Why
Bernanke’s Terrified of 2013
http://albertpeia.com/helicopterbenafraidof2013.htm
‘On December 12, the US Federal
Reserve surprised yet again by announcing QE 4: a program through which it
would purchase $45 billion of US Treasuries every month.
Between this program and the
Fed’s QE 3 Program announced in September, the Fed will be monetizing $85
billion worth of assets every month ($40 billion worth of Treasuries and
$45 billion worth of Mortgage Backed Securities) ad infinitum.
Indeed, the Fed’s new policies
are anchored to its goal of getting employment down to 6.5%. This means the Fed
will buy these assets non-stop until employment gets down to 6.5%.
I’ve spoken to a number of
people in the financial community as well as outside investors and no one seem
to grasp the significance of this announcement.
First and foremost, QE does not
create jobs. The UK has announced QE efforts equal to an amount greater than
20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has
announced nine rounds of QE for a combined effort equal to 20% of its GDP over
the last 20 years and job growth remains dismal there.
Based on this, the Fed’s
decision to anchor its QE efforts to employment is a bit hard to swallow.
Indeed, I would argue that the Fed’s moves have very little to do with
employment and instead are meant to address the following:
1) The US economy is
nose-diving again and the Fed is acting preemptively.
2) The Fed is trying
to provide increased liquidity going into the fiscal cliff.
3) The Fed is
funding the US’s Government massive deficits.
Regarding #1, the November ISM
report indicates the US economy is again contracting. Looking at the chart, you
can sense why Bernanke and the Fed are getting concerned: the similarities
between the recent downturn of the last few years and that going from 2004-
2008 are striking. It’s obvious helicopter Ben doesn’t want us breaking into
the mid’40s range.
Similarly, the ECRI, which has
proven a far better judge of the onset of US recessions than the NBER, has
stated that the US likely slipped back into recession in September. Bernanke
and the Fed have close ties to the ECRI. I believe they’re moving preemptively
based on this announcement.
We get additional indication of things worsening in the US economy from the
NFIB’s Small Business Optimism Index. This measure has entered an absolute
free-fall, posting its single largest drop in over 30 years. To put this into
perspective, this indicates that Small Business Owners are becoming less
optimistic about the future of the economy faster now than they were after
Lehman failed.
In additional to this, small
business earnings are have rolled over sharply since the beginning of 2012.
Small businesses account for 70% of jobs. To see both small business owner
optimism and as well as small business earnings cratering is a bad sign for the
US economy.
Bernanke firmly believes that
the single biggest reason the Great Depression lasted as long as it did was
because the Federal Reserve didn’t do enough to fight it at the time. This is the
driving thesis behind his life’s work and his tenure at the Fed.
With the above information
making it clear that things started to get quite ugly in September, QE 4 should
be seen as his attempt to act preemptively to stop another 2008-type economic
plunge.
In addition to this, we know
that Bernanke has stated point blank that the Fed does not have the tools to
deal with the fiscal cliff.
The U.S. economy is already
being hurt by the “fiscal cliff” standoff in Washington, Federal Reserve
Chairman Ben Bernanke said Wednesday. But Bernanke said the Fed believes the crisis will be
resolved without significant long-term damage.
The steep tax increases and
spending cuts can be avoided with a successful budget deal, Bernanke said
during a news conference after the Fed’s final meeting of the year. The Fed’s
latest forecasts for stronger economic growth next year and slightly lower
unemployment assume that happens…
Bernanke repeated his
belief that if the scheduled tax hikes and spending cuts do take effect in
January, they will have a significantly adverse effect on the economy,
regardless of what the Fed might do.
“We cannot offset the
full impact of the fiscal cliff. It’s just too big,” Bernanke said.
http://news.yahoo.com/bernanke-says-fiscal-cliff-already-hurting-economy-201018687–finance.html
Given Bernanke’s extensive
connections on capital hill, the move to implement QE 4 should also be seen as
a warning that we will very likely be going over the fiscal cliff; not having
the tools to deal with the aftermath of this mess, the Fed is moving
preemptively to prepare the system for what’s coming.
Finally, and most critically,
the Fed’s implementation of QE 4 represents the Fed’s full commitment to
finance the US’s deficits.
In 2011, the Fed bought over 70%
of US debt issuance. Based on the projections for QE 4, the Fed will buy
upwards of $480 billion of the $918 billion in new US debt to be issued next
year: roughly 52% of all new debt issuance.
Between this and the Fed’s
monthly monetization of $45 billion worth of Mortgage Backed Securities, the
Fed will be soaking up 90% of all net new dollar-denominated fixed-income
assets next year.
There are several implications
to this.
1) The US will be
lurching ever closer to an EU-style debt crisis.
2) There will be an
even greater shortage of high quality collateral in the financial system going
forward.
3) Inflation will
continue to rise.
Regarding #1, by soaking up so
much of the US’s new debt issuance, the Fed is permitting the US Government to
continue overspending at a time when the bond market would normally begin
raising interest rates.
Last year the US paid $454
billion in interest payments on its debt. This was at a time when the average
interest rate was only slightly above 2%.
During the same year, the US
only took in about $2.3 trillion in tax revenue. So, even with interest
rates at historic lows, we’re spending about 20% of tax receipts on interest
payments.
Now let’s suppose that interest
rates rise to an average of 4%. At that rate, the US would owe nearly $900
billion in interest payments: enough to soak up nearly 40% of all US tax
receipts. And this is assuming tax receipts don’t fall as the economy
contracts (historically taxes do fall during times of contraction).
This is why the Fed is committed
to keeping interest rates low: if interest rates were to rise then the payments
on the debt would send the US into an EU-style debt crisis along with the
commensurate intense austerity measures being implemented.
Having said that, the bond
market may force the Fed’s hands, at which point it’s Checkmate for Bernanke.
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Best Regards,
Graham Summers