Many people now believe that the Federal Reserve is composed of a group of persons who do the bidding of companies like Goldman Sachs (NYSE:GS). Jan Hatzius, chief economist of Goldman Sachs, is spearheading the effort to insure heavy dollar debasement, claiming that the issuance of $4 trillion new counterfeit dollars will help the real economy.
Reading Hatzius' justifications is like reading the ravings of a lunatic. If Hatzius were an imbecile, I would accept that. But, he is surely not. He is, instead, the living mouthpiece for a group of executives at Goldman Sachs, who are not satisfied with the amount of cash they have already managed to extract from the American public. They want yet more free counterfeit cash from the Fed to play with. It is not the first time this has happened. Firms similar to Goldman Sachs were also pressuring the Reichsbank of Weimar Germany from 1919-23 to engage in more and more quantitative easing. At that time, the German central bank obliged and the famous Weimar hyperinflation episode that scarred Germany for generations was the result.
It is said that the Federal Open Market Committee (FOMC), which sets interest rates and orders official counterfeiting from time to time, will never disappoint the “market”. The term “market” seems to be defined as the big investment banks on Wall Street. Jan Hatzius has a lot of wants and desires that mirror the goal of his firm to make as much profit as possible in their role as speculators and brokers who service speculators. He and fellow Goldman Sachs’ alumnus, William Dudley, President of the New York Fed, claim that counterfeit dollars (QE-2) will help lower the unemployment rate. Yet, the first round of quantitative easing did absolutely nothing to lower the unemployment rate.
QE-1 mostly juiced the stock and commodity markets with an unhealthy dose of speculative feel-good fever. It caused the price of many commodities to skyrocket. Higher commodity prices, fed by "counterfeit" QE cash, has put a great strain on the real economy. They have enriched many of our nation’s enemies in the Middle East, Venezuela and elsewhere.
The reflation of commodity prices, especially at the supermarket and at the gas pump, is very unhealthy for American consumers who are strapped to begin with. Yet, in spite of this, the primary dealers tell us that the Fed must do more. QE-1 was essentially a huge stealth tax imposed by the Fed to save the big banks. Now, QE-2 will essentially be another huge stealth tax designed to make big banks richer, at the expense of the rest of society.
Of course, the Fed is not supposed to have taxation power. Our Constitution reserved this for Congress. Indeed, taxation without representation was the rallying cry of the American Revolution. With the Fed and quantitative easing, however, we have reached the ultimate in taxation without representation. Americans must pay the tax, on food, fuel and other things, and no one in Congress can do anything about it. The tax has been imposed by the Fed, an organization controlled by the same banks that will benefit from taking this money from the American people.
QE-1 was most effective in saving big banks from what appeared to be their inevitable demise in March 2007. The weak foundations of their income and assets caused many banks to be unwilling to lend money to other banks. Some of the biggest financial institutions in the world were unable to convert many of their assets, then thought to be worthless, into cash. Quantitative easing created a market for agency and mortgage backed bonds, for example, at a time that the private market wanted no part of them. It put cash in the pockets of the banks and bonuses in the hands of their bank executives.
QE-1 was announced and carried out starting in March, 2009, a time of unusual dollar demand from foreign banks faced with billions in defaulting dollar denominated assets. The dollar had reached its highest level in years, and that fact helped the Fed get away with it. Dollar demand has drastically dropped since then, and the currency is floundering near its historic lows right now. The Fed won't get away with QE-2 without America paying heavy consequences.
Some countries, like Brazil, are already erecting protective tariff barriers in order to exclude unwanted dollar denominated investment. Given this backdrop, during a time of unprecedented dollar weakness, we believe that QE-2 will eventually lead to a runaway selloff of the U.S. dollar in the real market, as opposed to merely in the leveraged currency markets. That would be devastating both to the American economy and that of the world.
The world would have been better without QE-1. Insolvent banks should have been allowed to fail. That would have allowed us to nationalize them, fire all the incompetent executives, and sell off the pieces to more prudent management, leaving no golden parachutes and no rewards for failure. However, there was an argument, at that time, that doing this would send the world into a deep depression. It was a weak argument and I vehemently disagreed at the time. However, a lot of people believed it and it was used to justify the biggest counterfeiting and money debasement episode in history.
No such financial crisis exists today, and no such justifications can be relied on. Bank profits are now quite high. Profits in the rest of corporate America are also high. Corporate cash hoards are also high. Corporations will only be inclined to spend that cash in America (as opposed to converting it into foreign currencies and/or gold), or engage in speculation like the banks, if they have confidence in the U.S. economy. Engaging in another round of quantitative easing decreases confidence.
Some diseases weaken the host, but they allow the host to live. Others weaken and then kill the host. Guys like Jan Hatzius and William Dudley, as well as all the others who are pushing QE-2, are suffering from the second type of disease. They will not be satisfied with anything less than sucking all the life's blood from the nation’s economy, even if it means that the entire economy dies. They are willing and ready to destroy confidence in the U.S. dollar and the U.S. economy through more quantitative easing, at a time when no arguable justification for it exists. Once confidence is destroyed, it will be difficult or impossible to regain.
Meanwhile, virtually all the primary dealers of the Federal Reserve are expressing certainty that the Fed will begin another round of official counterfeiting on November 3, 2010. Bank of America/Merrill Lynch (NYSE:BAC) says $500 billion at the next meeting with a total of $1 trillion. Deutsche Bank (NYSE:DB) says $125 billion and then $50-100 billion for 6 months for a total of $500 billion. The Wall Street Journal has announced that the FOMC is poised to announce the printing of several hundred billion at its next meeting, without saying where it got that information. (See here.)
It is troubling, to say the least, that private companies like Goldman Sachs, Merrill Lynch, Deutsche Bank and media outlets, like the Wall Street Journal, often seem to know what the Fed will do, before it does it. Where are they getting this information? Reuters recently exposed corruption at the Federal Reserve in the form of selective leaks of inside information to favored persons in private industry. (See here.) A special prosecutor's office should be established to investigate and determine the source of the inside information. The S&P office should aggressively prosecute all persons at the Fed who are identified as sources, no matter how high they may rank in the hierarchy, as well as those who received the information. In any case, this type of foreknowledge activity illustrates a high level of corruption at the Federal Reserve and why the organization has lost most of its credibility.
For once in its lengthy existence, the FOMC should say “no” to the primary dealers. But, perhaps, that is impossible. Those who say that the FOMC, with one or two exceptions, is composed of financial whores and owned by various executives at the primary dealers, might be right. However, if they are wrong, given the circumstances, the FOMC will disappoint the "market" by announcing no further quantitative easing at this time.
Disclosure: No positions in any company mentioned