Operation Twist and More Ways to Throw Money Down the Drain

Last we checked, the world of money was still falling apart, breaking off one chunk at a time. And, just as might be expected, those trying to “fix” it were still busy hastening its demise. Some people never learn. More on that in a moment. First, a none-too-subtle analogy…

Your editor spent much of the past week trekking around Los Glaciares National Park, down in the Santa Cruz province in Argentine Patagonia. Our folks are in town from Australia, catching up with their walkabout son and his gypsy girlfriend. There’s not a lot of glacier parks back on the “sunburned continent,” so we thought a few days in crampons and thermals, hiking over the freezing ice pack, might make for a fun little excursion. Besides, nothing clears your mind quite like a sub-zero gust fresh off a snowy peak.

The Perito Moreno glacier is one of a small handful of glaciers in the world still thought to be growing. It’s gained approximately 700 meters in length since some intrepid adventurers discovered and mapped it sometime in the late 1800s. Top to bottom it measures roughly 200 meters in thickness, although only about one sixth of that can be seen above water. The “front” of the glacier, where all the calving takes place, is nearly five kilometers from side to side. There is something rather humbling about watching a chunk of ice the size of an apartment block fracture, break off from the main body, and tumble into the icy waters below.

Standing atop the Perito Moreno glacier itself, you can see the snow-capped mountains of the Austral Andes rise up spectacularly on either side, as the glacier underneath you creeps down the river in between, moving quickest in the middle, where there is less resistance, and slowest at the edges, where it clings to the shallow banks. It’s this difference in speeds — as well as in pressure, tension, depth, friction, etc. — that cracks and splits the glacier, giving it that spiky, other-worldly kind of look, full of crevices and drain holes that disappear into a deep blue abyss beneath the surface. Hold that thought…

Scanning the headlines this morning, it looks as though nothing major has changed in the world of finance and economics. There are daily announcements, of course, incidentals, talking points and chin-wagging “power lunches,” but the larger, more important trend is already underway…and it ain’t changing course. That trend, as we keep saying, has to do with debt…and the slow, painful march toward correcting it, breaking it up, destroying it.

Greece, for example, is as broke today as when we left it. Maybe more so. The yield on its 2-year government bonds is now over 134%. Well, that was yesterday…who knows what it is today? Who cares? The Greeks are going under. The market is expecting a default. It will get it. And Spain, Portugal and Italy are not far behind. All have their hands out for more funding. All are clinging to the continent for dear life. But all will have to reckon with their debts eventually, one way or another…chunk by chunk…

“A deepening crisis of some kind is certain,” opined Eric Fry in yesterday’s reckoning, “especially because the US economy is still reeling from the credit crisis of 2008. Fearing a repeat of ’08, the US Federal Reserve is springing into action, which pretty much guarantees a repeat. Earlier today, the Fed christened the launch of “Operation Twist” — a scheme to buy up a bunch of the long-term Treasury bonds…

“Operation Twist,” continued Eric, “is simply a new form of Quantitative Easing, which was simply a new form of printing money out of thin air. (The Fed says it will pay for its new purchases with proceeds from the sale of the short-dated Treasuries it already owns. We don’t believe it. By hook or by crook, the Fed’s balance sheet will probably grow over the next few months. We will be watching). Op Twist, therefore, is merely the next illogical step in a regrettable progression toward dollar debasement. After Op Twist, look for Operation Contort, Operation Zig-Zag, Operation Bait-and-Switch, Operation Capital Control and ultimately, Operation Devalue.”

“Op Twist,” we now learn, is to be a $400 billion dollar effort — much bigger than the market was expecting. Why “more action” is the order of the day, we don’t know. The economy is in tatters, even after trillions of quantitatively eased dollars were pumped into the system. The Fed even said so itself. Its own statement noted “significant downside risks to the economic outlook, including strains in global financial markets.”

If these magic elixirs are so helpful, so desperately needed, so critical for economic health and vitality, then why the soggy outlook? Fellow Reckoners already know the answer. There are no magic elixirs. No potions. No panaceas. No “free lunches.”

Investors, for their part, appear to be finally catching on. Just as they “re-re-discovered” Europe today, they also “re-re-learned” that the US Federal Reserve can do nothing to reverse the laws of economics; not with twists…not with zigs…and not with zags. Worldwide, markets are down big time. Measures in London, France and Germany were all off by about 5%, as was Hong Kong’s Hang Seng. Indonesia’s Jakarta Composite Index fell by 9% overnight!

In the US, too, trading screens are bleeding red. The S&P500, Dow and Nasdaq were all lower by about 4% as of this writing.

So much money…so heavy an opportunity cost…so much do-gooding and fixing, tinkering and world-improving. And for what? To delay the inevitable? To worsen the crisis that must eventually come due? Seems like a waste of time to us. Besides, what’s wrong with a little creative destruction from time to time? Why not stand back and allow some much needed debt destruction in the US? How about a fierce round of currency calving in Europe? Why not let nature take its course? Why not, as Bill suggests below, “give collapse a chance”?

In the end, it probably won’t matter whether the Feds “allow” collapse or failure to happen. Our money says, they’ll get it either way.

Joel Bowman
for The Daily Reckoning