Tuesday, November 9, 2010

Ben's Last Bullet

Watching The Fed is at times rather like watching the Vatican; waiting for the lofty Cardinals to let loose the white smoke, signaling a decision has been made. There is much politicking within the hallowed confines of 20th and Constitution, and each Chairman operates differently. From what I've read, Greenspan was rather like a dictator, allowing no real dissent, and he had enormous power in his time and would easily overcome any real internal resistance quite easily. I've read Bernanke, who was a Princeton academic before taking the baton from Greedspan, is more like a Chairman of the Board, listening intently to dissenting voices, but in the end doing what he wants. "Fed Watching" has become something of a skill, rather like "Palace Insiders" hopping around Buckingham Palace. Inside information obviously helps, and so the first amongst equals in this new arena is the WSJ's Jon Hilsenrath. The Fed quite obviously wields enormous power, and is indeed well worth watching. Not only do the internal politics play a role, but external politics as well.. pressure from the President, the Chinese, as well as economic factors such as the serious signs of deflation that were appearing this last spring. Consider me a rank amateur, but one with a blog, and so here I go !

It's my assertion that the winds of change are approaching hurricane strength. The elections in the US will bring a Republican majority to the House and gains in the Senate. The House Subcommittee that oversees The Fed will be chaired by Bernanke's harshest critic, Rep Ron Paul (R-TX). Ron Paul's son, Rand Paul, has won a Senate seat in Kentucky and has promised to stop the spending spree in DC by filibustering any attempt to raise the debt ceiling. Come January, there will be a couple new voting governors of the FOMC, all of whom appear to be hawks: Mssr's Plosser, Fisher and Kocherlakota, who will join noted hawk Thomas Hoenig from the KC Fed. The hawks want an end to money printing. They are also becoming more vocal and more media savvy.. this morning comes a report from the Dallas Fed that their President (and new FOMC member) Dick Fisher, said in an interview something quite startling and in reality unconstitutional: "For the next eight months, the nation's central bank will be monetizing the federal debt". Along with it, he passed a warning shot: "Here is the message: The Fed is going out of it's way to be a good citizen. It's time for Congress to do the same". Fisher will get an assist from Rand Paul and the newly elected Republicans, and well they should. No nation can continue to borrow 1/3 of it's entire budget forever and fill the void with printed money.

Money printing has a few drawbacks, among them is that it devalues the worth of US Gov't Bonds as well as the value of the currency. Our largest creditor, China, is none too thrilled with watching their $2.1 trillion in US dollar assets being devalued time and again. A few high ranking Chinese officials have openly advocated selling these assets lest they become even more devalued.. and were they to do this, it would be an utter catastrophe for the US. During the 2008 Lehman Crisis, Russia did just this and was urging China to join them in sinking the US economy, which was indeed within China's ability to do, and still is. Bernanke, as well as the Obama Administration, will need to begin listening to Hu Jintao. So far this year the Chinese have not become net sellers of US Treasuries, but neither have they stepped up and bought them in large quantities.

Among the other drawbacks of money printing is that it makes the currencies of other nations go up in value, thus making them increasingly uncompetitive as their exports compete with US exports and our weaker currency. First and foremost amongst the nations hurt by this is Japan, who's currency rose to another record level versus the USD last night. Because of the economic straightjacket Japan finds itself in, they are not as able as we are to simply print money. Their exports will suffer as a result, and this comes at a time when Japan can ill afford it. The EU is also being hurt by Bernanke's printing presses as the Euro passed the $1.40 mark a couple days back, thus hurting their ability to export. Other nations have taken matters into their own hands. Brazil, Korea and Vietnam have all imposed capitol controls as a way to halt the rise in their currencies versus the Dollar, and a few have done so with verbal broadsides.. notably Brazil's Finance Minister at the G20 Meeting, and rightly so. Canada and Australian dollars have reached parity with the USD this year as well for the first time.

Because of all of these factors, it's my humble belief that when the effects of this money blast begin to wear off this coming spring and summer, Bernanke will not be able to do a repeat performance. Bernanke will issue pages and pages of threats and hot air.. which actually do have an effect.. but I don't see him overcoming the internal and external opposition. The chamber is empty now, and next summer the deflationistas might yet be proven right.


  1. Hi, Mr K, just thought I'd stop by. Great post.

    I guess you have been reading ZH and Market Ticker etc - and my comments at Queenbee's Blog.

    Keep up the good work. Comment at Queenbee's once in a while.