All the talk of the town is deflation, disinflation or disinflationary trends, what does all of this mean, is it bad and more importantly, should the Federal Reserve try to stop it? First, deflation is negative price growth year-over-year, we are not there yet even though I often say we are in a deflationary period, because we will get there, in my opinion. Disinflation or disinflationary trends are signals that show prices are declining and is how many economists or snarky bloggers, like myself, describe the trend before we hit outright deflation. In a nutshell, deflation is demand destruction or no end demand which means companies must drop prices in order to attract business. The most commonly referenced period of deflation is the 1930’s where, sadly, food was cheap, but people starved, houses were cheap, but people went homeless. Deflation has been framed as ugly, horrible and something that must be avoided at all costs.
Deflation during the good times is fine and we all reap the rewards, such as cheaper technology, i.e. cell phones or computers, which become cheaper because of competition from outsourcing and technological advances. No one minds paying lower prices during these periods of times and the Fed even doesn’t mind deflation during these periods, but they like it to remain in check. Because lower prices do not mean people are not buying the products, the opposite is typically true. Plus, other indicators usually show that only certain items are prone to deflation under normal conditions, usually technology related items. The Fed would only be concerned if they saw other items start to lose pricing power and the money supply shrinking, people saving more money, basically.
When people save their money, in an economy such as the U.S., it is devastating because such a large portion of our domestic growth comes from spending money freely on stuff we really don’t need. When we save we stop that wasteful spending this grinds our economy to a halt. In order to get sales going again companies start to offer incentives to get shoppers in the door. This usually means lower prices through either temporary or permanent sales on the price of the products they sell. Since these products are not selling the stores are not ordering new products which mean the raw materials to make the clothes or whatever begin to decline. Even if the product begins to move at reduced prices the company selling to the end user begins to demand lower prices for the product and even if they don’t ask for it the orders are so much smaller prices would fall anyhow. Essentially it is a chain reaction, this is pretty common knowledge, but it comes from one simple thing happening, people saving their money.
The other part of the equation of people saving their money is that money is taken out of circulation. This sounds counterintuitive to those who rail against the fractional reserve banking system since this system allows for more loans to be made if the deposit base grows. However, if the economy is bad banks simply do not make loans because they fear not getting repaid. Therefore, a higher savings rate means lower monetary circulation, commonly referred to as M3, which the Fed no longer produces by the way. In order to boost the money supply the Fed will try to encourage banks to make riskier loans by lowering interest rates. By lowering interest rates banks make lower rates of returns for doing nothing with their money so by loaning out the money to borrowers banks can make higher interest rates. In turn the borrower will go out and spend that money which will ultimately boost the money supply and, hopefully, boost final demand.
That is how things work in normal business cycles, but that is not what we have now. We have a very abnormal business cycle that happens once every few generations where we go through this huge leveraging cycle and then have to live through a period when we deleverage all the debt. The last time we went through this was in the 1930’s and the time before that was about 60 years before the 1930’s so about every 60 to 80 years we go through a super cycle of debt leverage that blows up. During these super cycles the consumer has so much debt that they just try to pay it off and does not waste much money on other items. This is bad for our economy which is built on a consumption model to the tune of 70% of our GDP. This lack of demand or demand destruction means people just will not spend unless it makes absolute sense to them, i.e. a generous tax credit from Uncle Sam. This demand destruction leads to lower prices which starts out as disinflationary forces, moves to deflation when prices finally start dropping YoY, which will happen soon.
No matter what the central bank does, the Fed, it on its own cannot change this deflationary trend when it has spent all of its ammo. When interest rates hit zero there is nothing the Fed can do to spur demand from a monetary policy point of view. Remember, this is a very unusual situation because in these super cycles not only are consumers saddled with debt, but so are the banks and the banks are usually saddled with worthless debts which make them insolvent. That was true 80 years ago and the same thing is true today because banks are not making loans nor do they want to. So what can the Fed do? They have insolvent banks and consumers that don’t want to spend and are trying to shed their debt loads.
Some people say more quantitative easing will be helpful. I ask how? We already did how much QE? $2T+ that we know of and that did nothing. In fact, mortgage rates have dropped even more after QE stopped and we have falling demand for housing so what will another round of QE do? All it would do is cripple the dollar and trust me, the dollar is going to be in trouble soon enough anyhow because of the bloated balance sheet the Fed has and our national debt load. QE will not boost money velocity at all. It might give banks more money for their balance sheets, but other than that it will not boost the overall money supply so I am totally perplexed as to why anyone thinks QE will work. We have no problem selling our debt right now either, so it is a total waste of time and resources. The negatives far outweigh the positives.
What else can the Fed do? Nothing. They are done or have done everything they can do. Sure, they can roll out with TALF again, but the market has no problem placing junk paper right now so what would the point be? The problem is simple, the consumer does not want to spend. Businesses do not want to spend. Does anyone know why this is happening? I think it is pretty simple, no one knows what is going to happen. The President is keeping everyone in the dark about where taxes are going to go, heck, we are not even going to get a budget for 2010, unreal! We still have no idea how health care reform is really going to impact us yet, how much will it cost, etc. The business environment is weak at best and CEO’s are too afraid to admit it, look how they get treated by the administration, as traitors!
The consumer, well, I wonder why they aren’t spending. We have weekly initial unemployment claims coming in at well over 400K, 4 week average is 455K. We have more firings than hiring’s going on right now. The work week declined and so did wages. There are 6 people for every open job. It is taking 35 weeks to find a new job if you get fired. People were feeling more secure about their job, but when initial claims began to heat up again that confidence disappeared, even H-P started laying people off again and I bet Google will announce layoffs very soon. Their debt loads are through the roof and banks raised all their fees on the consumer so it is taking longer to pay down debt. Foreclosures, delinquencies and now a story broke tat home owner associations are foreclosing on homes for pennies on the dollar over the dues not being paid, come on. To top it all off the Senate is not extending unemployment benefits, but they can pass a 2,300 page Fin Reg bill with no problem, what is wrong with those people?
It is fair to say that there are plenty of reasons to not spend money from the consumer’s point of view. From corporate America’s point of view there is also little reason to spend money and even if they did it is so little of GDP it doesn’t even matter. The bottom line is how do we get M3 to increase? Can money velocity get positive again and should we even try? In my opinion, I do not believe we can get money velocity to get positive again without a drastic event such as WWII. These super cycles have to work themselves out and that takes time and the more tinkering we do the longer it takes. Look at housing, if we did not do the tax credit we might have bottomed in housing prices already, but we will never know now.
The Depression lasted as long as it did because of the tinkering and those who say we had a relapse because stimulus was removed in 1937-38 simply do not get it. If we cannot attract buyers to the housing market at 4.5% interest rates and prices significantly lower than the peak it just is not going to happen for some time to come. The market has to find its own bottom and it will be painful, but we cannot simply throw money at it and hope it works out. We could do that in the 1930’s because we had savings and we had manufacturing, we have neither now. We started out in a horrible position, greatly in debt, and to get ourselves out we are advocating going much deeper in debt. The problem is we cannot grow our way out of the debt we have, we cannot afford another New Deal. The most important thing to remember about the New Deal to begin with was that it did not work, it was a majorly failed policy.
As painful as it is going to be I say we have to let it be. No more QE and I hope we do not do another stimulus, but we will, look for a Bush style check coming right around October. Money velocity will sort itself out when the deleveraging is over and that could be as fast as next year or as long as 2015, no one knows except the collective minds of the consumers. The bottom line is we may come out, the consumer and corporate America, stronger than when we came into this thing with less debt and important lessons learned. Our government and the Fed, well, I do not believe they learned anything and look for QE and stimulus money just in time to buy your vote in November.
There is some hope that the next aftershock might be muted, a little bit at least. The President just launched his new initiative to save the housing market which involves principal write downs, but no one is asking the really big question, why? With an industry report due out shortly you will see why, according to Diana Olick of CNBC the foreclosure report coming will set a new record. Am I surprised? Nope and you should not be either.
The mortgage mania was an era that will probably never be repeated again by private lenders, it continues through the FHA though. Many believe or believed the worst was over for mortgages blowing up in 2009, but they clearly had not read any meaningful material on the subject. If one read any of the numerous books about the credit crisis, aka lend anyone with a heart beat some money to buy a house they could not afford, they would know that 2009-2010 (the beginning of 2010 at least) was the lull before the storm. Whitney Tilson has probably the best book about the subject with many interesting charts in it, but most telling is that the last 12 months was merely the eye of the storm.
What happens next is really anyone’s guess, but what we all know for sure is that the problems that existed in 2008 are still on the books right now and the problems were merely covered up with the FASB’s suspension of rule 157, mark-to-market accounting rules. As you know firms can now make-to-fantasyland what they feel all that worthless paper is worth, I wish we could run our books like that because I have a painting of some dogs playing poker that I know will be worth millions in a few hundred years. Regardless, the next wave of the crisis is starting to break now as we have resets on prime mortgages, Alt-A’s and even some sub-prime that will begin now.
Why do you think the major banks were so quick to agree with Obama and begin to really renegotiate those loans? It is because they know that the problem is still there and needs to be dealt with since mortgage modifications clearly have not worked, there-default rate is through the roof. Obama knows that the mortgage problem is still very real as well and if the FASB goes back to mark-to-market, well, we are right back to September of 2008 and now the Fed and the government have zero ammo left besides outright nationalization of the banking sector. This is why Obama has offered rich incentives to all parties to begin this program, to help avoid the next wave, but I have little faith that the program will work based on the modification failure. This has nothing to do with politics as I think this is the best plan to deal with the problem, but it is a huge problem and principal write down’s will mean losses for some banks.
The interest rate reset issue is also why you will not see the Fed raise interest rates soon either, along with that other little problem known as the national debt. All the talk about Hoenig getting rid of the “extended period” talk is just a side show. While he might have bubble concerns, rightfully so I might add, he merely wished to change the language, but it means, essentially, the same thing. According to the FMOC minutes here is what was said on the whole dissent issue:
“Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low “for some time,” according to the minutes, which did not elicit major market reaction.
Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.”
His dissent was for the markets, not because he really disagrees with the low interest rate policy. The Fed knows that the housing market is a mess, as they stated in their minutes, and they know that there are plenty of adjustable rate mortgages ready to reset, the terms stink I might add. Sub-prime resets are usually fixed to a maximum of, if memory serves me correctly, 15%, but the real issue is the deterioration of the prime mortgages which has yet to really get started. The prime mortgages, in my opinion, is just one of the reasons rates will not increase as the resets are prime plus (insert risk premium here). If these mortgages can be written down problem solved! Kind of.
Whether or not this new initiative will actually solve the problem remains to be seen, but as I said earlier it is just about all we got left without the government actually buying the houses and letting people pay rent to live in the house. Luckily we are not doing, oh, wait we are doing that to, never mind. Again, another shock to the system will be devastating and this is why the big banks are all over this new modification program, but it is unclear whether or not homeowners will go for the plan or not, see the latest GSE study on how Americans view homeownership. No matter what, unless there is another accounting gimmick, the banks will have to take some losses in the near future albeit smaller losses than a foreclosure.
Of course, the media is not looking at this data and merely parade people wearing rose colored glasses in for their interviews, but this problem is real and it is getting closer. I do not believe it will be as bad as 2008, but it certainly can turn as bad if the problem is not cut off over the next few months. If this new program fails or has a low participation rate that may be a problem. The other unreported issue is the SIV accounts that need to be brought on the banks balance sheets in the near future, those are the accounts that banks “sold” their CDO’s to in order to securitize them, but since 2008 that paper has not moved.
In short, the problems have not changed or gone away. All those who told you everything is fine are either lying or do not have a clue what was written. With 4 negative days in the past month and a rising tide still lifting all boats I think that alone should be a warning that we are still in very unusual times. Let’s face it, markets never go parabolic without having a not so bullish ending and with the banking system still impaired I believe there is a recipe for disaster in the not so distant future.
There is a lot of hot air coming out of Washington and the press about who saved the financial system over the past few months. The White House claims they saved the system, the press agrees, and others say Ben Bernanke saved the system, even though he caused or helped cause the problems. Others in Congress believe that they helped save the system, who knows how they think that. Out of all of these credit seeking entities it does raise the question of who really saved the system, for now.
As far as the White House is concerned, I cannot think of one legislative item they produced in the past year that directly did anything for the banking system, but they demand credit for the save. The fact of the matter is that TARP, for all of its flaws, did save the system and that was a Bush era solution. Obama and Geithner simply imposed a ‘stress’ test for the banking system, just an FYI on the stress test, we surpassed the ‘rigid demands of that test’ as far as unemployment and other economic hardships. It is safe to assume that the stress tests were a joke and meaningless other than a confidence booster. Outside of that particular item the administration simply spent trillions on pet projects through the stimulus bill, which is clearly a failure, and that is it. Obama had nothing to do with saving the system outside of his vote for TARP, period.
To think Obama or any Congress person did anything else to save the system is pure partisan politics. I am fine with people giving the credit to Obama, because it proves my point that people do not follow what is really going on and have the attention span of a nat. However, this is a double edge sward because nothing has changed within the system itself so are they going to take credit when this thing falls apart? I doubt it, but it will be interesting to watch them weasel their way out of it. It is also clear that the latest proposal to separate prop trading from banks proves that the current administration does not and never did understand what caused the problems to begin with. In short, they are empty on intellectual knowledge and packed full of the people who helped create the problem so they are all simply doing a major CYA right now.
Congress has done nothing for the system, sure we got show trials, but they just threw a bond broker in jail for selling AAA rated securities, talk about misplaced blame! The reality is one person saved the system, in my opinion, Ben Bernanke. Now, just because I am giving him credit for the save it does not mean I like him or his policies. Yes, he cleaned up, or started to, his own mess, but make no mistake about it, he caused or helped create the current mess. Ben denies that he had any responsibility in making the mess, but he did as he endorsed, feverishly, low interest rates for a prolonged period of time during the early 2000’s. He actively endorsed QE by other countries and, now, the US and did not realize that housing prices increasing at 10-20% a year were a bad thing, huh?
Ben did save the system, but he also is responsible for its demise at the same time, so how much credit can you really give him? I do not think Ben should be reappointed as he clearly has no forward looking vision as far as potential trouble in the economy. That is one reason why I find it funny that Ben ‘sees no bubbles’ in the US markets or economy now. Yes, I believe equities are in a bubble, I have always believed that, since there was no real fundamental reason for the markets to go from the March lows to 1,150 on the S&P and 10,600 on the Dow. The markets were due for a bounce as stocks were pricing in a financial system collapse, but not all the way back up to current levels. As it turns out we might be at the precipice of the much anticipated correction now, a weak currency and massive pumping up of the monetary system is not a good thing over the long-term and is why we saw such a rally.
Regardless, Ben believes the market’s reaction is normal which can be interpreted many different ways, the conspiracy minded will say that confirms the Fed is buying S&P futures, but I read it as Bernanke is just oblivious to reality as the market grinded its way higher, with no volume or flows from retail investors, away from the economic reality of the times. Green shoots are everywhere according to Ben, but consumer credit is contracting, housing is being propped up, unemployment is grinding higher, the national debt is increasing a scary rate, Greece, Ireland, and other European countries are on the verge of default, Dubai did default, banks will not lend and hiring is minuscule at best. Sure we saw some GDP growth, government induced, and some areas, technology, look promising, but other than that there is no fundamental good economic data to support the current market levels.
It is clear that the pricing in of all the good news has already happened, Intel released good earnings and it sold off, the same with IBM and a host of other firms. Just because the market goes up does not mean everything is fine or that the market is forward looking, it is not. If the market was a good forward indicator we would not have sharp corrections because the market would always know in advance. If the market was forward looking we would not have seen the Dow hit 14,000 in the fall of 2007 when all the warning signs were clear as a bell, the Fed was dumping hundreds of billions of dollars into the overnight markets. What I am saying is I am happy if you are long and made money, but just because you made money and the market is trading at irrational levels it does not mean it is correct. The market is also not a forward looking instrument, so stop saying it is.
At the end of the day it was only Ben who saved the system pushing rates to zero, putting together those funding programs, TALF and such, but he did this at a price. By moving rates to zero he forced savers out of secure investments into higher risk assets so firms can refinance their garbage and give it to safety seeking investors because they have nowhere to turn for yield. Ben has expanded the balance sheet to new weekly records for the past year and it will continue to grow indefinitely, at this rate. Ben has started QE and it looks like he cannot stop those programs without a huge amount of pain to everyone, so it will continue forever. Ben has risked the entire future of the USA by putting the central bank in a position to permanently devalue the dollar, part of the ultimate goal I might add, and by taking excessive credit risk.
Ben just might have put the country at greater risk than the banks did in the previous 10 years. While I know deflation is in the works for the foreseeable future it is only a matter of time before inflation does hit or we are forced to openly devalue the dollar. All because Ben saved the system for a few bankers who we could have lived without as smaller institutions would have stepped up to the plate. To re-nominate this guy is the single worst idea I have ever heard. To give credit to Obama for saving the system is laughable at best, just because we want to have a beer with the guy does not change the fact that his policies are horrible and he has done nothing in his first year in office. We have to stop being influenced by what we want to believe and look at the facts on the ground. Those facts tell us Washington and the Fed have failed, end of story.
Long-term I am a firm believer that this administration along with Uncle Ben has it out for the US dollar and both have a policy of dollar devaluation. After all, Obama likens himself to FDR, as anyone who actually read a history book would know only prolonged the Depression, and FDR loved a devalued dollar. Uncle Ben realizes that the only way to grow the economy, pay for Obama’s crazy social plans and cover the present and past politicians reckless spending is to inflate our way out. The operative word in that last sentence is ‘inflate’ meaning inflate the monetary supply thereby creating inflation. However, that is on a much longer time frame, but between then and now it is deflation as far as the eye can see.
No matter what report you look at, the Beige book, ISM or any other industry report there is zero pricing power. As a matter of fact I just say Old Navy, known for really cheap prices, advertising more 50% off sales and I am willing to bet, especially given the very weak YoY retail sales comps, the sales go to 60%+ very soon. That is not exactly definitive proof of no pricing power for that you would have to go and see the other hundreds of sales going on in local and national chain stores.
Up until the last few days the only industry that had real pricing power was the energy industry and that is going away very fast. Commodities have been hit hard because of a rising dollar which is driving speculators, finally, out of the space. Oil is getting pounded which will mean lower gas prices which is great news for Fedex, UPS and you at the gas pump. Unfortunately matural gas is still holding its own and your state is sure to raise its taxes on your utility bill to cover its budget shortfall so your power bill will likely remain the same or go up, sorry. I should say tech did maintain some pricing power, but not for much longer as the consumer is not returning.
This is all evidence of deflation or lack of overall demand. Frankly, with oil especially, there was never any real demand anyhow as the economy is in worse shape than advertised, see the continually revised down GDP figures. It is unfortunate that this is the case because this lack of demand, deflation, will mean big trouble for the economy in the next few months. All those wishing, dreaming, or smoking those green shoots will be rudely awakened to the fact that deflation will lead to more jobs being trimmed and sales not meeting expectations. As I have stated many times before, we were on deaths door a year ago and earnings expectations have been lowered to levels not seen in years and many companies cannot even beat those figures.
If you cannot beat EPS or revenue estimates that were what your firm easily beat 5 years ago, there are major problems out there. However, let’s not let the facts get in the way of a great recovery story. Well, actually, there is never really a recovery until demand comes back and with deflation in full swing it is painfully obvious that demand is dead. Just because there has been a huge melt up in stocks does not mean there is a meaningful recovery in the economy, the data disproves that theory. The market is and always has been a horrible forward looking instrument, if it was truly a forward looking oracle like people claim there would never be a correction and we certainly would not have seen 14,000 in the fall of 2007.
Regardless, until Uncle Ben and Obama can create inflation, believe me they will do whatever they can to create it, we will not have a meaningful recovery. Ironically, what I guessed they would do, set up a quasi-government banking institution with the TARP funds or a public term lending facility, is coming to fruition. I do not know what this will do to money velocity, but it will certainly distort it and either devalue the USD or inflate it to levels we have not seen before. Whether this has the desired reaction or not is also unknown, but we will find out. We need controlled inflation from competent public officials, but this government and this Federal Reserve are not competent.
I have been a vocal critic of the Federal Reserve over the past decade as they have created this current mess and now demand credit for cleaning it up. I liken their current demand for praise to the following: Ben spilled a glass of cherry Kool-Aid on his white carpet then quickly ran over to my house finding my most expensive white cashmere sweater, taking back to his house and cleaning up his carpet. Those of us understanding the staining reaction of Kool-Aid know that his carpet is destroyed and my very expensive sweater is also destroyed, but this guy wants praise for fixing the problem even though the issues are still right there in front of us.
Ben deserves absolutely no credit for fixing anything and deserves to be fired along with having history branding him, and Greenspan, branding them as the two who destroyed the financial system. Of course there are a whole slew of Congresspersons and economists who deserve to go down with them, they are too numerous to name, but I am sure you can guess the top 10 or 20 off the top of your head as they are still wildly popular and in office today. None of this changes the fact that I know exactly what Ben is trying to do and, this will be a shocker to most of you, I do support what he needs to do, but I have so little faith in the man that I know he will fail. My knowing he will fail is why I criticize him so.
We can all agree that the efforts of the government over the previous 12 months have benefits one group of Americans, bankers. Thinking that any of the actions have benefited anyone else is ridiculous to say the least. Your credit card rates have increased, your banking fees went up, people lost their jobs, credit is contracting, income for workers is down, taxes are heading up and banks are making record profits and bonuses that is a rather lopsided list. Ben is not oblivious to this fact, but what he was and is trying to do is create inflation. However, the Fed can create money at the stroke of a few keys on the computer keyboard, but what the government cannot do, ever, is create credit.
Without credit or credit demand, which there is very little of, there cannot be inflation. Another term for this is money velocity and, again, we can all agree that there is no money velocity happening as bank balance sheets are swelling at the Fed right now. This is why I firm believed that the government will open term lending facilities directly to the public or small business in the near future, which will be a huge mistake, in my opinion, because we will go from massive deflation to massive inflation overnight, but that is for another article and let’s focus on what Ben is trying to do.
We know that Ben knows what he and Congress have done is wildly unfair to the public and his inflation creation is his gift to you. What he is trying to do, through devaluing our currency, is raise your pay by weakening the currency through the printing press. By doing this your pay will increase, but your debts will remain the same and as long as he leaves interest rates at 0-.25% your debt servicing costs will also not spiral out of control. This was also taken care of for unsecured debt with the credit card reform act passed earlier this year, is this all making sense yet?
Now, this is not all for you, don’t be silly, this is also for Uncle Sam as well. We have $12T in total US debt, $7T in US treasuries with $2.8T maturing next year. We will also have to spend between $1-1.6T in deficit spending next year as well which means we, the US, will have to raise some $3.8-$4.4T in treasury sales next year, that has never been done before. The US has also restructured most of our debt to mature in <10 years on a rolling basis, I have no idea why other than creditors demand shorter maturities, which is scary. Regardless, the US cannot raise interest rates to a meaningful level ever again. Let me repeat that, the US cannot ever raise interest rates to a meaningful level ever again.
I can hear you saying that I am nuts or do not know what I am talking about. Maybe, but guess again. At the current rate of spending, not including health care, within 10 years at the current interest rate levels the debt servicing costs will be so great that we will not be able to spend money on anything else. It is not me saying this, it is mathematics based on demographics, projected unemployment rate and a bunch of other major issues. What I am getting to is the only way out for the US is to inflate our money supply, exactly what Ben is trying to do now. Who cares that we are the reserve currency, it doesn’t matter as everyone has accepted that this is our only solution or accept a US default on our debt. That is the truth and there is no strong dollar policy, that exists in media sound bites to make people like me happy, that is it.
Back to Ben and you. If Ben is successful, which is doubtful, then he will inflate our way out of this mess. You will earn more money and your debt will remain flat which means you will be able to pay it off in no time at all. However, new debt will be hard to obtain and terms will be very unfriendly as the administration has made rate increases for lenders difficult. Here is the real catch, while the Fed will not be able to raise interest rates, the market will demand much higher rates on government debt so kiss that 30 year bull market in treasuries goodbye. This will translate into higher rates on other debt across the spectrum. Basically, credit will continue to contract at a continued record pace for consumers and, in my opinion, high yield debt defaults will be through the roof.
With all of that said, you want Ben to succeed, as strange as that sounds. You want him to implement this plan and then pull it in on a timely basis because that means banks will be made whole and the consumer, yes, something for the consumer, will also be made whole. Not only that, but it will allow the government to continue down its reckless path of spending and funding its idiotic projects without directly taxing you to death. Notice I said directly taxing you to death? Because you have to remember if Ben pulls this off your energy bill, on top of and cap and trade BS, will go through the roof, your food bill will go through the roof and any other commodity based purchases will be sky high which is a hidden tax. All of those purchases have a hidden tax that you are unaware of, they are always buried in the small print, but nevertheless they are there and fund the government especially on the state and local levels. In this case, the higher the prices, the higher the tax revenue which will fund the local, state and federal governments without taxing you directly. Don’t blame me, you all voted for these people.
Never fear though, this plan by Ben is failing and will fail. As I said earlier, the Fed can print all the money it wants, but it cannot create credit no matter what it does. That is our issue right now, not only do banks not want to extend credit, but no one wants credit. Without extending credit we do not get the important inflationary impact of money velocity which makes Ben’s plan useless. Never fear though, President Obama and Tiny Tim is here to mess everything up as I bet they will announce a public lending facility very soon to “initiate job creation” with leftover TARP funds. This will not only create some perverted unforeseen form of inflation that no one has ever seen before, but it will skew all sorts of numbers as well. I cannot wait to see how the employment report looks after these new programs are announced!
Even if I am wrong about Obama and Tim the Fed will fail at what it is trying to do, I am sure f it. The organization has failed at everything it has tried to do previously and no one should have faith that it can succeed in doing what it is trying to do. Ben tried to talk the Japanese into monetizing their debt in 2003, that made sense. Ben applauded Greenspan’s cheap money policy in 2003 and said he should keep it longer, what? He did not see the asset bubble building when you could get a $500K no document, nothing down mortgage, are you kidding me? I am sorry, but if you did not see this coming with that type of garbage out there you are an idiot, but this guy is running the Fed and says no one can see bubbles coming. The irony is the market is the next big bubble to pop because of his cheap money policy, for the love of God, it trades with the USD/EURO pair, that is the sign of a bubble!
If we look at the Fed’s balance sheet it is impossible for them to drain the liquidity in an orderly fashion. Banks are basically refusing to reverse repo out the liquidity, why would they want to? I wouldn’t when I am making riskless money by borrowing at .13% and loaning it to the government at 1% for a year. Not to mention that the banking system itself, because they will have to bring their SIV’s on balance sheets, are very insolvent in reality so the Fed cannot bring in the liquidity for only God knows how long. Frankly, with the current US debt load and projected debt load, combined with the Fed’s balance sheet we are not getting the inflationary impact Ben wants. We are getting the worst part of it, a falling dollar (Just a note here, the dollar was much worse under Bush before the crisis than under Obama, so cut the guy some slack there) without wage inflation. That means you pay more for gas and food while earning less, not a good thing.
In my opinion, Ben has failed as Fed Chairman and should go back to teaching and that is even questionable. There is no way his plan will work because there is simply no demand for credit out there. Americans are in the middle of a secular shift to frugality and not willing to expand their balance sheets. This is especially true with unemployment ballooning up to where it is and sure to get worse, unless you believe the last employment report (if you did believe the report than please contact me for some excellent investment opportunities in Pakistan and Afghanistan). I hope his plan does work because the consumer could use the wage inflation to pay down their debt, but given the last reports about consumer credit, fat chance. Companies desperately need credit, but they are closing shop so fast that banks do not want the risk. Basically, if you are IBM, you got credit, but if you are Ma and Pa Kettle, sorry, too risky.
The worst part of it all is that while Ben is trying to devalue the dollar to create inflation, which is dumb without any money velocity, he will lose control of the process. When FDR did this in the past, which is what Obama likens himself to, he had one very important thing going in his favor, the gold standard which allowed him to set the devaluation amount. Obama and Ben do not have that luxury. This time there are 100,000 trades around the world that will pile onto a short sale of the USD driving the value down to nothing. This is the primary issue that has me concerned, they ultimately have zero control over the devaluation process. What can they do to stop the devaluation process, print more money? That makes the problem worse, not better. Luckily, for now, we have deflation in the US with an international problem of devaluation so we simply exported our problem, thanks China.
Deflation is here to stay, get used to it. High unemployment is here to stay, get used to it. The federal government will continually interfere and make things worse, get used to it. We will see some funky things happen from some very self important, politically motivated individuals that will create problems we have never seen before, so be prepared. The Fed will fail in its attempt to fix what is created, but you knew that. Wait for gold to come down in price a little more and buy a ton of it because while we will not get inflation like Ben wants, we will get massive dollar devaluation that will eventually come home to roost and it will not be pretty when it comes home.
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