Wednesday, February 10, 2010

Bernanke's Naked Put Signals End of Fed

Once upon a time, I owned a fairly successful, profitable newspaper publishing business. Due to events mostly beyond my control the business declined and eventually was bankrupted. During the phase of decline, my father, knowing the challenges and tribulations I faced on a daily basis, used to say, "I don't know how you keep going."

Being a resourceful and resolute sort, I usually replied that the alternative would be to ball up in a corner and cry.

Nowadays, I laugh. I laugh quite a bit. And, what keeps me laughing the most is the outright insanity of the global economy and the people who are supposed to be running it. That idea alone, that a few people, like Fed Chairman Ben Bernanke and heads of foreign central banks, are supposed to keep the global machinery of commerce well-maintained and regulated.

HAHAHAHAHAHAHAHA!!!!! Financial mismanagement of far-flung enterprises, like nations, began with the creation of money, but didn't really gather momentum until the Fed was created in 1913 (just before the Great Depression, I should add) and John Maynard Keynes began commenting and writing on economics. The art was nearly perfected by the expansionist Maestro himself, Alan Greenspan, and is today being expanded to the nth degree of absurdity by Chairman Bernanke.

Today was a literal laugh riot. Bernanke released a transcript of his remarks prepared for testimony before the Committee on Financial Services, U.S. House of Representatives. His actual appearance was postponed since the nation's capitol is currently under two to three feet of snow (this is a probably a good thing that won't last), but Chairman Ben decided to unveil it today, since he probably wanted to get the blueprint outlining the devastation of a nation's finances out for inspection by his central banker buddies around the world.

The text of his remarks, lined above, reads like a fantasy. It is almost all fiction and represents the hopes and prayers of the fed Chariman, because, technically, with the federal funds rate essentially at zero and there being no economic conditions which would cause the FOMC to change its policy stance, i.e., raising the rate, the Fed has NO WAY TO INFLUENCE INTEREST RATES.

What our ingenious Chairman has suggested in this little piece of fiction, is that interest rate policy will be tied to interest paid on member bank reserves. In other words, Bernanke has suggested a game-changer because the usual federal funds rate is going to stay at ZERO for much longer than he or anyone else in the banking industry ever imagined it would.

Essentially, he's saying - despite his claims that the economy is improving - that conditions continue to deteriorate and will continue to deteriorate for as far as the eye can see. Inside his veiled statement of "change" (we've heard that one before) is the seed of truth: the Fed has failed in its responsibility to promote a sound economy and stable prices. They have been unable to shake loose from their accommodative posture because the debt burden is still too severe and getting worse.

The only way out for them is to pay interest on their money they themselves hold and hope that credit markets respond in kind to yet another inflationary gesture. In all probability, it won't work, for two good reasons. First, the entire structure of the Fed is based on lending out money at interest, not paying interest on money held in reserve. Their plan is entirely a chimera, a sham, a puppet show. Second, the private markets will not adjust to the "new, improved" interest-on-reserves-as-the-basis-for-all-lending program. Markets, regional and local, have their own priorities and standards and will shake free from the Fed umbrella. Growing markets will encourage higher interest rates. Slowing or stagnant markets, that being most of the nation, will not be able to raise rates with any success.

Bernanke's plan is as boneheaded as most of the ideas spawned by the minds of these Lilliputian thinkers. More than anything else, the Chairman has issued the first statement signaling the end of the Federal Reserve. He admits that the economy's problems began in August of 2007, as I have repeatedly stated at various times on this blog and elsewhere. His highly-fictionalized account of the proceeding events fail to hide the fact that the Fed and his counterparts at the US Treasury have been entirely unable to correct the prevailing conditions of decline.

He is admitting defeat, The US economic system, as it has been engineered by the Federal Reserve, is broken beyond repair. The fed funds rate is ZERO, and will remain at ZERO forever, or, until the Federal Reserve Act is either amended or revoked. Since the Federal Reserve Act did not include a charter or set term for the operation of the Fed, there is no renewal or expiration. They operate in perpetuity, thus, the only way to dispose of or abolish this abominable creation is by an act of congress, so don't hold your breath. By the time the numbskulls in DC come to the realization that the Fed has bankrupted the nation, it will be too late. Besides, the federal government has done their own demolition job with entitlements, deficits and the burgeoning national debt.

In 2007, I suggested taking all money out of the stock market and putting it into cash. This new twist on the entire structure of money reinforces my ideas from yesterday that the only place to put money now is in foodstocks that can be stored, reliable transportation, clothing, arable land and tools of trade. Obviously, an investment in a sewing machine or any kind of gardening instrument would be a worthwhile use of your money in light of today's developments.

The Fed's failure may result in very unusual movements in currency markets. An absolute breakdown of global trade is not out of the question as more and more individuals and countries question the viability of fiat currencies as a whole. The alternatives to our busted system of credit are gold, silver and barter. However, since gold and silver have been highly commoditized and traded as investments, they may be less reliable as stores of wealth as their values should fall along with all other asset classes, albeit to a lesser degree. Add to the list, seeds, for vegetables. They're cheap, and everybody needs to eat more veggies.

The market reaction to Bernanke's comments, released about 10:00 am, was complete horror. Stocks immediately sold off on the very thought that the fed would even consider ending their free-money regime. Cooler heads prevailed, however, sending stocks back up and into a stable area for much of the remaining session. Overhanging everything was the snowstorm ravaging the East coast, which kept Washington shut down and many traders away from their desks. Volume was a dribble and the major indices ended the day without much change, though all were down.

Dow 10,038.38, -20.26 (0.20%)
NASDAQ 2,147.87, -3.00 (0.14%)
S&P 500 1,068.13, -2.39 (0.22%)
NYSE Composite 6,819.12, -16.04 (0.23%)

Declining issues beat advancers, 3271-3086. New highs: 113; New lows: 53. Still no perceptible break in these indicators. Volume was on the low side.

NYSE Volume 4,982,940,500
NASDAQ Volume 2,039,927,875

Commodities were split. Crude oil gained 17 cents, to $74.69. That's about to change. Look for crude at $65 within months, possibly sooner and possibly lower. Gold lost $1.10, to $1,076.10. Silver edged down 11 cents, to $15.33.

Just to reinforce how grossly mismanaged the US economy is, I cite this mainstream article, called, Is America about to go broke?, a brief, yet exceptional insight to the unfunded liabilities of Social Security and Medicare by Scott Burns.

Having previously written on this topic just a few days or weeks ago, I discovered that the unfunded liabilities were an amorphous blob, with estimates ranging from $69 to $99 trillion. Burns pegs it at a "mere" $42.9 trillion, citing the actual 2008 Trustee's Report as his source. Burns makes more claims in his article, the most compelling being that the total expense for SS and Medicare will outstrip revenue sometime between 2010 and 2015. Previous estimates had this date pegged as 2037, quite a few years off. Burns also pegs Alan Greenspan as the architect for the detonation of the entitlement time bomb, a point on which he is probably correct.

But then Burns makes the leap to inflation, purporting that in order to keep the payments system going, the Fed will have to print more money. That's where he and I part company. The Fed has been printing money as fast as it can for years. Inflation has not occurred because the banks are hoarding it, keeping an ungodly amount as reserves within the Federal Reserve. Just printing money doesn't cause inflation. It has to be put into circulation, and currently, its not. And, as we learned today, the Fed is going to pay interest on all this money the banks have stored within the Fed as reserves. There's the final solution. The US economy is kaput, forcibly being thrown down a deflationist hole by the Federal Reserve and its member banks.

The plan by the Fed is ingenious, yet utterly transparent. They'll inflate when they see fit. When they have every mortgage in America underwater, when real estate values have plummeted to 30-40% of what they are today, that's when they'll release a torrent of previously-reserved money as they buy up every depressed property in America, converting the nation's most valuable assets from the hands of homeowners, Fannie Mae and Freddie Mac, to their own. Oh, yes, and then, once Americans already have been forced out of their homes, the prices of everything - from food, to fuel to every imported good - will rise out of their buying range.

Yes, we will have inflation, but not before we encounter years and years of crushing deflation.

I'm not laughing as hard as I was earlier, because the conditions are dire indeed. However, the proposed solutions and what passes today for economic analysis are absolutely side-splitting.

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