“The accident that involves you is NOT the one you see coming.”- Nate Martin
Today’s announcement calls for “printing” another $1.15 trillion and using it to buy up our own debt in the form of Treasuries and agency paper or derivatives of debt.
While that may sound nice if you are a bank that holds this debt, if you are a homebagholder who is making payments on your house to service that debt, you were just put on the hook for $15,000 in loss of purchasing power and/or future taxes to pay for that debt – that you continue to service.
The problem here is that in a closed system you would expect the resulting inflation to drive your wages up to compensate. Only our system is not closed, it is open. And there are many hungry people throughout the world willing to do your work for a much smaller paycheck than you. That’s why all our capital is flowing overseas to places like China where cheap crap can be made cheaply.
This brings about a negative trade balance. That imbalanced must be financed by the issuance of debt or eventually all the capital (money) would leave the United States (international flow of funds). We are thus a debtor nation owing countries like China and Japan who hold our nation’s debts.
Now, if we are announcing to the world that we are going to jump in and buy up our own debts and our own Treasuries, then we are saying that we are going to keep interest rates low and devalue our currency (nothing but a circle jerk to be sure).
If you are an international investor, you may be willing to suffer through low interest rates, but NOT if the underlying currency is going down, because that will net you a REAL LOSS.
Thus, if you are overseas and hold U.S. debt, you should be hitting the SELL BUTTON and HARD on this news. At the very least you would be foolish to add more of your money to this devaluing effort.
As foreigners do this, it will mean that to keep interest rates low (a must in this environment), Bernanke will have to buy and keep on buying treasuries which are already in a huge bubble. He cannot “print” enough money to do that or our currency will be worthless. That process, IN THE OPEN, began with today’s announcement.
The implications and unintended consequences are huge. Of course these consequences were considered, but evidently Bernanke is standing on the rooftop with feathers glued to his arms and believes that jumping will cause him to fly. Flap hard, Ben, real hard!
You see, if Bernanke is successful in pulling up perfectly at the exact right moment, he will be the first in the history of the planet to do so. What’s at stake is the CONFIDENCE in our entire money system. Once that confidence is gone, there’s no coming back unless you have an entire new system to replace it.
So, the immediate consequences are that the dollar sinks, Gold, oil, and other commodities increase in anticipation of inflation, and bonds collapse in yield or go up in price.
The equity people love it (stocks), because it’s inflationary. They won’t want their money out of the market, again because of the expectation of inflation, stocks should perform better than bonds which are being bought to lower their yield.
If stocks do rise, however, it will be FALSE, as the purchasing power of the currency will be sacrificed at an even greater rate. NOTHING REAL has happened to make stocks increase in value, it’s just that the money supply has increased.
Look at Zimbabwe… they had the stock market that went up increadibly, yet their country and currency is destroyed (check out this list of Q1 2007 International Stock Market Performances ). It will take quite some time to turn the world’s reserve currency into Zimbabwe inflation, but today was a good start. The math and numbers involved are untenable.
Total income cannot service the debt already and doing this will increase the cost of living but your wages are unlikely to improve at the same rate.
We are now attempting to reinflate the world. That is their goal but they believe, like all people who attempted the feat in past history, that they can control it. No, they can’t. Many unexpected events can happen.
One possible outcome would be that enough bond holders leave the market to force interest rates higher, overwhelming Bernanke’s attempts. That would prove to be disastrous and is an outcome that I do not rule out over time.
Investors and markets are not stupid in the long term. Yes, they can be extraordinarily dumb in the short term but eventually the equity markets will figure this out. Much will depend on the extent of the printing that winds up happening.
Do you see that BIG RED Current Account Deficit number at the bottom of the page that just turned $11 TRILLION? That figure is grossly UNDERSTATED. The hundreds of billions and Trillions thrown at agency debt (FNM & FRE) are not being included on our balance sheet figures (but don’t worry, Obama IS including the miniscule in comparison war spending in our current budget). Nor are any of our future obligations now totaling over $56 trillion (or way more) included in that figure. Simply put, there’s not enough income to make the interest payments on that debt, much less pay down the principle (Death by Numbers). Now we’re piling on debt and printing money in exponentially increasing sizes. That simply never ends well, Spend some Time with the Good Dr. Bartlett….
So, the stock market and the bond market have been in a tug-of-war over dollars. The problem has been that there wasn’t enough money for BOTH stocks and Bonds to rise together. If stocks went up, bonds had to go down. And for bonds to up (interest rates down), stocks had to be sacrificed.
But if Bernanke is buying bonds down, that frees money to chase higher returns… and thus his buying bonds could finally allow money to come buy stocks higher. I do not doubt that this is what’s been happening already. I have remarked several times that I’ve seen unusual buying in bonds right at critical levels, even on days when stocks were rising. This is NOT natural, even if it’s just people trying to “front run” Bernanke’s printing or “Quantitative Easing” (QE). Please view Quantitative Easing Explained for a QE refresher if needed.
Their theory is that this will force interest rates lower and allow people who are stuck to refinance. Will it make the value of their house go up? Not in REAL terms. And again, if it does, what are we producing that will make our WAGES go up?
So, what I can see happening is that we’ll get on the fast track to the trends that have already been playing out but have been so slow people haven’t YET rioted in the streets. Those trends are that things will go up in PRICE, while your wages simply do not keep up.
Does this mean that DEFLATION is dead? NO, not yet. Remember that wealth is being destroyed at numbers way larger than the trillions announced to date. But this is a watershed event that could change the mentality and we’ve already seen buying panics in stocks. The thing that would really hose Bernanke now would be panic selling in bonds by foreign debt holders. Again, to reiterate, it does not mean immediate inflation is here.
Anyone thinking this move is roses and sunshine for the future is DELUSIONAL and does not understand math. Confidence in the system is being destroyed, and that process is accelerating.
They are trying furiously to reignite credit (borrowing), and will apparently do anything to keep the bubbles rolling, despite what Obama said just today to the contrary. “No,” they say. “Securitizing debt is just fine!” CDS? “We know what’s best!”
The entire concept of a privately owned Federal Banking system run by “The Fed” is ridiculous and needs to end, the sooner, the better.
The problem with credit run amok is that it represents DEBT that must be repaid by someone. QE is simply printing the value of our money away – it’s a form of stealth tax. No economy and no money system in the history of mankind has withstood that type of treatment for long. Ours won’t be the first.
Do not play the following Youtube video with children in the room or if your ears are “sensitive.”
F--- the Fed: