STAFF NEWS & ANALYSIS
The Fed Feels So Good
By Staff News & Analysis - March 21, 2011

Bernanke in Testimony Can Show Ron Paul How QE2 Works in Markets … The next time Federal Reserve Chairman Ben S. Bernanke (left) appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working: The Standard & Poor's 500 Index of stocks has climbed 18 percent since he said Aug. 27 that additional asset purchases might be warranted. The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show. Inflation expectations have jumped by 44.4 percent. The unemployment rate has fallen to its lowest level in almost two years. So much for 2008 Republican vice-presidential candidate Sarah Palin's assertion that the "dangerous experiment" wouldn't "magically fix economic problems." – Bloomberg

Dominant Social Theme: The Fed is misunderstood and trying hard. QE2 was a stroke of genius.

Free-Market Analysis: Last week, Bloomberg published a full-throated defense of the US Federal Reserve (see excerpt above). It is not merely a defense of Chairman Ben Bernanke, it is basically an endorsement of the IDEA of central banking as well as a celebration of its function.

Below, we'll review the article to see how Bloomberg repudiates critics of this all-important dominant social theme. The ability to print money-from-nothing and control its dissemination is THE important promotional element of those who are attempting to control society while elaborating on ever-more centralized world governance.

It is "quantitative easing" itself which the Bloomberg article is most focused on defending – and the resultant prospect of price inflation which the article assumes is a kind of absolute good. While most people would grant that printing electronic currency at the touch of a button and then using it to purchase Treasury bonds to fund America's unsustainable spending is rashly illogical, Bloomberg devotes not a word to the actual definition of the practice. Instead, it jumps right in with endorsements.

Quantitative easing "was a key factor in taking deflation risk off the table," the article quotes Peter Hooper as saying. Hooper is identified as chief economist at Deutsche Bank Securities Inc. in New York. "It certainly helped bolster longer-term inflation expectations, and it was a factor that contributed to the rally in the stock market," he adds.

The next paragraph of the article expands upon why the article is being written. The Fed's Nov. 3 decision to buy $600 billion of Treasury securities through June "sparked the harshest political backlash against the central bank in three decades." Apparently this sort of criticism of the Fed has sounded alarm bells. We've pointed out this out before. In fact we led the way, over a year ago in warning that the Fed had no effective weapons to counteract the surge of anger that was headed in its direction as a result of the trillions that it had printed and either lent into the market or given away.

The issue was not "strategy" but the realization by millions via the Internet that a small group of people somehow controlled the ability to print trillions of dollars while most in the US were worried about losing their jobs and fighting foreclosure. The issue, as we wrote back then had to do with the morality of the mechanism. Never before had the Fed's functions been exposed so transparently.

Prior to the Internet, such bailouts would have received front-page treatment by the New York Times, but the manner in which the Fed injected money into the economy would not have been clarified but glossed over. Only the result would have been celebrated. But in the era of the Internet, too many people – and certainly too many Americans – have come to understand the way central banks really operate. It has doubtless caused disbelief and even anger; this is the syndrome that the Fed and central banks in general must combat.

Unfortunately, since central banks DO create money-from-nothing and provide it at basically zero cost to various financial entities, there is not much that can be said in self-defense. The Bloomberg article is instructive in that we can see how one goes about defending central banking without addressing the central malfeasance.

The article now begins an elaborate defense of quantitative easing; but again the mechanism is not explained. Only the result is emphasized. The uptick in price inflation, excluding food and fuel, began in January, we are informed, when there was an 0.8 percent rise compared to a year earlier; this matched December's gain but was yet considered low since the Fed was apparently aiming for a "long-run overall inflation of 1.6 percent to 2 percent."

Why an inflation rate of two percent is considered to be a positive is never explained anymore than quantitative easing itself is explained. However, it is apparently assumed the reader will go along with the notion. New York Fed President William Dudley, who is also vice chairman of the Federal Open Market Committee and a former partner and managing director at Goldman Sachs, is quoted as saying that the ‘considerably brighter' outlook of the economy isn't yet reason to withdraw the stimulus. Of course, it is not clear exactly why there is a "considerably brighter" outlook. One is left to presume at this point that it has to do with "uptick" in price inflation. Another encomium: "QE2 is ‘working pretty good' at achieving the Fed's goals of higher inflation and faster growth, said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis."

Because of this, the FOMC intends to continue the program through June, we learn. The FOMC also believes "the economic recovery is on a firmer footing," according to notes taken at a recent meeting. And the article now adds in another strand of "good news" – pointing out that in addition to rising price inflation, the employment rate has risen too: "The unemployment rate fell to 8.9 percent in February, the lowest since April 2009. The decline ended the longest period of joblessness at 9 percent or higher since monthly records began in 1948." So-called junk bond sales are on the rise as well. Capital available to the "lowest-rated companies" has expanded since the initiation of QE2. High-yield bond sales for the first quarter of 2011 are hovering around $72.9 billion. Bloomberg claims this is a record.

Of course, having painted what it considers to be an optimistic picture, Bloomberg wants us to know that there are still "risks." Price inflation itself can spin out of control if the Fed "botches the withdrawal of its unprecedented stimulus." Assets have expanded to a record $2.58 trillion and the Fed must "unwind" such a vast balance sheet. But not to fear: "While the Fed hasn't committed to the specific methods it will use to exit, or in what order, it has been releasing details about its progress in building new programs and expanding its ability to drain reserves. This includes increasing the number of its counterparties."

The article concludes with a rousing summary of the "tools" that the Fed has at its disposal to drain excess currency from the system; tools, predictably enough that begin with the obvious – raising interest rates to slow the velocity of money. Moreover, the article wishes us to understand that the wise men running these programs have considered the consequences well in advance. The Fed "never would have done" QE2 if there were a real risk in the "surge in prices," according to Dudley. And he adds confidently, "People worry that these purchases will ultimately be inflationary, and I don't think they have anything to worry about … We are absolutely determined to prevent any long-term inflation problem."

It is of course comforting that someone like Dudley, who is also the chairman of the G-10 Committee on Payment and Settlement Systems of the Bank for International Settlements, believes everything is under control. But one cannot help note, if one is a skeptic, that the Fed believed the risk of catastrophic unwinding of the housing market was minimal at best right up until the end of 2007. And that of course is only the latest in a series of missteps, miscalculations and recession-causing inflations that go back decades; in fact, some 16 years after the founding of the Fed in 1913, it is generally acknowledged the American central bank kicked off the greatest depression in history. This is not a record that generally inspires confidence in the Federal Reserve System.

The article itself is a good example of how mainstream media (seemingly always complicit in supporting the central banking scheme) positions the "good work" that the central bankers are supposedly doing. But one questions how in this day and age Bloomberg's brain trust – which is very obviously pro-central banking – believes that such analyses will have an impact on what millions actually perceive to be true; that central banking is neither scientific nor effective – but is in fact a kind of massively expensive welfare for the wealthy.

The article emphasizes price inflation, but neglects to explain the nature of REAL inflation, which is in fact monetary inflation. It never even deals with the issue of why price inflation is preferable to price DEFLATION – why currency debasement is considered positive and why the Fed actually wishes to debase the currency by two percent in 2011. The article glosses over, as well, central banking's abysmal record in removing excess currency from the system.

As we have pointed out many times, there are absolutely no tools that allow central bankers to know how much money is too much and how stimulative the money supply has become in advance of considerable price inflation actually showing up in the economy. And by then it is too late. The result is either inflation verging on hyperinflation or, more likely a wretched economic slowdown that may well verge in this case on a Depression.

Articles like this one supporting the Federal Reserve and central banking worked better in the 20th century when the conversation was controlled and few understood how destructive – and arbitrary – central banking money printing actually was. But as we have long suspected, the Fed and its defenders have few rhetorical gambits to counteract the negative impressions that have taken root regarding central banking in the 21st century. There is in fact not much that central bankers can do to regain the trust they have lost from the long, grinding financial crisis of the past three years.

After Thoughts

The Bloomberg article wants us to believe that employment is rising, inflation is better than deflation and the Fed as an institution will know exactly when to withdraw all the extra currency sloshing around in the system. But the central unfairness that has to do with a handful of bankers controlling and printing trillions is never addressed. Yet it is this perception of raging unfairness that central bankers ultimately have to combat. This article convinces us anew that those who created, control and support central banking have little or no idea of how to combat the increasingly widespread fury over this critical power-elite tool.

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