Saturday, December 13, 2008

Monetary Madness

"The Fed will have to lead the charge, they say. They recommend that the central bank purchase or guarantee massive amounts of all sorts of credit instruments to unclog the markets and push interest rates down from their punishing levels. While the Fed has more than doubled its balance sheet in less than four months, with assets now totalling $2.2 trillion, much more may be needed. The central bank's holdings may have to swell to $6 trillion or more to stem the destruction of capital. ... 'Look, this is no time for the Fed to act like a bashful virgin,' says Vincent Reinhart, a key Fed operative during the Greenspan era in the powerful post of director of monetary affairs. "We're in a very dangerous period, and the Fed needs to be aggressively buying all sorts of paper, including toxic assets like collateralized debt obligations, non-agency mortgage-backeds and non-investment-grade corporate bonds in order to bring liquidity to the markets and raise security prices.' ... Nothwithstanding the jargon and stochastic equations, the paper's message was clear: The central bank must print money with abandon. ... As a practical matter, a further ramping up of Uncle Sam's asset buying is unlikely under the lame-duck Bush administration. Current Treasury Secretary Henry Paulson is a free-market fundamentalist and has resisted unleashing the government's full firepower. ... Reinhart, for one, contends that his former colleague Bernanke, now the Fed's chief, has been too 'deferential' to Paulson in failing to unleash the heavy artillery. ... It just might be time for Ben Bernanke to scramble the Fed bomber force and attack. Then, Helicopter Ben--a nickname he acquired for once suggesting that money be dropped from helicopters--could become B-52 Ben", my emphasis, Jonathan Lang (JL) at Barron's, 1 December 2008.

"Deflation won't happen here; at least not if ... (Fed) Chairman's Ben Bernanke's plan pans out. ... Until September, excess reserves hovered at or below about US $2 billion, but has ballooned to over $600 billion as of November 19, 2008. ... While Congress may be furious that banks are not lending, the Fed has an interest in keeping the long-term cost of borrowing low. ... In our assessment, the Fed will do anything to keep the cost of borrowing low. ... What happens if the Fed keeps the cost of borrowing artificially low, either directly or indirectly? ... Paradoxically, it's precisely government debt that investors are looking for because of all the uncertainty in the private sector. However, as the U.S. does not live in a vacuum, international flows of funds do need to be considered. ... After all, the massive stimuli under way should be highly inflationary; but if the Fed helps to engineeer that markets cannot price inflation into bond prices, there has to be a valve. This valve, in our view, will be the U.S. dollar; we cannot see the dollar hold up in the face of the types of intervention that are under way and the we see play out. ... However, the value that foreigners may place on the U.S. dollar may be substantially less the more inflationary the policies are that the U.S. is pursuing. ... In particular, it is irresponsible for the U.S. to pursue a policy that is destructive to the dollar while counting on Asian governments to prop it up. In the meantime, responsible savers in the U.S. have out their savings at risk due to the all the bailouts", my emphasis, Axel Merk (AM), 2 December 2008 at http://www.gold-eagle.com/editorials_08/merk120208pv.html.

JL believes printing money can prevent the "destruction of capital". How? JL is an alchemist. The Fed "Must print money with abandon"? What has it done for months? "Paulson is a free-market fundamentalist"? Huh? I call him Zimbabwe Ben (ZB) now, what's this B-52 Ben business? JL is lost.

AM's piece is important. Probably more important than AM realizes. On 26 July 1941, FDR, capitalism's savior, issued Executive Order 8832. I bet 99.99% of Americans never heard of it. EO 8832 "froze" all Japanese assets in the US, about $5 billion, or say $130 billion today. This act was probably more responsible for 7 December 1941 than any other. FDR goaded Japan into attacking Pearl Harbor, make no mistake. The US intercepted the Japanese "war message" on 26 November 1941, precisely four months later! Coincidence, we don't think so. Why raise this now? Because ZB's monetary policy could be today's EO 8832 with respect to China as the value of China's foreign exchange reserves are depleted by ZB's actions! Is ZB a warmonger? Yes, despite his getting 1590 on the SATs, I consider ZB a dangerous, irresponsible ignoramus. But ZB went to Harvard. So? But ZB was a Princeton professor. So? Book suggestion: a must read for monetary history students, The Warmongers, Howard Katz, 1979. Katz connects paper money and war. Another paradoxical result of current Fed policies: a wild bull market is coming! Why? As desperate American "sell" dollars for something, stocks will rise.

4 comments:

Anonymous said...

"a wild bull market is coming! Why? As desperate American "sell" dollars for something, stocks will rise."


You keep buying and I'll keep shorting the hell out of them. Ain't no bottom to this fiasco until Q3 2010.

Anonymous said...

Somehow I've had this dream that Chairman Bernanke would come to his senses and rein in the money printing...

That's nonsense... because it's all about saving the banks... the FedFriends...

Vincent Reinhart says ... "We're in a very dangerous period, and the Fed needs to be aggressively buying all sorts of paper, including toxic assets like collateralized debt obligations, non-agency mortgage-backeds and non-investment-grade corporate bonds in order to bring liquidity to the markets and raise security prices.'

It's all about unclogging the FedFriends... zero strategy...

Printfaster said...

I am with you IA.

Up to now it has been the search for yield. It is now becoming the search for safe assets. Some idiots think it is dollars and treasuries.

With credit being destroyed, yes the value of assets is going down, but only those that were leveraged, or that represent debt. Unencumbered assets will be sought as the haven from debt/yield.

The money flows in this electronic world are truly breathtaking.

Oh on the seizure of Japanese US assets, frankly I doubt that Japan cared. What they did care about was access to Shell Oil in Indonesia. That meant the end of Japanese naval power and the ability to subjugate Asia. It was the cutoff of Indonesia with a Roosevelt issued ultimatum that sent things in motion.

When Japan attacked Pearl, it was to prevent the US Navy from stopping Japan's invasion of Indonesia.

Today's wars are triggered by the desperate search for oil, and its distribution, eg, Iraq war, Georgia, Somalia, Sudan, Nigeria, Falklands (yes Falklands was fought over oil, look it up), Suez crisis, Angola/Cabinda,...

Junior said...

Funny this post is from December 13th... you DO know Zimbabwe Ben and I share a birthday, right?

Sorry, Pop, but I have to disagree with you, if slightly. Bernanke is an academic, duh, we all know that. He may be seriously lacking in practical execution of academic knowledge or perhaps he knows exactly what he is doing.

First of all, he had to know what kind of mess he was set to inherit from Greenspan. Secondly, he had to know exactly which direction this ship was headed when he chose to take it on.

Second of all, he has spent his entire life and academic career feeding his Great Depression Obsession; what if clever ZB saw the chance of a lifetime to watch a broken machine collapse a la 193x from the inside?

I agree he leaves much to be desired in the execution.

But I also believe he knows damn well he is destroying the USD and is even doing so intentionally as some giant social and economic experiment.

Jr