Bernanke has made his policies clear. The Fed will purchase $85B of Treasuries and Mortgage Backed Securities per month going forward as long as the inflation rate is 2.5% or less and the unemployment rate is 6.5% or more. This plan may sound rational, but we suspect the numerical guidelines given here are firmly etched in wet sand.
The Fed has made it clear that there will be an adequate supply of money to finance a recovery. There are limitations, however, to what this might accomplish. Currently, there is an ample supply of money, but a paucity of demand for those funds. Adding to the supply of that which is abundant is hardly a solution.
What is needed to kindle the revival of capitalists' animal spirits, to create enterprises that need workers, is a tax incentive to succeed, and simplification of the regulatory climate. Neither is present in the Obama administration.
The United States has the highest corporate tax in the world -- 35% -- to which some states tack on another few percentage points. The only discussion about taxes currently coming from Washington is which existing taxes are going to increase, and by how much?
The tax status is not supportive of business formation. What then, is the regulatory climate? A report last March made these observations:
"Federal data marshaled in 'Red Tape Rising,' a report by the Heritage Foundation, a conservative think tank in Washington, convey an even starker picture of regulatory growth during the Obama administration's first three years. Since January 2009, 106 new "major" regulations have been enacted, at a total estimated cost of $46 billion, plus almost $11 billion more in implementation costs.
This track record leads the study's author, Heritage senior fellow James Gattuso, to label President Obama 'the No. 1' regulator in American history."
Granted, the trend for an expansion in regulations has been going on for many years under both parties, but it is now growing exponentially. Consider:
"Spending outlays for the nation's major federal regulatory agencies has grown with breathtaking speed over the last half-century -- and under presidents of both parties. Such expenditures totaled $533 million under President Kennedy; reached $7.29 billion by the middle of Jimmy Carter's one term in office; skyrocketed to $25.49 billion by the end of the 1990s; and are projected at $57.33 billion for the end of this year."
With the expansion of regulations, the current administration should be well-supplied with regulators. Since the beginning of the Obama administration, the Federal Government has hired 101 new employees a day, every day, seven days a week, every week, according to Andrew Malcolm in Investors.com. This tallies up to 143,000 new workers, and had taken the total number of Federal employees above two million.
In this business climate, it would not be surprising if the unemployment rate failed to respond to Bernanke's monetary medicine.
There has been some progress at the EU Summit. At long last, Greece will receive €34.3B of their bailout money, originally scheduled to be distributed this past June. And German Finance Minister Wolfgang Schaeuble has been successful getting a single bank inspector to be in charge of bank inspections in 17 countries.
Why then is the EURUSD (FXE, UUP) not trading higher? The 1.31 handle is presenting resistance. Are there market insiders who sense that ECB President Draghi, like Bernanke, a former doctoral student at MIT, is about to commence with his own version of QE?
We are approaching the gift giving season. Last year on December 21st, the ECB offered banks three-year loans at 1%. A total of 523 banks requested €489B in loans. It was called a resounding success by the ECB.
In the current climate, we are not friendly to either the euro or the USD, so it may be best to just observe from the sidelines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.