2009-03-23
In its attempt to bolster the U.S economy, the Federal Reserve has left no doubt in my mind that we are in a modern day depression – one that will be addressed by a massive expansion of the Fed balance sheet by trillions of dollars.
In 1929 the Fed contracted the money supply, and as a result we had deflation. The same was occurring in the initial stages of the current recession that began in December of 2007. If that recession had been allowed to run the normal course of a recession, we would be well on our way to recovery. But given the low tolerance for political pain in D.C., our leaders employed massive doses of spending that killed the pain but did not address the disease.
The economy is worse off now than it was before all the government "help."
Bernanke is making it clear he is going to expand the balance sheet of the Fed to whatever level is necessary to avoid a deeper and more prolonged recession/depression. Bernanke's master thesis for his doctorate was the Great Depression. It has long been known that Bernanke's assessment was that the Fed acted way too late in 1929 and should have never restricted the money supply. Bernanke is a firm believer in printing money and even throwing it out of helicopters to stimulate an ailing economy.
This attitude earned Bernanke the nickname, "Helicopter Ben." Last week Ben loaded the chopper with $1.125 trillion of freshly printed U.S. dollars and threw it out onto awaiting recipients. He purchased an additional $750 billion of government-guaranteed, mortgage-backed securities on top of the $500 billion he has already purchased.
The Fed also agreed to buy up to $300 billion worth of longer-term Treasury securities over the next six months; a move virtually never seen from the Fed. What need has the Fed to buy the safest financial instrument available other than to lower rates, thus forcing Treasury holders to look for better returns in other markets. There is no other plausible explanation for such a Fed purchase.
He will also buy up to another $100 billion of agency debt for a total of $200 billion. In essence, the Fed has expanded its balance sheet to $1.8 trillion from just under $900 billion. The actions announced last Wednesday may well ultimately expand the balance sheet to $3 trillion or more over the next year.
How did the market receive this stroke of Keynesian genius?
Stocks rallied from down 50 to up 80 points, gold rallied from down $30 to up $30 and the dollar suffered it single worst day since 1985 losing a full 3 percent against all major currencies. Gold went up an additional $18 on Thursday while stocks dropped 80 points and the dollar received a thorough pounding. Friday faired no better with stocks down another 122 points. And while I enjoyed the increase in gold given I own a gold company, this was the worst thing in the world for the country.
After reducing interest rates to virtually zero and employing quantitative easing with little to no positive effect on the economy, Bernanke is using one of the last tools in his box of fixes: printing money. He is now in competition with anyone who holds U.S. dollars.
It is reported there are trillions of dollars on the sidelines in bank deposits, money markets, treasuries etc. Now that Bernanke has printed another trillion dollars, it makes those deposits worth less as the quantity has increased. If you have 100 bushels of corn and the farmer next door grows 200 more, your corn becomes worth less as the quantity has increased without an increase in demand. Its Economics 101. If you increase the supply while demand remains unchanged, prices drop; increase demand while quantity remains the same, prices go up.
Bernanke is clearly willing to exponentially increase the supply of dollars by printing as his ability to borrow dollars at this time is at zero. Who in their right mind is willing to lend dollars knowing the Fed can and will print more making what they lent worth less, especially when the rate of return is less than the rate of devaluation?
The talk of re-inflating a balloon that has burst is a joke. That is unless the fabric of the balloon has been repaired. If not, the newly pumped air escapes. So the Fed will be forced to watch this air (printed dollars) disappear into this atmosphere.
In the past, the Fed has pumped billions through low-interest loans, thus creating the "dot-com" bubble, the stock market bubble, the housing bubble and now the Treasury bubble as people seek safety. Once Treasuries burst, which should be any day now given the Fed's willingness to devalue the dollar, the recipient of the pumping will be commodities. However this time the bubble will not burst for unlike paper markets there is an actual commodity. Gold, oil, wheat, steel, copper, corn etc. cannot be created out of thin air. They are real.
And as such their price movement will be a reflection of supply and demand.
The old days of simple stock and bond portfolio strategy in planning for retirement and savings are no longer valid. Commodities and commodity-oriented companies will be a must for every investor if they wish to survive the ongoing market management of the Fed and the government. As Obama, with the assistance of Bernanke, continues to create trillions of new dollars to bring about the socialism he envisions, the long term value of the dollar will go substantially lower.
Lower dollar value translates into higher costs of living, or a lower standard of living if an individual has no way to offset raising costs and possible unemployment.
Make no mistake about it, Obama, Bernanke and Geithner are doing exactly what they said they were going to do: print and spend their way back to prosperity. Their delusional minds actually believe that can be achieved by spending money we do not have with little to no prospect of ever being able to pay it back. For Obama to suggest he can balance a budget, no less reduce the national debt, with his corrupt math is ridiculous.
If some of the predictions are accurate, we may see a doubling of the national debt in the next decade if some fiscal sanity does not return to Washington and stop this very flawed and politically expedient process that the Keynesians and socialists are pursuing.
The Obama administration made it very serious last Thursday when Congress passed legislation to tax 90 percent of the bonuses at AIG with the blessing of the White House. While that may satisfy the populist outrage festering in America about bonuses, it will do little to fix the problems – not to mention the unconstitutional nature of such actions. Taxes are a means to generate revenue to facilitate the proper functioning of government, not to punish people. If the Treasury, the Justice Department and the Fed do not see the danger in such a move, they have ignored the Constitution.
The framers in their wisdom knew the potential threat of politicians being whipped into a frenzy by an angry electorate. Thus Article One and Nine state, "No bill of attainder or ex post facto shall be passed." This was designed to assure enforcement of the separations of power and as such protected individual rights. Disputes like the bonuses should be handled by the courts, not by legislative fiat. There are also specific assurances of "due process" and "sound legislation" to keep Congress from reacting irrationally. Obama should veto this bill to fulfill his oath to protect and defend the Constitution, regardless of how repugnant these bonuses may be.
If listening to Chucky Schumer and "Bawney Fwank" wax eloquent on how they will tax all of any citizen's money away doesn't send a chill up your spine, then you are a mindless follower of Obama mania. Where is the ACLU when Frank demands to have the identities of people under death threat be made public? Maybe we should ask for a list of Barney's boyfriends?
Am I the only American who is troubled with a Congress that takes only a few hours to increase taxes to 90 percent when it takes months to pass a normal spending bill? Every member of Congress should be impeached or fired over violating the oaths they swore to the Constitution. If they want the bonus money back, sue in the courts. That is what the judicial branch is for. Of course, they can't win because these contracts existed and were even reinforced in the TARP legislation passed to "save the world." Remember?
If the American people want to hang someone, it should be Congress, the secretary of the Treasury and the president. Each of them knew full well that TARP money would be paying bonuses at AIG, just as the money would be paying Goldman Sachs the $20 billion AIG owed it. Or how about the many foreign entities that received TARP funds via payments from AIG? American taxpayer dollars used to bail out cronies at Goldman and foreign banks all with the full knowledge of Congress? That is outrageous, don't you think? But Congress has done a fine job focusing our anger on AIG employees instead of where the real responsibility should lie ... with it!
If Obama and Dodd are so set on AIG employees giving back their bonuses, maybe they should give back the $100,000 plus each received from those employees in campaign contributions. How about John Kerry, Hillary Clinton ... shall I go on?
So while the "outrage" that Congress fakes incites a nation, Rome is still burning. And Obama is on Leno talking about his handicapped bowling abilities. How presidential.
So it is simple. It's simple to even a novice. The government, with full cooperation and participation of the Fed armed with printing presses, will print money to avoid a repeat of 1929 – regardless of what the long-term consequence is to the value of the dollar every American works for, saves and spends.
The government should have never gotten involved in trying to short circuit the normal business cycle we have seen over and over again in the economy. Our economy has expanded and contracted several times over the last 100 years. It is normal. But now that the government has made it its business to stop a recession, it will quickly learn it can no more legislate us out of a recession any more than it can legislate away the principles of mathematics.
It will fail, and I would argue it already has. That is why in prior writings I have pleaded with the government to stop any more wasteful deployment of taxpayer dollars. It is making things worse, not better.
If it really wanted to address the real problem, it would reduce the size of government, stop wasteful government spending and put more of America's money back in the hands of Americans. It would encourage savings, not consumption. It would lead by example in not spending money we do not have.
But obviously to do so would demand an immediate termination of the welfare state birthed under FDR and fulfilled under Nancy Pelosi and Obama. To have 300 million Americans all dependent upon government is not freedom. It is slavery. Abraham Lincoln helped end slavery, and now Obama wants it back – this time for all Americans. He's an equal opportunity master of our time. A good crisis is a terrible thing to waste, according to Rahm Emmanuel. That is especially true if you can expand the welfare state in the process.
These recent events demand immediate decisions by "We the People." If our government is going to pursue the "run the printing presses till they burn out" approach, we must take immediate steps to protect our financial future. The government stopped listening to the American people long ago. Therefore those steps include reducing personal debt and purchasing gold, other commodities and companies that produce commodities. Writing letters and making phone calls to the deaf and dumb is a waste of time.
Inflation is coming. Bernanke, short of taking a full-page ad in the Wall Street Journal, told you so. And while you may not see it just yet in the CPI, it will be there. It may well become hyper-inflation. I am convinced our leaders are such pansies that they will not make the tough decisions or demand sacrifice from the nation. Why? They are not willing to sacrifice themselves. They have become spoiled beyond belief, totally out of touch with reality and merely want to hold on to their power. The principles that will get us back the nation we are rapidly losing be damned in the eyes of this leadership. It is all politics now.
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