapidly moving objects was a privilege strictly reserved for Fed chairmen. Not any more. Moments ago, a car chase in South Los Angeles went horribly right, when two bank thieves who managed to find a Bank of America branch which actually had cash in it, and robbed it, proceeded to throw cash out of the moving car as it was being chased by a cohort of cops. Since the getaway car happened to be a Volvo, they naturally failed to get away, but not before they became local Robin Hood-type heroes to the massive gathering of gawkers all of whom would appear gainfully employed if only they were not just standing there, doing nothing, and hoping to steal the already stolen money in a major LA intersection at 11:30 am local time on a Wednesday. At least we now have the first two joint candidates to take over the BOE's soon to be vacant governorship.

Some very curious thoughts ahead of tomorrow's FOMC announcement from none other than Citigroup: "There is a strong view in markets that 1) the Fed have to do a big QE, given the expectations that have been built up, and 2) the added liquidity will have a marginal effect.  Taken together this raises the risk that the assets that will benefit are those sensitive to liquidity, such as money substitutes and Treasuries, rather than assets that are sensitive to real business cycle expansion." Money substitutes = gold