With yesterday's Fed decision and press conference [Sept. 13], Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.
Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.
The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!
Last year, the Fed launched the so-called "Operation Twist," which was designed to lower long-term interest rates and flatten the yield curve. Without creating any real benefits for the economy, the move exposed US taxpayers and holders of dollar-based assets to the dangers of shortening the maturity on $16 trillion of outstanding government debt. Such a repositioning exposes the Treasury to much faster and more painful consequences if interest rates rise. Still, the set of policies announced yesterday will do so much more damage than "Operation Twist," they should be dubbed "Operation Screw." Because make no mistake, anyone holding US dollars, Treasury bonds, or living on a fixed income will have their purchasing power stolen by these actions.
Prior injections of quantitative easing have done little to revive our economy or set us on a path for real recovery. We are now in more debt, have more people out of work, and have deeper fiscal problems than we had before the Fed began down this path. All the supporters can say is things would have been worse absent the stimulus. While counterfactual arguments are hard to prove, I do not doubt that things would have been worse in the short-term if we had simply allowed the imbalances of the old economy to work themselves out. But in exchange for that pain, I believe that we would be on the road to a real recovery. Instead, we have artificially sustained a borrow-and-spend model that puts us farther away from solid ground.
Because the initials of quantitative easing − QE − have brought to mind the famous Queen Elizabeth cruise ships, many have likened these Fed moves as giant vessels that are loaded up and sent out to sea. But based on their newly announced plans, the analogy no longer applies. As the new commitments are open-ended, quantitative easing will now be delivered via a non-stop conveyor belt that dumps cheap money on the economy. The only variable is how fast the belt moves.
Fortunately, the crude limitations of the Fed's only policy tool have become more apparent to the markets. If you must stick with the nautical metaphors, QE3 has sunk before it has even left port. The move was explicitly designed to push down long-term interest rates, but interest rates spiked significantly in the immediate aftermath of the announcement. Traders realize that an open-ended commitment to buying bonds means that inflation and dollar weakness will likely destroy any nominal gains in the bonds themselves. To underscore this point, the Fed announcement also caused a sharp selloff in Treasuries and the dollar and a strong rally in commodities, especially precious metals.
Given that 30-year fixed mortgages are already at historic lows, there can be little confidence that the new plan will succeed in pushing them much lower, especially given the upward spike that occurred in the immediate aftermath of the announcement. Instead, Bernanke is likely trying to provide the confidence home owners need to exchange fixed-rate mortgages for lower adjustable rate loans − which would free up more cash for current consumer spending. He is looking for homeowners to do their own twist. If he succeeds, more homeowners will be vulnerable to increasing rates, which will further limit the Fed's future ability to increase rates to fight rising prices.
The goal of the plan is to create consumer purchasing power by raising home and stock prices. No one seems to be considering the likelihood that unending QE will fail to lift bond, stock, or home prices, but will instead bleed straight through to higher prices for food, energy, and other consumer staples. If that occurs, consumers will have less purchasing power as a result of Bernanke's efforts, not more.
The Fed decision comes at the same time as the situation in Europe is finally moving out of urgent crisis mode. While I do not think the ECB's decision to underwrite more sovereign debt from troubled EU members will work out well in the long term, at least those moves have come with some German strings attached [For more on this, see John Browne's article from earlier this week]. As a result, I feel that the attention of currency traders may now shift to the poor fundamentals of the US dollar, rather than the potential for a breakup of the euro.
In the meantime, the implications for American investors should be clear. The Fed will try to conjure a recovery on the backs of currency debasement. It will not stop or alter from this course. If the economy fails to respond to the drugs, Bernanke will simply up the dosage. In fact, he is so convinced we will remain dependent on quantitative easing that he explicitly said he won't turn off the spigots even if things noticeably improve. In other words, the dollar is screwed.
The Daily Bell is pleased to offer our readers Peter Schiff's Economic Commentary. This column was originally published September 14, 2012 at EuroPac.net.
Posted by truthbetold on 09/28/12 10:39 AM
Another brilliant article by the best of the best whisle blower... ... ... Thank You Mr. schiff
Posted by mava on 09/27/12 09:51 PM
Anyone who is holding USD for longer than few days, and / or who's compensation was negotiated in USD more than few days ago, - are going to pay for this.
If you bought a house to speculate on, well beyond you ability to pay, then you are simply going to pay to level your own situation, - hopefully, but I'd say forget it. If you did not buy a house, then you are going to pay through the nose to help those imprudent people who did.
What I wonder is how long is it going to take to understand this for the majority? And then, how long will it take for them to say "I ain't paying!"?
Posted by Danny B on 09/27/12 10:46 AM
This is a timely article on equilibrium. It has a great graph. If you integrate the idea of dis-equalibria withing equilibria, you can see that the FED actions invite radical departure from equilibrium.
Click to view link
Imagine 100 people perfectly matched in a tug-of-war all pulling on a rope. The rope doesn't move. There are huge pressures but, they all cancel. Then imagine, somebody wets the ground on one side.
It could be Spain, Britain, Japan.
It's not just Germany. Other northern countries are trying to stop the runaway money printing.
Cataluna and Bavaria want to breakaway. Peril on every side.
Posted by dave jr on 09/27/12 12:04 AM
With the latest Fed pledge of ongoing purchases, Central Banking or "the owners" will become the landlords. The goal, I believe, is a nation of renter-worker in a technocratic era. A little worse than serfdom, more benevolent than slavery.
I think it is enevitable that USgov will come crashing down. Government has become such a large part of the "economy", that many will be swept into the trap. I can only hope that they grossly overestimate the percentage of brain dead "we the people".
I think we already have a defacto one world curreny... fiat. And that a one world government is not needed to accomplish their goals, albeit they must think it would be convenient if practicable. So they work on it.
Does a one world currency bring a one world government or vise-versa. The EU is just another experiment.
Posted by dave jr on 09/26/12 08:36 PM
"Good analysis. But it's been going on for centuries, Dave Jr!"
OK. I'm not that old.
Posted by laceja on 09/26/12 12:52 PM
In the end, the gov't will own all mortgages, so when it all crashes down around our ears, the gov't will be the ones foreclosing on our homes.
Posted by Col on 09/26/12 10:53 AM
Any chance of getting Robert Wiedemer author of Aftershock in for an interview?
I'd be very interested to see his reaction to the lastest Fed developement.
Posted by dave jr on 09/26/12 06:48 AM
Back and forth. The EU then the US then the EU, etc. Slowly, so as to not cause a stampede, what is left of the free market is being nudged down the long narrowing end of the corral that leads to the slaughter house. One by one, behind a curtain, the cattle are processed.
A while ago, early 80s?, currency creation was taken over from the free market. Today, interest rates and currency volume have less impact on prices than the price of oil. Currency is little more than coupons that can be redeemed for oil and the rest of the market can only follow the progression.
Though the coupons have always been issued to the good do bee as debt, less and less it is for the expansion of markets and production and more and more for mere survival.
What happens after we are "processed"? We become wards of the State and a circle of global corporations around central banking, the managers for a band of power hungry elite.
Reply from The Daily Bell
Good analysis. But it's been going on for centuries, Dave Jr!