Monday, April 18, 2011

Ben Bernanke as a Three Card Monte Dealer

FT writes today:

An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June.

When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter.

Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop.
This looks to me like the kind of comment that is written after a long background chat with Fed chairman Bernanke. The writer of the piece is D.C. based Robin Harding.

Regardless of the ultimate source, though,  for the speculation in the column, the very nature of the FT focus, on whether there will be a QE3, continues to show that Bernnake's skills as a three card monte dealer are advanced.

With over $1.4 TRILLION in excess reserves, Bernanke never has to resort to QE style monetary operations ever again, to print money. If those excess reserves leak into the system, Bernanke has enough sitting there to make Zimbabwe look like a model of prudent money management. As per usual, Bernanke has most of the media and Fed watchers looking at the wrong card.

Forget about QE3, keep your eye on excess reserves. Excess reserves are funds that are not in the system bidding up prices, but when they enter the system by banks using them to make loans, have the potential to result in a multiple of their size, when they impact the money supply. Because of this potential for multiple size impact, excess reserve entering the economy are considered high-powered money.

Excess reserves, when they are used by bankers, are no longer "excess", but actually become part of the money supply and are then out there bidding up prices. Thus Bernanke has plenty of these excess reserves on the sidelines to increase the money supply by, literally, many trillions.

Keep an eye on excess reserves and the money supply, that's where the real action will be, not the QE3 card. That's just a Berenanke diversion. BTW, I analyze every Fed money supply report and excess reserve report in the EPJ Daily Alert.

Bernanke is perhaps the most passive-aggressive personality on the planet, he will say one thing and appear to be doing that thing, but because of the creation of his various new monetary "tools", he may actually be doing the exact opposite. Before Bernanke started paying interest to bankers on excess reserves, there hardly were any--maybe a few billion. Now, the size of the excess reserves is more than 200 times what it used to be. That is a tremendous pool of money to be sitting on the sidelines, one false move by Bernanke and he could very quickly blow up the entire economy. Very scary.


  1. The other time-bomb waiting to go off that the U.S. has limited control over is other countries' use of the dollar as a reserver currency. Once the excess reserves start circulating, that will increase pressure on other countries to dump the dollar. If the estimates that I've read are correct, roughly 50% of dollar transactions in the world have nothing to do with U.S. goods and services. Once those dollars are dumped back to the U.S., it will add gasoline to the inflation fire.

  2. yes, BRIC understands Bernankes scheme, and won't play his game of monte. Instead, they just walk away from the table.

    Ha ha ha. The dollar is doomed. And the Federal Reserve bankster money cartel and the Federal government plutocracy regime are responsible for ruining what once a great country.

    This is one way how nuts like Hitler come into power and create chaos and war.