How Ben Bernanke Saved the World

“It became necessary to destroy the town to save it.”

                    U.S. major talking about Bến Tre, Vietnam

The Wall Street Journal doesn’t have a humor section, so “How the Fed Saved the Economy” appeared on the op-ed pages under the byline of Ben Bernanke, former chair of the Federal Reserve Board.

In his commentary, Bernanke takes credit for saving the economy – rather than responsibility for the most dismal recovery in history.Bernanke

Anyone who has read even one of our blog posts knows that we would disagree with any claim about the Fed saving the world, especially given that the economy continues its slow-motion deterioration after nearly eight years and several trillion dollars’ worth of “saving” by the Fed.

However, Mr. Bernanke has a book to sell.  And while it will likely appear in the non-fiction section, we’re guessing by its title that it is even more self-congratulatory and less fact-filled (if that’s possible) than his op-ed piece.

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Abnormalization and QE4

It seems to be a policy of the Federal Reserve Board to never use a two-syllable word when a four- or five-syllable word is available.

So we have “quantitative easing” instead of “bond buying,” “tapering” instead of “reducing,” “forward guidance” to describe announcements of future Fed activities, and “macroprudential supervision” for “we have no idea what to do, but we have to say something that sounds important.” US-economy_try-it-now-707x404

What may be the most annoying Fed malapropism, though, is the Fed’s use of the word “normalization,” as in the following quote from Fed Chair Janet Yellen after a recent Fed meeting:

“For all of us, the appropriate policy decision is going to be data dependent and all of us will be looking at the incoming data and our opinions about the appropriate timing of normalization are likely to shift as we look at how the data evolves.”

In other words, we’re currently going through a period of abnormalization and the return to “normalization” will begin when the Fed starts raising interest rates.  Although, after eight years of zero interest rate policy (ZIRP), shouldn’t we consider ZIRP to be the new normal? 

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ECB: Cheap Oil Is the Problem, Not Iran’s Nukes

If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.

What’s the big deal?  Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.

Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit.  OMG!!!

Not to worry.  Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.

Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus. 

Low Inflation Is the Problem

How many people do you know who are worried that the rate of inflation is too low?

If you know anyone who thinks the most important step forward for today’s tepid economy is to raise the inflation rate to 2%, there’s about a 100% chance that person is a central banker.

Central bankers are the folks who have been running the economy in recent years and, based on their logic (or, more accurately, illogic), it’s a wonder there still is an economy.

Everything wrong with the U.S. economy today is even worse in Europe.  Unemployment has been so high, it’s as if every month is August.  For the Eurozone as a whole, the Read more

Correct Yourself

Last week was a tough week for investors, given that the market dropped for six consecutive days. It was an even tougher week for financial advisors and investment managers who have been advising clients to keep a heavy allocation of stocks in their portfolios.

Advisors who are telling their clients to invest a greater percentage of their portfolios into stocks should be able to answer clients’ questions about why they are so optimistic that stock prices will continue to increase.Exp_2013_11_21_0

Investors, likewise, should ask why they are following that advice.  Investors need to be accountable for their future.  If their advisors are wrong, they will pay the price, not their advisors.

Answer These Questions

Given the state of the world economy – and stock markets throughout the world – many questions need to be answered.  Here are some of them:

Where is future growth going to come from? Don’t look to China, which may claim to be growing at 7% this year, but few believe it. Don’t look to the U.S., where baby boomers are retiring and millions of people in all age groups have stopped looking for work.

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QE 4, 5, 6, 7, 8, 9, 10 …

Why didn’t we think of this?

For years, we’ve been criticizing the Federal Reserve Board for buying too many bonds, keeping interest rates too low, boring us with talk about “macroprudential supervision” and doing precious little to actually help the economy.Fed Pyramid

We’ve also been critical of the federal government, state governments, municipal governments, foreign governments, U.S. consumers and U.S. corporations for carrying too much debt.

But, until now, we failed to put the two together.  The Fed loves to print money.  Governments love to spend it.  So maybe the problem isn’t that the Fed has been printing too much money – the problem is that the Fed hasn’t been printing enough money to keep up with government spending.

The Global Slant blog suggested that the Fed initiate a fourth round of quantitative easing (QE 4) and print enough money to pay off the federal debt (as well as the writer’s debt).  But why stop there?

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Bazooka or Blunderbuss?

Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.Bazooka 2

Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.

He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.

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The Inflation Straw Man

 “When real interest rates start to move up, that’s when the crisis could hit.”

                                                  Alan Greenspan

So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.

How did that go?  Not so well.

This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis.  It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment. CPI

In other words, the U.S. has joined Europe and is in deflation mode.  It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009.  Imagine how low prices would be if the Fed didn’t buy all those bonds!

That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.

As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”

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Another Year of ZIRP?

When the economy recovers, interest rates will go up, right?

That’s been the Federal Reserve Board’s line for years now.  Yet as the Fed gushes about an allegedly booming economy, some are saying that interest rates are unlikely to increase this year.

So what gives?Interest Rate Chart

Last week’s Federal Open Market Committee Statement, which summarizes monetary policy, noted that since the FOMC’s December meeting, “the economy has been expanding at a solid pace.”  The statement notes that the unemployment rate is declining, consumer spending is increasing and, if not for that troublesome housing market, everything would be just dandy.

As if to put an exclamation point on the FOMC statement, Fed Chair Janet Yellen met with Congressional Democrats last week to reiterate just how fine the economy is doing.  (The real purpose of the meeting may have been to explain the FOMC statement to members of Congress, as it contains phrases such as, “underutilization of labor resources continues to diminish;” which could have been worded more clearly by saying, “Many former middle managers are still working as greeters at WalMart.”)

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The United States of Europe

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets.

Will QE have an impact on interest rates if they are already near zero?  How much lower can they possibly go?  And if interest rates that low have not stimulated spending and investment, what difference will a few basis points make?  QE is enacted to lower interest rates, because – in theory, anyway – the lower rates go, the more they will stimulate spending and investment.  However, European interest rates are already near zero and the interest rate on bank deposits is negative.

Why is the ECB worried about lower

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Swiss Diss

“It is said that the Swiss love only money … this is not true. They also love gold.”                                                                                                                          Anonymous

 The last time we checked, Switzerland was still part of Europe.

Then again, Switzerland has long been different from its European brethren.  Switzerland is historically an observer, not a participant.  Neutrality gives the country points for ethics among the peace-loving folk – although it didn’t stop the Swiss from dealing with the Nazis during World War II. Swiss Franc

Switzerland is also “the vault of the world.”  It’s where money and wealth are omnipresent, but never talked about.  “Swiss” and “bank” go together like “Swiss” and “watch.”

But there’s a big difference between the Swiss National Bank and the European Central Bank.  While the ECB is likely to announce a quantitative easing program to fight deflation next week, Switzerland this week strengthened its currency with a surprise announcement that it was removing its cap on the value of the Swiss franc.

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