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  • QE2: This Time It's VERY Different!
    Contrary to a post I wrote last month outlining why I thought Bernanke was bluffing about starting another round of quantitative easing (QE), the Federal Reserve announced Wednesday it intends to purchase an additional $600 billion in “longer-term” Treasuries between now and June 30, 2011. This does not include its ongoing Treasury purchases reinvesting agency debt and MBS.

    Both the FOMC statement and an op-ed piece in Thursday’s Washington Post by Fed Chairman Bernanke explaining that another round of QE is necessary to help the Fed fulfill its dual mandate to “promote a high level of employment and low, stable inflation.” In the most blatant acknowledgement yet of the Fed’s intentional use of the wealth effect, Bernanke wrote that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

    But deep reflection and inspiration derived from an article in the November 1 issue of Bloomberg Businessweek has led me to conclude that the Fed is using their dual mandate as a smokescreen for currency manipulation.

    In “The Keynes Solution,” Peter Coy outlines three options the US could engage in to correct chronic trade imbalances without resorting to retaliatory measures that could spark a trade war with China. While the Obama Administration is against imposing trade barriers outside of the WTO (option #1), monetary policy has already devalued the dollar (option #2), and appears to be launching QE2 as a vehicle to secretly implement option #3. This would force our trading partners to spend their dollars on U.S. goods, services, or mortgages instead of buying Treasuries. The more Treasuries the Fed is holding on its balance sheet, the fewer Treasuries will be available for both domestic and foreign investors to purchase.

    Since all dollars will eventually have to be spent or invested in the U.S., the Fed is using QE2 to transform our trade imbalances to productive economic uses of capital. If the Fed’s goal is to maintain its balance sheet of between $2 and $3 trillion primarily in Treasuries, that amounts to $2-3 trillion less available for foreigners to purchase. In essence the Fed is trying to control how trade surpluses are being spent by China and our other large trading partners.

    QE1 (March 2009 – March 2010) was different as only $300 billion consisted of Treasuries. With QE2 comprised solely of Treasuries, the Fed is “cornering” the market, restricting China and other countries to spend their excess reserves in the U.S. economy.

    Since Bernanke knows that further fiscal stimulus is not politically feasible (especially in light of Tuesday’s midterm election results) and the Treasury’s plan to cap surpluses at 4% has fallen on deaf ears, the Fed is using QE2 to force China to provide the stimulus. The Fed is sending an under the table message to the Chinese government that says you didn’t raise the value of the yuan, so we will use QE2 as a weapon to wreck your economy and force you to buy American, lowering our trade deficit with you.

    As an additional side benefit, QE2 helps the deficit. It amounts to an interest free loan since the Treasury pays interest to the Fed on its bond purchases and then the Fed turns over its profits to the Treasury.

    If the Fed wants to increase employment and spending, QE2 is not the right vehicle to do it. According to calculations by Macroeconomic Advisors LLC, even if the Fed ended up buying $1.5 trillion in Treasuries it would only lower the unemployment rate 0.2% by the end of 2011. And even that might be too optimistic since economic growth normally is accompanied by an increase in the money supply.

    The Fed is not increasing the money supply when it conducts QE because individuals and businesses who want credit don’t qualify. Those who do qualify don’t need additional credit as they are trying to deleverage from the previous Fed supported housing and asset price bubbles. The Fed’s traditional means of spurring economic growth is to lower interest rates to spawn speculation which causes asset bubbles. This creates more collateral “value” to expand credit. But this time is different because so far the Fed has been unsuccessful in expanding the money in circulation through either traditional or untraditional means.

    The only way the Fed could help to increase employment would be by partnering monetary policy with fiscal policy. One idea would be for Congress to pass a major infrastructure spending bill that is “paid” for by the Fed monetizing the corresponding debt.

    The Fed claims that inflation is too low. Yet the unfortunate irony is that price inflation without wage inflation will only end up reducing demand. Bernanke has the chicken and the egg reversed since excess capacity in the labor market will prevent wage growth even in a price inflationary environment. Creating wage inflation would require Congress increasing the minimum wage. And Bernanke knows that idea would be D.O.A.

    Increasing economic growth could better be achieved through regulatory measures than through QE. Bernanke writes that QE1 “had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation.” Since Bernanke is telling us that QE1 did not work as the velocity of money did not increase, why embark on QE2 unless there is a hidden agenda at work?

    If the Fed wanted to help expand credit, it could eliminate the 0.25% interest it pays on excess reserves sitting at the Fed as well as establish limits on the amount of excess reserves banks can keep there. University of Massachusetts economist Robert Pollin has proposed a 1-2% tax on the estimated $1.1 trillion in excess reserves. However, as the bank regulator the Fed has to carefully balance the potential economic benefits of these options with banks taking excess risk.

    The myth that QE is devaluing the dollar is contradicted by the sterilization of QE by excess bank reserves held at the Fed. The fall of the dollar and the rise of gold are the result of ultra low interest rates and speculation. Inflation won’t occur until the actual amount of currency in circulation increases. Therefore, the only thing that Bernanke is aiming to achieve is to remove the risk free option from both foreign and domestic investors.

    The commodity inflation that has evolved is actually reducing demand due to a lack of wage inflation. Unlike the 1970s wage/price inflation spiral, globalization has capped the ability of labor to keep up with price inflation.

    Disclosure: No positions
    Nov 05 9:59 PM | Link | Comment!
  • Ben Bernanke & Fritz Henderson Refuse To Flow with the Winds of Change

    When a planet from Earth’s vantage point appears to be stationary and change direction, its energies are more pronounced.  Uranus the planetary energy of shocks, surprises, shakeups and dynamic change, was stationary in the sky from November 28 to December 4, 2009. 

    Uranus stationed direct on December 1, the day of the Full Moon in Gemini.  The Full Moon marks a culmination point in the lunar cycle, as the Moon’s bright light illuminates issues we’re aware of that need to be resolved.   

    Gemini is symbolized by the twins.  Last week the careers of two leaders hung in the balance. One has exited the executive suite and the other is battling to hold on to not only his position, but the powers of the institution he leads.  The Sun represents an individual’s career and reputation.  Both of these men were born with the Sun and Mercury in Gemini’s opposite sign Sagittarius. 

    As the energy of communication and movement, Mercury and Gemini rule automobiles.  Shock” and “surprise” are the words the Financial Timesused to describe the mood within GM after Tuesday’s unexpected announcement of CEO Fritz Henderson’s immediate departure from the company.  The “pressure from an assertive and mercurial board” put in place after the US government took majority control of GM created disagreements between Henderson and Ed Whitacre, the retired chief executive of AT&T who became the government appointed Chairman of GM in June.    

    In a post written on April 5, 2009, I wrote: “Based on the transits to his chart, I think it is unlikely Henderson will be running GM for very long.”  Saturn square Pluto describes the difficult transition from bankruptcy to the restructuring necessary to rebirth a new GM constrained by 68% US government and 8% Canadian government ownership.  The exact alignment of Saturn and Pluto on November 15 affected Henderson’s progressed* Saturn in Capricorn.   

    Saturn represents contraction, and GM is experiencing difficulties shedding unpopular brands.  Deals to sell its Saab and Saturn divisions fell through.  Last month GM’s board reversed Henderson’s short-sighted decision to sell control of GM’s Opel unit to Canadian auto supplier Magna International.  Additionally, the board felt Henderson’s timetable to take GM public again in 2010 was overly optimistic.

    The Sun and Saturn represent the father; Fritz Henderson was born with the Sun conjoining Venus (finance) in optimistic Sagittarius, and Mercury (siblings) conjoining Saturn in Sagittarius.  Henderson is a GM “lifer” just like his father and brother, beginning his career at GM in 1984 as a senior financial analyst to becoming Vice Chairman and Chief Financial Officer in 2006.   

    Sagittarius is ruled by Jupiter, and Henderson’s Jupiter in Scorpio opposes Mars (action) in Taurus and squares Uranus (change) in Leo.  With these planets in fixed signs, dynamic change does not come easy for Henderson even when the pressure reaches the boiling point.   

    As Paul Ingrassia writes in The Wall Street Journal, Henderson’s idea of change was to name “a new executive team that consisted entirely of other GM lifers.”  Uranus is the outsider, the rebel needed to go into GM and shake things up.  Uranus in visionary Pisces describes the best CEO for GM would be a visionary leader in the mold of Steve Jobs to build quality vehicles that are functional, stylish and totally cool.   

    Henderson launched a “tell Fritz” web page to make GM appear more responsive to consumers.  But when asked by a consumer to explain why GM did so poorly in a recent Consumer Reports survey, Henderson’s response was:  We were genuinely disappointed in our results.  We simply must produce better results.”  Saturn and Uranus opposing Henderson’s natal Mercury and Saturn reflect that Henderson failed to grasp that GM requires a lot more to be viable than the largely superficial changes he was willing to make.   

    As I wrote in “Detroit Automakers’ Bailout Plans and Prospects,” it is GM’s “bean counter bureaucracy” that smothers its potential to make great automobiles.  Mars in Leo began impacting Henderson’s planetary trio at the same time as Saturn/Pluto last month.  During breakfast with Ed Whitacre on Tuesday, Henderson asked Whitacre if he supported him.   Whitacre said he did not.  Mars in Leo exactly opposed Henderson’s Jupiter and the Gemini Full Moon opposed his natal Venus, reflecting that action would be taken concerning the tremendous philosophical differences the two had over how GM should be restructured.  Fritz Henderson left GM at lunchtime.   

    Fritz Henderson was born with the Sun square Pluto in Virgo, but he was no match for Ed Whitacre who has the Sun in Pluto-ruled Scorpio square Pluto in Sun-ruled Leo.  Mars ruled Scorpio before Pluto was discovered, and Whitacre has Mars in its “home” sign Aries harmonizing with Pluto in Leo.  Whitacre’s planetary energies reflect an intensely strong-willed individual who is not afraid to go after what he wants (which includes killing rattlesnakes).  

    Whitacre took over as CEO until a replacement for Henderson is found which Whitacre anticipates could take up to one year.  Whitacre is right that he will be CEO for no more than one year, but he might not be Chairman by that time either. 

    GM was founded when the Sun was squaring Pluto, and Uranus turned direct Tuesday opposite GM’s Virgo Sun.  Saturn and Libra are affecting GM’s progressed Sun in Capricorn.  The Sun represents the leader of the company, and these planetary transits reflected GM’s abrupt change in leadership and the many changes taking place as part of its transformation. 

    The Federal Reserve is also undergoing a dramatic transformation as Saturn and Pluto affect the Fed’s Sun in Capricorn opposite Pluto in Cancer, along with the sector of the chart representing its reputation.   

    Thursday’s confirmation hearing to appoint Ben Bernanke to a second term as Fed Chairman did not go smoothly.   The night before the hearing Sen. Bernie Sanders (I-VT) put a hold to block Bernanke’s nomination that would require 60 votes to override.  Sen. Jim Bunning (R-KY) told Bernanke at the hearing: "You are the definition of a moral hazard. I will do everything I can to stop your nomination and drag out this process as long as I can." 

    In “Bernanke’s Confirmation ‘Not Necessarily’ A Done Deal,” I pointed out that with Uranus turning direct squaring his Jupiter, Bernanke places too much confidence in his academic theories.  Uranus in Pisces is a wakeup call that new policies are needed now.   

    Uranus represents sudden and extreme price movements in either direction and Pisces rules bubbles.  Saturn and Uranus squaring Bernanke’s Jupiter (foreign nations) shows there’s no change in Bernanke’s philosophy that carries on the Greenspan mantra that you mop up asset price bubbles after they pop.  (This is why it is understandable Sen. Bunning made a Freudian slip, calling Bernanke “Greenspan” during the hearing.)  First the Fed Chairman needs to be able to identify the bubble in the dollar carry trade he helped to create.   

    During questioning Bernanke said:  “We do not see, at this point, any extreme mis-evaluation of assets in the United States.  It is really not the United States’ responsibility to make sure there are no misalignments in every economy in the world when those countries have their own tools to address them."   

    Each time Bernanke is asked why the Fed agreed to pay AIG’s counterparties at par he has a different excuse.  Thursday’s latest was that “most of the firms were foreign and we had no authority over them.”  Bernanke said that “UBS offered a 2% discount if and only if all the counterparties accepted one and they did not.”  Even Sen. Dodd who told Bernanke he supports his nomination, became frustrated with Bernanke’s responses to questions about AIG.  Bernanke told him that after the Fed prevented AIG from going bankrupt the Fed lacked the leverage to threaten bankruptcy if the counterparties wouldn’t take haircuts.  Yet a report by the inspector general overseeing the TARP criticizes the Fed for asking rather than demanding the banks take a haircut, a stark contrast to the Fed playing hardball with the banks to take TARP as one example. 

    The uniform message the Senate Banking Committee presented to Bernanke Thursday was that Congress and the public has had their fill of Fed enabled bubbles and the painful busts that follow.  This is consistent with the cycle of Saturn opposing Uranus that began on Election Day 2008 and will continue through the summer of 2010.  This cycle is about shaking up the status quo through dynamic changes that create a new foundation sustainable for the long term (Pluto in Capricorn). 

    Saturn represents life’s lessons, and it is clear that Fritz Henderson and Ben Bernanke have yet to learn that failure to adapt to the winds of change can cost you your job. 

    *A mathematical calculation that moves the planets forward in time as a method of prediction. 

    Frederick “Fritz” Henderson:  November 29, 1958 time unknown Detroit, MI
    Edward E. Whitacre:  November 4, 1941 time unknown Ennis, TX
    GM Founded:  September 16, 1908 time unknown Flint, MI
    Ben Bernanke:  December 13, 1953 time unknown Augusta, GA
    Federal Reserve:  December 23, 1913 6:02 PM EST Washington, DC

    Dec 06 10:01 PM | Link | Comment!
  • Federal Reserve Won’t Prevent Bubbles Because “It Would Not Be Popular”

    "We nonetheless think someone should say that, as a matter of accountability for the financial crisis and looking at the hard monetary choices to come, the country needs a new Fed chief.” – “The Bernanke Record,” Wall Street Journal lead editorial December 3, 2009 

    On the day of the Senate Banking Committee hearing to confirm Ben Bernanke to a second term, The Wall Street Journal has reached the same conclusion that I’ve been blogging about for over two years:  Ben Bernanke is not fit to be Fed Chairman.  But I’ll go one step beyond the Journal and say that the entire Board of Governors and the regional bank presidents should be removed for enabling Bernanke to continue to carry out Greenspan’s bubbles. 

    WSJ:   The real problem is Mr. Bernanke’s record before the panic, with its troubling implications for a second four years.  Mr. Bernanke was the intellectual architect of the decision to keep monetary policy exceptionally easy for far too long as the economy grew rapidly from 2003-2005.”   

    Bernanke joined the Board of Governors in 2002, encouraging Greenspan to keep interest rates low even as the housing and credit bubbles were spinning out of control.  As the Journal points out in yesterday’s front page story (“Fed Debates New Role:  Bubble Fighter”), the Princeton professor first attracted the central bank’s attention when he delivered a presentation at the Fed’s 1999 Jackson Hole gathering where he warned the Fed against trying to prick asset price bubbles. 

    WSJ:  “This, too, might be forgivable if Mr. Bernanke had made any attempt in recent months to acknowledge the Fed’s role in the mania.  Mr. Bernanke and Vice Chairman Don Kohn have formed an intellectual moat around the Fed, blaming the credit bubble on the ‘global savings glut’ that they themselves helped to create.” 

    From Bernanke to the regional bank presidents, no member of the Federal Reserve has admitted that mistakes were made.  Instead Bernanke and the Fed have defended their actions by trying to trigger people’s fear-based emotions into believing that the Fed saved the financial system from a catastrophe greater than the Great Depression, refusing to admit that their policies enabled the crisis in the first place!   

    Bernanke strongly disagrees with legislation that would remove the Fed’s power to supervise banks and regulate consumer finance, yet refuses to admit that the combination of overly accommodative monetary policy and lax supervision created a super spiked punchbowl that has left the nation with a huge hangover that will take several years to wear off.   

    The Fed claims its ability to effectively carry out monetary policy will be affected if Congress removes its authority to supervise banks, claiming it will no longer have access to the “economic color” provided by the banks.  But there is nothing in the financial legislation that would hinder the Fed’s ability to communicate with banks or anyone else it chooses to receive “color” about market conditions. 

    In “Asset Inflation:  The Missing Indicator In Economic And Monetary Policy,” I described how easy it is to determine when rising asset prices are driven by inflation rather than real increased net worth.  Asset price bubbles require collateral to grow.  The reason why the housing bubble became the biggest bubble that caused the greatest financial crisis since the Great Depression is that real estate can be purchased with 95% leverage vs. 50% for stocks.  And once one lender was willing to stretch the rules regarding who would qualify for a mortgage, who do you think realtors would steer buyers too?  As more lenders stretched the rules, all had to follow or be exluded by the markets for being too cautious.   

    No matter what the asset class, leverage creates what the above cited WSJ “Bubbles” article calls “a self-feeding loop” where increased leverage creates increased collateral values which in turn again increases the ability to leverage more.   

    Real estate became the most dangerous bubble of all because no one believed that real estate prices could ever decrease in value on a nationwide basis.   The Fed was dead against increasing margin requirements on securities.  Beyond the Fed, no one in government wanted any kind of restrictions placed on real estate purchases. 

    WSJ:  “The hard part, the time when central bankers earn their fame, is when they have to take the money away.  We see little in the chairman’s policy history or guideposts to suggest he will be willing to endure the criticism that will come with tightening money amid a lackluster recovery.” 

    It has been 30 years since a Fed Chairman had the guts to go against the grain and raise interest rates in spite of the highest rate of unemployment since the Great Depression.  Paul Volcker chose to ignore the Fed’s dual mandate to do what was politically unpopular and painful in the short term in order to create long term economic growth.   

    In an interview with CNBC’s Maria Bartiromo (Part I and Part II) yesterday, St. Louis Fed president James Bullard* said that the Fed has debated about how to react to asset price bubbles for the last 15 years.  “The question is what to do? Quashing a bubble in the middle of good times is not a very popular thing to do.   

    The Fed resists any attempt by Congress to alter its purpose and scope, claiming it would be a threat to a “strong and independent Federal Reserve,” yet here we have an entire Federal Reserve System that enables an environment to allow bubbles to form in the first place, but lacks the courage to carry out its duties because its members put their own personal interests first!  Then when the economy suffers a train wreck, the Fed rescues Wall St. at Main St.’s expense because as the banks’ chief regulator, their loyalty is to stabilize the banking system.   

    The Fed is not really independent since the President nominates and the Senate approves the Chairman and the Board of Governors while private bankers choose the six of the nine directors that comprise each of the 12 regional Fed banks.  The Fed’s independence is entirely up to the Chairman and its members desire to do what it best for the health of the entire economy.  From a monetary policy perspective this would mean keeping interest rates on a steady course, balancing the interests of borrowers and savers.  Asset price bubbles are born when investors become frustrated by the abysmally low rate of return received on safe instruments such as FDIC-insured bank certificates of deposits. 

    WSJ:  “Mr. Bernanke is assuring the world that, this time, he knows how and when to start removing this stimulus.” 

    The Fed knows that zero rates and excess liquidity has spawned another asset price bubble in equities, commodities (especially gold), Treasuries, and has caused the desecration of the dollar.  Yet the Fed continues to fuel the hot air balloon by telegraphing that “interest rates will remain low for a considerable period of time.”    

    Never has the Fed injected so much liquidity into an economy running record debt levels.  Bernanke believes he knows when to begin the Fed’s exit strategies, but Bernanke’s well known obsession with the Great Depression will make him reluctant to tighten until every economic indicator is solidly green.   

    The unfortunate irony here is that the Fed’s actions will delay the green light from being steadily solid anytime soon because the economy will take a few steps backward first when Bernanke’s bubble bursts. 

    *Bullard be a voting member of the FOMC in 2010.

    Disclosure: No disclosures.
    Dec 03 11:31 AM | Link | Comment!
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