The Fed And The Efficacy Of Duct Tape

Includes: DIA, SPY
by: Brian Anderson

In what has got to be one of the largest admittances on "trials of the efficacy of duct tape," aka "trial and error testing," aka "jerry rigging," or aka "slapping it together," FED Chairman Bernanke presented his take, quite humbly, on the FED's aggressive monetary policy enacted since 2008. From his speech: "As the Committee embarked on this path, we were guided by some general principles and some insightful academic work but - with the important exception of the Japanese case - limited historical experience. As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing." Allow me to paraphrase. "With our principles generated, and some really good papers written by some really smart folks, we decided to ignore the one example in Japan being a marked and utter failure and see if embarking on similar actions and engaging in trillions of dollars of money printing and fancy named shenanigans would work despite having no evidence that it would." I have to hand it to the guy, I mean, what in your life has been your most ambitious trial and error of duct tape? Perhaps I'm the outlier, but mine is nowhere close to this. I mean the one example in history of a zero interest rate policy has awful results. Why would one think theirs would differ? But then again, what's several trillion dollars anyway? What he probably should have said is "I can't believe I have to attempt all of this ridiculousness because we can't follow the simple axiom of not spending more than we have. How's that going to work out?"

However, because we are in the midst of the great experiment, what is in question, seemingly, is not whether or not it is working, but should we apply more duct tape? In reference to this, he continues "... the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant." This the is the key phrase, in my opinion, from Ben Bernanke's speech in Jackson Hole last week. The markets were a bit tumultuous when the speech was released, as some believed the Chairman was possibly back peddling on the QE route. However, with that phrase, the markets likely found some comfort and therefore found their footing. Bernanke further expanded on his opinion by stating "The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years." It seems as if Bernanke is laying a groundwork of fear that basically says "If we don't do anything, the ramifications would be dire for years. And have no fear of the unintended consequences of our actions, because things, uh hum, "appear manageable." Here comes more duct tape.

Disclosure: I am long GLD, SLV, OIL, SGG, BAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.