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Liquidate savers to save the world - Part I

|Includes: GLD, SPDR S&P 500 Trust ETF (SPY), SPY, TLT
Liquidate savers to save the world
 
An open letter by Ben Bernanke
(A parody)
 
There are still numerous people out there that doubt the wisdom and logic of the policy actions I have led the Federal Reserve to pursue since the onset of the financial crisis in 2007.  Some have wisely recognized that we have prevented a second "Great Depression".  Some even made a non-trivial fortune in the market rally since March 2009.  Turning a potentially great depression into simply a bad recession may be the greatest accomplishment of my lifetime.  It is a small contribution to the country I owe so much (so few recognize the Federal Reserve that I lead is the nation's real power center).  Although, should the Nobel Prize Committee award me the ultimate recognition one day for my contributions to the dismal science, I would have no good reason to decline the million dollar prize.  The latest financial crisis, while far from over, is on its last legs.  One day, this may simply be remembered as the Financial Crisis of 2007/8, a much benign case than the alternative scenario had the Federal Reserve failed to act with great force.
 
I am aware that certain characteristics of the system I saved are undergoing fundamental transformation, namely, the government has replaced the private sector as the dominant actor in certain industries (e.g., housing, banking, auto for now, and healthcare soon).  I hope such so-called transformation is transitory.  However, should such transformation permanently alter the landscape of the American economy, I would view it as a natural progression that is commensurate with the natural evolution of our nation's political system.  Honestly, people who hold no elected offices such as those of us at the Fed have always questioned how long a democracy can last without self-destruction?  Frankly, this is a much delayed recognition in America of the great insight of the late Karl Marx, whose brilliant criticism of the capitalist system should have saved us from our own folly.  If so, better late than never.  With a timely elected charismatic President, and a fully empowered Congress, our nation is about to embark on the greatest journey yet.
 
I would like to use this letter to address a few issues that some market participants are still fiercely debating.  Out of sheer concern for some people's financial well-being, I hope to set the record straight promptly so they may formulate suitable investment strategies that the Federal Reserve fully endorses (silently, of course).  This will not only save them their hard-earned cash, but also (hopefully) channel their resources into productive use that benefit the American public.  To borrow an old saying from the Chinese (whom I will specifically discuss later), when everyone pitches in the firewood, the flame will be much brighter.  Let there be no doubt that the market rally we have ignited will be the greatest financial fireworks the homo sapiens will ever witness.  Some poor souls will be burned in this fire, let me hope my letter ensures they are not average Americans.
 
The first question I would like to answer is whether this market rally is for real.  The official way to state it may be whether the rise of risk assets price and the reduction in risk premium of various asset classes since March 2009 is sustainable. Personally, ever the commoner who speaks in plain English, I prefer to ask if the "green shoots" I have identified earlier this year will grow into something meaningful.  To put it another way, does the Federal Reserve have the resolve to keep cheap money flowing despite its unintended consequences.  My answer is an unequivocal YES.  Let me explain.

The trouble we found ourselves in during 2006 and 2007 when the housing bubble (let's agree on it being a bubble with the benefit of hindsight, although one can argue if it can be identified beforehand) burst was not unprecedented in its nature but in its intensity.  As a long-time student of the Great Depression, I am keenly aware of the dangers posed by deflation following the burst of asset bubbles exacerbated by tight money policy.  Some, with their blind trust in markets (like the Chicago boys), would argue that the best course of action is to let the deleveraging process run its course so that resources can be reallocated from the irresponsible operators and inefficient sectors to responsible operators and efficient sectors (Are you reading out there, Jim Rogers?  I'm glad to return the favor for all your criticism).  Their favorite statement is that the market will find its natural clearing price (translation: invariably lower price in such deleveraging process) as entities/people that have over-extended themselves are forced out of business/existence (at times through an open window of a building on Wall Street).  My studies over the years have shown that it is precisely such a policy the Federal Reserve pursued following the stock market crash of 1929 (the famous Andrew Mellon comes to mind: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate") that made matters worse.  There is little doubt in my mind that was wrong-headed.  My conclusion from my studies has always been that should conditions similar to the 1929-1932 crash reemerge, the correct policy response would be to flood the financial system with abundant liquidity (the metaphor I used years ago was "dropping money out of a helicopter" which led some pundits to dub me the "Helicopter Ben", a colorful but not entirely exaggerated moniker) so that all asset price can be reflated.  People have to understand that even though asset price reflation will never be an openly stated policy goal for the Federal Reserve during and following a financial crisis, it will nonetheless be pursued by all of us on the FOMC as the ultimate goal. Let me also add, we will pursue it with the greatest force.  No tool in the toolbox at our disposal will be left unused.
 
To be continued ...

Disclosure: Long almost all available financial assets (S&P Index, US Treasuries, Mortgage-backed securities, gold), short US$ (as I will keep printing)