Friday, October 9, 2009

What the Hell Is Bernanke Talking About?

The dollar staged a modest rebound on Friday after comments from Federal Chairman Bernanke led to speculation that the US might make an early exit from unconventional monetary policy.

Bernanke said on Thursday that the Fed had the apparatus and the ability to recover the cash and loans to the financial system over the past year, signalling that it had its exit strategy worked out. BUT the Fed balance sheet and money supply hasn't grown since the first quarter of '09.

So, Bernanke is likely blowing smoke here for the financially clueless who have never read the M2 data repoted weekly in the Fed's H.6 report. Take a look for yourself, right here. I am not making this up. Although I prefer to look at M2 not seasonally adjusted, M2 seasonally adjusted pretty much givies the same picture--and that's what Bernanke would be looking at right now. M2 seasonally adjusted over the last three months (through September 28) has declined(!!!) by 0.4%. Over the last six months it has grown at only 1.1%.

In other words, Bernanke is not printing any money. The money he pumped in at annualized rate of roughly 15% between September '08 and February '09 is slowly working its way through the system and is becoming simply a part of the overall money supply, to drain this money would shrink the money supply and plunge the economy into a deflationary depression not seen since, well, never seen.

Now, Bernanke may withdraw funds from some of the specific programs he has pumped money into, but, if he does that, he will most assuredly sterilize the withdrawal by buying Treasury securities. It will be money supply neutral.

Those who are looking simply at the current near-zero Fed interest rate simply do not get that Bernanke's new "tool," which allows him to pay interest on balances banks keep on deposit at the Federal Reserve, has pretty much neutralized the Fed funds rate as a money creation tool. Keep you eyes on what the Fed is paying on the excess reserves and any significant decline in excess reserves, that will signal that the Fed is money expansionary again. But they are not now. Very few get this, even WSJ.

In an editorial, this morning WSJ writes:
The Fed has been flooding the world with dollars in the name of preventing a U.S. deflation after last year's panic, and it shows no sign of tightening any time soon.
Which is certainly an indication that they are not following H.6. But, it also signals they don't understand what they are putting on their front page. Since the front page is running this chart, which shows that Fed credit has not grown since early '09.

Bottom line, the Fed is helpless, and the media is clueless. When it comes to battling the falling dollar, there's just not much the Fed can do right now. It would require a huge increase in rates, to battle a declining dollar, and an increase in rates would drain money from the system and crash the economy. That drain is not going to happen.

As Hans Palmstierna wrote to me in an email, yesterday:


Your dollar destruction post got me thinking, and I realized something I haven't seen anyone make comments on. Those who have understood what is happening seem to agree that the dollar is doomed, because the Federal Reserve is going to kill it - and it is indeed extremely troubling that it is falling when the money supply is contracting. Obviously there are lots of dollar sellers at the other side of the world right now. But more importantly, and this is my point, imagine what will happen if the US Federal Reserve does NOT sit idly by. What would happen if Bernanke & Co. did the right thing, and tomorrow the US wakes up with a Federal Funds rate at 5%? Wouldn't what is left of the US economy simply topple over and die instantly (total monetary and banking collapse within a week)?

Isn't the most scary fact - that no one is acknowledging - that the game has already been over for quite a while - because it's "damned if you do, damned if you don't" for the US Federal Reserve?
Indeed. The fate of the dollar, thus, is in the hands of foreigners. They hold tons of the green stuff, which may be a slight saving grace, since they have no reason to see the dollar crushed before they are out of it. But, in a panic situation, they will sell. Some small country with relatively small dollar holdings may even try and sneak out of the dollar in advance of dollar heavy selling from country's like China and Japan. If one small country does it and other small countries get a sense of what is going on, they may also bail.

It won't be China and Japan that lead a dollar panic. It will be small countries and non-U.S. based multi-national corporations, who think they can get out before the collapse. Their selling pressure, at that point, will cause China and Japan to step up their steady shifting of assets out of the dollar.

It's wouldn't be a pretty picture. In the U.S. it would mean dramatic price inflation, since the days of cheap goods from China would be over. And who, just who, will buy U.S. dollar denominated Treasury securities?

It's all about international view and opinions about the dollar, right now. It's about the psychology of the markets. If panic intensifies, the dollar is doomed. Gold could trade at $2,000, $3,000, even higher. Who really knows how high? On the other hand, if international fears calm down, and because Bernanke is not printing money right now, a collapse in gold back to the $500 level could occur. It's a very tricky time and the only thing Bernanke can do, outside of jawbonig, is what you and I can do, and that's just watch it all unfold via the quotes on our computer screens. But, there is one other thing we can do that the Fed can't, and that's bet on volatility. Becasue the volatility is here, and that is not going to stop anytime soon.

5 comments:

  1. It makes some sense from a different perspective. Fed poured in the money lat year, the money tree grew up and is richly decorated with, well, money. It's time to pick the fruits for those who run the show. Here they are in September/October, baskets ready, waiting. "Benny, what gives? Give it a kick in the trunk."

    Wouldn't it be interesting to get gold for $500 (oil for $35, etc.) after one bought a river of dollars at last year's rate? But the dollar is rotten, so time is short. It needs a kick, now.

    ReplyDelete
  2. It makes some sense from a different perspective. Fed poured in the money lat year, the money tree grew up and is richly decorated with, well, money. It's time to pick the fruits for those who run the show. Here they are in September/October, baskets ready, waiting. "Benny, what gives? Give it a kick in the trunk."

    Wouldn't it be interesting to get gold for $500 (oil for $35, etc.) after one bought a river of dollars at last year's rate? But the dollar is rotten, so time is short. It needs a kick, now.

    ReplyDelete
  3. Anonymous said...

    "Wouldn't it be interesting to get gold for $500 (oil for $35, etc.) after one bought a river of dollars at last year's rate?"

    It would be both interesting...and a good buying opportunity!

    ReplyDelete
  4. Wenzel,

    Now that I had a chance to read this it's pretty clear Murphy was being rude and slight in his version of what you said. Your $500-$3000 call was not a "Gold could do either, no way to know" it was a "If this, $500, if this, $3000, and the selection made will be a political one."

    Imminently sensible I think. I don't know why Murphy took issue.

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  5. I think Murphy "took issue" and was just poking fun because of the vagueness of the prediction. Not a very impressive prediction to say Gold couple triple or lose half.

    ReplyDelete