03/20/09 Paris, France Wham! For a while, investors didn’t seem to know what had hit them. They were dazed…dumbfounded…awe-struck…
The Bernanke Fed announced a “stunning” plan to save the world from depression on Wednesday.
The numbers were hard to follow, but they were big:
$300 billion, was the number Bloomberg reported
$1 trillion, said the New York Times.
$1.2 trillion, countered the Washington Post.
It turned out that all these numbers were correct. The Fed was going to buy $300 billion of U.S. Treasury bonds…and more of other securities – notably bonds from Fannie and Freddie.
“Quantitative easing,” the papers called it.
“What’s that?” investors wanted to know.
So, it took them a while to put two and two together. But when they’d done the math they began to see what we’ve been warning about.
“This is a very powerful and aggressive move,” said the chief economist at Bank of New York Mellon Corp., speaking with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”
Bloomberg continues: “With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.”
What do we know? Maybe Ben Bernanke will be able to do what no central banker has ever done before: put in just the right amount of inflation…not too much, not too little. In the past, they tended to overdo it. There are not many examples. France, England and America in the 18th century. Practically no examples we know of in the 19th century (they’d learned their lesson!). And in the 20th century – only marginal countries…or countries with nothing left to lose…engaged in ‘quantitative easing.’ Germany did it in the 1920s, because her war reparations burden was greater than she could sustain. Argentina did it in the 1980s, because it owed too much money to too many foreigners. And Zimbabwe did it in 2003-2009, for reasons of its own.
There are not many examples because the consequences of over-doing it are so horrible, central bankers have generally not done it at all. Quantitative easing was always a possibility…but it was always a last resort…like blowing up the powder and spiking the guns; it was something you did when you knew you’d lost the battle already.
But here is the world’s biggest economy and its oldest (arguably) and most successful government…doing something that used to be done only by desperadoes…
What does it mean? Where does it lead?
We don’t know. But we don’t think we want to go there.
Investors didn’t seem to want to go there either. They sold off stocks and bought gold.
Gold shot up on Wednesday, after the Fed announcement. Then, it just kept going…adding another $70 yesterday. We wondered why the price hadn’t already hit $1,000. It looks like it soon will…this morning it is back over $960 an ounce.
Meanwhile, oil rose above $50, the dollar took a big drop and the Dow finished down 85 points. The greenback slipped to $1.36 per euro.
As to the stock market, whether this is a pause in the rally…or a reversal, caused by the Fed announcement…we don’t know. Our guess is that it’s just a pause. The rebound is still unfinished business. Besides, investors aren’t running scared like they were a few weeks ago. Sentiment seems more relaxed. “We’ll muddle through this somehow,” investors tell themselves.
And the news appears more positive…at least, if you stand on your head and look up it.
Jobless benefits, for example. They’re getting paid out to a record number of recipients. But not as many as economists had expected.
The leading indicators are down 0.4% in February – but not as much as expected.
And consumers are spending less money – but not as much less as expected.
And, of course, there’s the money flowing from Washington. The auto suppliers just got $5 billion. Obama’s budget will probably reach $2 trillion in deficit this year. And this extra $1.2 trillion from the Fed is not exactly small change. And that’s in addition to the $11.7 trillion the feds have already ponied up in their fight against a free market. Investors are going to look at this flood of cash from the Fed and figure that it has to go somewhere. Some of it is bound to go into the stock market.
Now, we turn to our friends in Baltimore to see what the have in store for us…
“The larger [monetary] story,” opines Rob Parenteau, lending a The 5 Min. Forecast a hand today, “can be found in the deleveraging effort of households, which accelerated in the fourth quarter of 2008.
“We have never seen such a sustained buildup of credit flows to the U.S. household sector like the one that began in the late ’90s. Nor has the U.S. economy experienced such a reversal of household credit flows since the Great Depression.
“Policymakers, investors and entrepreneurs need to grasp this essential piece of the puzzle:
“There are good reasons why the household sector is are paying down debt in an environment of declining asset prices and personal income. Falling asset prices reduce wealth faster than households can pay down debt.
“We believe this has a number of very important implications, not the least of which is for the restructuring of global growth away from a growing dependence on consumer debt binges in Anglo-American developed nations. Not to mention the policy objective of renewing lending to the private sector… it’s misguided.”
And yet, it’s the very core of the justification for the TARP bailout and the broader Congressional stimulus plan. Rob unpacks this phenomenon in the latest issue of the Richebächer Letter entitled “Deleveraging Demystified”. You can learn more on the site.
The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.
And back to Bill with more thoughts…
“Fed’s decision to put more money into the financial system reflects its worry that the U.S. economy is plagued by excess capacity,” says the Wall Street Journal.
As we keep saying, the economically correct thing to do would be to let the excess capacity sort itself out. People lose their jobs – and get new ones. Factories close down…and open up again, producing something else. Companies go broke…and new companies spring up to take their places. That’s what needs to happen. Then, after this restructuring, the economy can begin rebuilding on a more solid foundation.
But the Fed doesn’t listen to us. Ben Bernanke is determined to stop a Japan-style depression from happening in the United States – at all costs. And the only way he can possibly stop it – by his logic – is by increasing demand. Putting more money into circulation gives people more money to spend. It also raises prices – giving them a reason to spend it now.
“Will it work?” was the question put to our little band of analysts this morning.
“It depends on what you mean by ‘work’,” was the answer.
Bernanke has set the blaze…broken the glass…and pulled the alarm. Now, the sirens whine and the crowds form. He has no choice but to follow through. What that means is that he must continue fanning the flames…inflating the money supply (monetizing the debt)… until consumer prices rise (reflecting an increase in demand).
We don’t know how long that will take. But in that sense…it will work…sooner or later. Prices will rise…people will spend.
But what else? Do prices suddenly go wild? Or, do they gently rise…giving the feds time to get out the fire extinguishers before the whole economy burns down?
We don’t know. But here is a guess: between the time the flames shoot up out of the roof…and the time the feds have the conflagration under control…you’ll see gold over $2,000 an ounce.
*** Poor Tim. The U.S. Treasury Secretary is “out of the loop,” says one source. He’s “on thin ice,” says a member of Congress.
He appeared on TV and said he couldn’t stop the AIG bonuses. Then, the next day, his boss goes on the air: “Yes we can!” says he.
“US moves to take back bonuses,” says today’s Wall Street Journal headline.
Geithner has only been on the job a couple of months. And he’s had to deal with bailouts, meltdowns, regulatory restructuring. It’s a “crushing workload,” says the New York Times.
But it’s the bonus sideshow that gets people’s attention. And poor Tim is on the wrong side of the story.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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1. Gold only rose in dollars while the Greenback dropped off late, so fear of inflation is the biggest in the US.
2. Fed and Bernanke will surely know what they do now is in sane, but as longterm solutions aren’t there no more, they are forced to shortterm acts to buy time.
3. In a globalized world dollar-weakness or US-inflation will not be a problem soon, as import and export (tourism included) will always push those entities to some kind of equilibrum.
Cut all wages some
3/19 DR: “Companies should be able to pay their employees however much they please. They should be able to go broke too.
That’s how capitalism is supposed to work.”
Ahhh, but this isn’t capitalism anymore. If the government didn’t inject money into these institutional entities such as AIG and Merril Lynch, how would they pay these bonuses that they are contractually required to? The answer is that they couldn’t because they have no organic cash flow in which to derive it from. What they are doing amounts to stealing money from the rest of us non-banking workers and the government enables it. That is why the outrage is justified. You would expect bankers to try to pay themselves these undeserved windfalls, but the government is the one that facilitated it. The government is to blame. They are stealing from the collective to pay financial services aristocrats. These bonuses were not earned but stolen from society. As soon as AIG took public funds, it became public business. It is a disgrace to our government that they were ever paid out to begin with. It is a bigger disgrace that these institutions were not liquidated. But alas, this is not capitalism but a feudal system masquerading as such.
As we keep saying, the economically correct thing to do would be to let the excess capacity sort itself out. People lose their jobs – and get new ones.”
Where, Mr. Bonner?
WHERE???
WHEN???
HOW MANY, Mr. Bonner? Certainly not nearly the same amount as those that have, already lost them!
Factories close down…and open up again, producing something else.
Show us examples of CLOSED factories that’s been refitted to ‘produce something else’. Have you been to Steubenville, Ohio?
Companies go broke…and new companies spring up to take their places. That’s what needs to happen.
No argument with THAT IF the new companies spring up in sufficient type and number to put the myriad numbers of unemployed back to work.
Then, after this restructuring, the economy can begin rebuilding on a more solid foundation.
More solid than the quicksand in which we find ourselves, now, no doubt, but that still may not be saying much. You have no idea of the time line for restructuring either.
Your prescription is as flawed as those presently being administered.
The brutal fact of the matter is, aside from pushing the printing panic button, NO ONE HAS THE FOGGIEST IDEA OF PRECISELY WHAT TO DO beyond hopelessly vague bromides like those advanced above.
GD II here we come.
Bernanke claimed on 60 minutes that he was a man of the people and came from a average small town and understands their problems. If so how is it that with all the printing and devaluing of the dollar and purchasing power the most affected are the average people that are losing? What a rat bum.
You seem to (conveniently) forget that “money”, under our current economic system, is really DEBT not wealth.
NOW the “powers that be” are holding the bag (of debt) that THEY CREATED, hoping to restore THEIR DEBT system, and they are desperate to get others (aka US) to take the debt load off their shoulders. But we’re not buying it, heh heh heh.
All the moneychangers have been laid bare before everyone (as the liars and thieves they are), their tables have been turned over, their “golden calf” (Bull) they created on Wall Street (to draw everyone into their ponzi-scheme of masquerading derivatives) has been ground to dust, and THEY are going to eat every little bit of it as THEY are slaughtered by their own deceit.
The “Net Worth” of people will NO LONGER BE MEASURED by mere “money”, nor the amount of DEBT that anyone can carry to uphold that beast (of DEBT) you call an “economy”.
The REAL economy that is emerging in the midst of all this confusion that bankers and governments have created is going to take over everything – and it is founded upon FAMILIES who serve their God, their own and their communities, wherever they may find themselves.
So keep your “DEBT” based economy (and watch with joy as it goes BUST), people don’t want any more economic bondage, people want REAL relationships that fulfill life, create real wealth and worth, and THOSE are measured by what one can GIVE for the good of all, not by how many people can be hooked by greed and enslaved in DEBT because they continually lust for MORE– that NEVER SATISFIES ANYWAY.
So let meaningful face to face relationships be created between people who are willing to serve each other in common good – and LET the hypocrites who wear masks to deceive each other deal with their own worhtless “paper”.
Heh heh heh!!!
Bill, I hope you can answer this for me:
The thing that makes the US (and Europe and Japan) different from all sovereign defaults of the past is ÌNTELLECTUAL PROPERTY.
Countries that have defaulted in the past have had to sacrifice their countries assets. This was done through IMF loans and currency devaluation that allowed American companies to buy their assets on the cheap.
But, now that it is the G7 countries that are in trouble, what will be the pound of flesh that its creditors extract
I believe that the pound of flesh that their creditors (especially China) will extract is that they will feel justified in no longer respecting (paying rent on) intellectual property rights in areas such as technology, agriculture, pharmacueticals, and manufacturing.
So, G7 creditors will see the purchasing power of their savings wiped out, but in return, the rest of the world gets to leap frog in regards to advancements that have been developed by companies that are domiciled in G7 countries.
This means, the profitability of these companies will evaporate.
Bad for developed country investors, but good for the world as a whole.
Right on Micheal A.