By John Galt for America's Chronicle
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The chairman cannot solve the economic trap developing
and is preparing an "I told you so".
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What do I see coming?
It's
me, in a Bubble!
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The chairman of the Federal Reserve of the United States who
has spent the best part of his term trying to pump up the economy with
trillions of dollars through QE1, QE2, and now is in the midst of a
QE-Infinity, or until the unemployment rate deeps to 6.5%, which could be the
same thing, has suddenly started to worry about his own actions and his legacy after his coming departure.
In a speech on Friday, May 10, in Chicago, he delivered what we interpret as a
warning to himself, even though he was by all appearances talking to an
audience of incredulous investors and economists. The Chairman said that “in light of the current low interest rate environment, we are watching
particularly closely for instances of ‘reaching for yield’ and other forms of
excessive risk-taking, which may affect asset prices and their relationships
with fundamentals”.
Mr. Bernanke was of course referring to the "low
interest rate environment" that he himself has created with trillions of dollars
of magic money. We don't want to say "printed money" unless the
phenomenon is underestimated. It is more like magic money for it is created not
by a slow clunky printing press but by the magical instantaneous pressing of a
button on a computer, eh voila, more than $3.4 trillion dollars, and counting, of
treasury's and mortgage backed securities bought mostly at the top of the
market have been stuffed into Bernanke's attic. Plus another $3 trillion bought
by American and foreign investors. Mr. Bernanke is now suddenly worried, after
hearing similar warnings from economist not associated with the MSM for the last 4 years, that eventually
other investors less tied to political masters with an economic policy from the
1930's will decide that it isn't a good wealth-creation idea to have to pay to
hold assets instead of getting a return for those assets. Presently 10-year
Treasury's are costing (as in, paying instead of getting paid) investors around
0.5% to hold them (receiving a yield of 1.5% and paying 2.0% in devaluation by
inflation).
The consequences may start
the
minute the market gets wind
of Mr. Bernanke's
insecurity.
Mr. Bernanke's warning against "reaching for
yield" is particularly amazing as it assumes or implies a
condemnation of investors should they become unsatisfied with paying the
government for the privilege of giving them their money, advising instead that
at no time they should be as crass and ambitious as to engage in "excessive
risk-taking" by demanding a return on their investment, however small that
may be; and believe us, it is pretty small indeed. Mr. Bernanke calls the
desire to get 3-5% out of their investments, presently provided by junk-bonds,
"excessive risk-taking" with disapproval. It is also a warning to all
those seniors and savers that depend on a yield to survive their day-to-day
existence to not expect even the most modest of yields by such
"risk-taking" to assuage their bare necessities.
Well, the chairman is right to be worried and this unusual
warning is being made in front of a mirror and it may be an indication that the
Federal Reserve may be preparing to interrupt the creation of magic money. The
Fed may be signaling that the size of its balance sheet may be reaching a level
where a quick, or even a slow, reversal could bring dire consequences. But the
consequences may start the minute the market gets wind of Mr. Bernanke's
insecurity which will be followed by a panic in the bond market. The run for
the exits can be dramatic. Those that are waiting for the stampede to begin
will be trampled.
Mr. Bernanke seems to be
caught
in an economic catch-22.
That is the "Bernanke bubble" that all of a
sudden Bernanke is worried about. It will make the "Greenspan Bubble"
of 2008 look like child's play because the "Bernanke Bubble" involves
foreign sovereignties who hold large amounts of treasury's and it will burn
like fire through dry grass due to instant electronic markets. The
"Greenspan Bubble" of 2007-2009 was slow in comparison because it
involved fixed assets that where not liquid or marked to market daily by
holding institutions. They were slow to ascertain their true value. The
"Bernanke bubble" is by far more dangerous.
Mr. Bernanke seems to be caught in a catch-22, one that
will burst the bubble if he succeeds or will burst the bubble if he fails. His
massive creation of money in circulation has the purpose of reviving the
economy. We won't go here into the reasons of why it hasn't don't so quickly,
but the fact that it hasn't has created one side of the catch by obligating the
Fed to prolong the time and scope of the money creation policy, inflating the
balance sheet of the Fed to massive proportions and those of other investors. In
the process it has thus increased the probabilities of a failure by either of
the only two exit roads possible for the economy. One, if the economy finally starts
growing and consequently starts pushing prices up creating inflation and a rise
in interest rates, or, two, that the economy fails to a degree where it is
impossible to keep selling debt without a rise in risk premium demanded by
overwhelmed buyers. Catch-22, indeed, in either of those two only possible ways
for the economy to go, the burst of the bond market bubble would be inevitable
with prices of Treasury's and all bonds dropping dramatically.
The strange thing is, nevertheless, that the Fed is
delivering the warning in front of a mirror hoping against hope that it won't
arrive until after his term ends at the end of the year and the next guy will
have to carry the burden, under the cynical "I told you so" from
Bernanke - he is setting a personal escape.
We are more worried that the impact to the economy will carry the
burden to main street - that is, you the reader.
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