Monday, December 23, 2013

Peter Schiff: What Bernanke Should Have Left Janet Yellen at His Last Press Conference

A Spoonful of Sugar  
By Peter Schiff

The press has framed Ben Bernanke's valedictory press conference last week in heroic terms. It's as if a veteran quarterback engineered a stunning come-from-behind drive in his final game, and graciously bowed out of the game with the ball sitting on the opponent's one-yard line. In reality, Bernanke has merely completed a five-yard pass from his own end zone, and has left Janet Yellen to come off the bench down by three touchdowns, with no credible deep threats, and very little time left on the clock. 
The praise heaped on Bernanke's swan song stems from the Fed's success in initiating the long-anticipated (and highly feared) tapering campaign without sparking widespread anxiety. So deftly did the outgoing chairman thread the needle that the market actually powered to fresh all-time highs on the news.
There can be little doubt that the Fed's announcement was an achievement in rhetorical audacity. In essence, they told us that they would be tightening monetary policy by loosening monetary policy. Surprisingly, the markets swallowed it. I believe the Fed was forced into this exercise in rabbit-pulling because it understood far better than Wall Street cheerleaders that the economy, despite the soaring gains in stocks and real estate, remains dependent on continued stimulus. In my opinion, the seemingly positive economic signs of the past few months are simply the statistical signature of QE itself. Even Friday's upward revision to third-quarter GDP resulted largely from gains in consumer spending on gasoline and medical bills. Another major driver was increased business inventories fueled perhaps by expectations that QE supplied cheap credit (and the wealth effect of rising asset prices) will continue to encourage consumer spending.
But to many observers, the increasingly optimistic economic headlines we have seen over recent months have not squared with the highly accommodative monetary policy, making the arguments in favor of continued QE untenable. Even taking the taper into account, the Fed is still pursuing a more stimulative policy than it had at the depths of any prior recession. As a result, as far as the headline-grabbing taper decision, the Fed's hands were essentially tied. But they decided to coat this seemingly bitter pill in an extremely large dollop of honey. 
More important than the taper "surprise" was the unusually dovish language that accompanied it. More than it has in any other prior communications, the Fed is now telling the markets that interest rates - its main monetary tool - will remain far more accommodative, for far longer, than anyone previously believed. Abandoning prior commitments to raise rates once unemployment had fallen below 6.5%, the new statement reads that the Fed will keep rates at zero until "well after" the unemployment rate has fallen below that level. No one really knows what the new target unemployment level is, and that is just the way the Fed wants it. On this score, the Fed has not simply moving the goalposts, but has completely dismantled them. With such amorphous language in place, they appear to be hoping that they will never have to face a day of reckoning. This is a similar strategy to that of the legislators on Capitol Hill who want to pretend that America will never have to pay down its debt.
At his press conference Bernanke went beyond the language in the statement by hinting that we should expect consistently paced, similarly sized reductions through much of the year, and that he expects that QE will be fully wound down by the end of 2014. The outgoing Chairman may be writing a check that his successor can't cash. He also made statements about how monetary policy needs to compensate for "too tight" fiscal policy that is being delivered by the Administration and Capitol Hill. Does the chairman believe that $600 billion annual deficits are simply not enough... even with our supposedly robust recovery? By the time President Obama leaves office, the national debt may well have doubled in size, and he will have added more to the total of all of his predecessors from George Washington through the first five months of George W. Bush's administration combined! How can Bernanke possibly say that our economic problems result from deficits being too small?
It's easy to forget in the current euphoria that a majority of market watchers had predicted that the first taper announcement would be made by Janet Yellen in March of 2014. But perhaps with a nod toward his own posterity, Ben Bernanke may have been spurred to do something to restrain his Frankenstein creation before he finally left the lab. But no matter who pulled the trigger first, this initial $10 billion reduction in monthly purchases has convinced many that the QE program will soon become a thing of the past.
But without QE to support the markets, in my opinion, the US economy will likely slow significantly, and the stock and real estate markets will most likely turn sharply downward. [To understand why, pick up a copy of the just-released Collector's Edition of my illustrated intro to economics, How An Economy Grows And Why It Crashes.] If the economic data begins to disappoint, I believe that Janet Yellen, who is much more likely to be concerned with full employment than with price stability, will quickly reverse course and increase the size of the Fed's monthly purchases. In fact, last week's Fed statement was careful to avoid any commitments to additional tapering in the future, merely saying that further changes will be data dependent. This means that tapering could stall at $75 billion per month, or it could get smaller, or larger. In other words, Yellen's hands could not be any freer. If the additional cuts never materialize as expected, look for the Fed to keep the markets convinced that the QE program is in its final chapters. These "Open Mouth Operations" will likely represent the primary tool in the Fed's arsenal. 
Despite the slight decrease in the pace of asset accumulation, I believe that the Fed's balance sheet will continue to swell alarmingly. As the amount of bonds on their books surpasses the $4 trillion threshold, market watchers need to dispel illusions that the Fed will actually shrink its balance sheet, or even halt its growth. Already fears of such moves have pushed up yields on 10-year Treasuries to multi-year highs. Any actual tightening could push them significantly higher. 
We have much higher leverage than what would be expected in a healthy economy, and as a result, the gains in stocks, bonds, and real estate are highly susceptible to rate spikes. If yields move much higher, I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter. 
In the meantime, the Fed's open-ended commitment to keep rates at zero, despite the apparent recovery, should provide an important clue as to what is really happening. We simply have so much debt that zero is the most we can afford to pay. The problem, of course, is that the longer the Fed waits to raise rates, the more deeply indebted we become. As this mountain of debt grows larger, so too does our need for rates to remain at zero. So if our overly indebted economy cannot afford higher rates now, or in the next year or two, how could we possibly afford them in the future when our total debt-to-GDP may be much larger?
As he left the stage from his final press conference, Ben Bernanke should have left a giant bottle of aspirin on the podium for his successor Janet Yellen. She's going to need it.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.


  1. I strongly disagree, and charge Peter with not having sufficient respect for the markets. IMO, it is not impt what Yellen, or even the other Fed doves desire; the markets will call the tune going forward. Although stocks took the mini-taper by making new highs, 3,5 & 10-year Treasuries, have declined (higher rates.) The Fed is losing control of even the short end of the interest-rates (other than 1-6 months.)

    But more significant, despite the couple of Fed Reserve studies, most, including I suspect many Fed members, see that QE has done little to help employment. Nor has it helped corporate profits, except directly via corp buy backs, courtesy of ZIRP and QE. So the old Greenspan (& Bernanke) notion of the wealth effect is also mostly discredited.

    Fed members, esp Yellen, want to improve the economy. Boosting the stk mkt was a means, but unlikely, IMO, to be pursued further. At 4 trillion, the Fed balance sheet will be prevented from growing, both by the bond market, and then by Congress, which I think will place limits on Fed's powers, should balance sheet increase.

    I think we have mostly the Chinese curse to look forward to: "May you live in interesting times."

    1. What are you talking about? The Fed doesn't want to improve the economy, they wan't to inflate asset bubbles and create easy money. The Fed balance sheet is growing and will continue to grow at an alarming rate. The government will continue to increase spending and the Fed will have to continue to monetize the debt. The markets are broke and manipulated by QE , ZIRP, LIBOR, and high frequency trading.

    2. What he is talking about is the Fed's balance sheet in FY 2013 grew by 830 billion and the Fed's liabilities (excess reserves) grew by 800 billion. So QE slightly reduced long term rates while slightly increasing short term rates. In other words, it was essentially a wash and did little to help the economy.

      Anyone expecting a stock market crash will be disappointed. However, look for gold to finish the year below 1200 as predicted and expect it to be in the 800s this time next year.

    3. WTF are you talking about?

      Jerry, usually your trolling has some point, but this is just embarrassing.

      Question- do you think that the Federal Reserve purchasing $1T/yr in UST and MBS has helped the economy?

  2. From Anonymous, "I strongly disagree:"

    The point is the Fed has not particularly helped the economy. It is now mostly acknowledged the Fed has helped almost exclusively the top 1%, whether via stocks ownership, real estate, corporate pay and/or stock options. They thought increase asset prices would help, but now that it has not, expect them to try other avenues. But I don't think they will continue to inflate the stock mkt. 4 Trillion seems to be very close to a top, IMO; a top imposed by the (bond) mkt, and likely even by Congress.

    If I'm correct in 4 T max, then there will be a stk mkt crash, IMO. The mkt needed QE2 to prevent a drop. Then needed QE3/infinity. The realization/fact that there are no more QEs coming, will have dramatic effects, once year-end levitation ends, as the calendar turns. Abysmal retail sales is just the beginning.

  3. Note to Republicans: purposefully lose 2016 election if you know what is good for the party.
    Give up on winning. Throw away the House. Don't even try the Senate. And stick another sure loser like Bob Dole or Mitt Romney in as candidate for prez. Let the Democrats have everything. That way when the economy shits the bed, the dema can take full blame.
    I give this same advice to democrats. Stick a Mondale or Dukakis in the election. You do not want to be the party in charge when this house of cards collapses.

    However, if the economy stays afloat I credit Jerry Wolfgang for single-handedly saving the nation by schooling all of us yokels in the realities and wonders of the Fed and the welfare state.

    1. Agreed more or less. The scenario I envision is for the Fed to keep ZIRP & QE through the remainder of The Dear Leaders glorious reign. Once his earthly successor claims The Imperial Throne in early 2017 I anticipate the monetary and fiscal insanity will come apart at the seams.

      If the Stupid Party wins the Presidency in 2016 they will be caught in the ensuing economic tsunami and wiped out. Can you imagine Boehner, McConnell or President Chris Christie being able to handle such a crisis, because I can't. The corporatist news media will blame it all on the Stupid Party and the masses will respond in the usual Pavlovian fashion. Then the Evil Party will take control of congress (with super-majorities) in the next election and work hand in hand with President Christie to destroy the last vestiges of a constitutional republic.