 The
Green Ben Bernanke
by Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Nov 14, 2005
The named appointment of Ben
Bernanke (green from inexperience) represents a
promise for continued dependence upon inflation for economic
growth. He might possibly be the critical agent for unbridled
acceleration in money supply growth which rivals the Weimar Republic.
A green light for massive monetary inflation can
be obtained by an incompetent targeting of inflation using fallacious
statistics. His printing press will surely be dripping green
ink, once it revs up in the Fed basement. One should note that
before 2003 Bernanke had no banking experience, no business experience,
and no financial market experience. His apprentice post for several
months and Fed Governor experience counts for something, as do
his clear speaking style, friendly manner, and less craggy visage.
His academic roots are a huge negative, where theory is preached
and arguments offered as justification for a system gone badly
awry, horribly dependent upon debt and a fiat currency. The academic
arena is not the place to test reality, take my word, from a
guy with a doctoral degree who has seen many a doctor totally
clueless about the real world.
Is the US Federal Reserve
becoming an irrelevant body? Of course not, but it might fast
be lowing its power.
The role of the US Federal Reserve has become overshadowed
by international markets. The USFed has only a few, although
powerful, weapons or devices to use. They direct interest rates,
control money flow, and dictate bank reserve ratios. Increasingly
in today's global economy and global financial markets, these
devices are outmoded. Trade-offs must be made on inflation versus
employment, on continued consumption versus debt burdens, on
growth versus foreign trade gaps. A sick byproduct of outsourcing
is the accumulation of trade gaps and foreign ownership of US
Treasury securities. These onerous symptoms are direct byproducts
of the Greenspan legacy and his inflationary dependent policies.
When a nation cannot obtain wealth through legitimate means,
it must resort to inflation as a tool. Then it must justify the
usage of inflation and lie through its teeth in bold statistical
falsehoods and murky platforms of rationalization. The distortion
of the Gross Domestic Product, lifted by under-stated price inflation,
is fully analyzed in the November Hat Trick Letter issue,
out early next week. Conundrum? What conundrum? The flat Treasury
yield curve comes from flat economic growth. At least 3%
of the GDP growth is pure fiction, nonsense, distortion, and
lies.
Increasingly, the USFed is
bewildered by the changes in progress, yet it still clings to
broken theories such as the Phillips Curve. That theory links
in two dimensions employment with price inflation in a pathetic
narrow-minded fashion, in a childlike attempt to hold fixed all
other factors. Try not to laugh too hard about fixing items in
a fast changing world, with numerous changing external relevant
factors. The USFed controls less of lending operations. Increasingly,
big banks are not the principal intermediaries who lend from
savers to borrowers. Refer to Fanny Mae, for instance, which
has spewed over a $trillion into the mortgage finance system,
separate from the banks, or rather as an adjunct (counterfeiter)
to banks and mortgage agencies. Refer to convertible bonds from
home builders, to mortgage backed bonds, to collateralized debt
obligations, which all swirl around the financial markets in
the derivative casinos like pinballs on a roulette wheel, bypassing
banks. Banks do not contain savings ready to loan to borrowers
anyway!!! We have no savings. We do have inflation engines which
provide money to borrowers. Refer to venture capitalists, hedge
fund lenders, and mezzanine investors, which tend to provide
seed capital for new corporations, not banks. Many credit paths
trace back to Asia, and more often from China.
The USFed consequently is catching
up to the realities of fast evolution in financial markets, rather
than leading them. No sooner did Chairman Greenspan order the
mortgage rates lower from his bully pulpit, but Fanny Mae grew
out of control. Unfortunately, the USFed does not pump much anymore.
They influence by altering inflation expectations, and by altering
perceptions of economic growth. They also regulate, which is
a nice word for directing traffic. The new Chairman Bernanke
will find himself caught in a nasty web of Greenspan's making.
Bernanke has experience in academia, with next to no experience
with financial markets, and next to no experience with big business.
Bernanke could easily become the worst central banker ever
as steward for the economy, but the best monetary drug dealer
ever as provider of easy money. Just think how Greenspan
has presided over a big economic collapse of the manufacturing
sector, huge debts, housing bubble, and bubblicious false income.
Bernanke will surely be forced to learn on the job, and react
to conditions beyond his control.
Two open USFed Governor posts
should be filled soon, and the best choices might be experts
with strong experience in both financial markets and big business,
the weaknesses of the former Chairman of the Princeton Economics
Dept, with a mere half year logged as head of the Council of
Economic Advisors. We might soon learn that being popular and
residing in the mainstream does not mean qualified. Safe looking
does not translate into competent.
Some have charged the medical
profession as elevating physicians to a deity, the givers and
takers of life. In psychological parlance, the term "Messiah
Complex" is used to describe the condition. Thanks to
The Economist for their excellent graphic of the monetary
messiah below. Given the financial market dominance in the last
15 years, and the heavy reliance upon inflation and cheap money
to satisfy the needs for growth, it is clear that the USFed Chairman
has unduly been elevated to a position of a financial messiah.
Bernanke has been clear to espouse monetary inflation as a route
to salvation. My accusation for the last three years has been
that the USFed Chairman has operated more like a monetary drug
dealer, with unmistakable parallels. See the June2004 article
"US
Financials as an Addiction System" for a cold splash
of water on the face on how the addiction parallels are engrained.
My expectation is that Bernanke, as the new chairman, will continue
to operate like a monetary drug dealer, perhaps even more vigorously
and enthusiastically. Weimar, here we come! At risk is the confidence
in the US financial system. If creditors sense that a flood of
new money supply puts their reserve holdings at risk, placing
a threat to their wealth, a mass exodus might occur out of the
US$-denominated securities. After all, a fiat currency has as
its basis foreign confidence in its value from prudent management.
One of my favorite economic
analysts is Stephen Roach of Morgan Stanley. The rub against
him is that he has expected a severe recession for the past three
years, one which has not arrived. He is a traditional economist
of solid background and integrity, who might have been silenced
somewhat for his regular warnings (bad for brokerage business).
In a recent piece, Roach makes some excellent points.
"Every Fed chairman
I have ever worked with or observed over the last 33 years has
had to face circumstances that he was unprepared for. Arthur
Burns was a business cycle expert ill-equipped to cope with inflation.
G. William Miller was a businessman untrained for the vicissitudes
of financial markets. Paul Volcker was a financial expert who
struggled with a wrenching recession. Alan Greenspan was a business
consultant who was quickly thrust into the thicket of financial
crisis management. Ultimately, Volcker and Greenspan learned
to adapt and cope, but not without initially going through wrenching
financial market corrections. Volcker quickly faced a wrenching
selloff in the bond market, and Greenspan had to cope with the
stock market crash of 1987... Why
should we presume that Bernanke would be spared the same test
that his predecessors faced? Financial markets have had an uncanny
knack of finding the weak link in the new guy's chain. The history of modern day macro, to
say nothing of the experience of the Fed and its various chairmen
over the last several decades, warns of extrapolation [and similar
test]."
So Roach is warning that Bernanke
will be challenged right out of the gate next winter after being
sworn into office. Look for the USDollar to go into decline at
that time, and for gold to rise then also. A discontinuation
in interest rate hikes by the young Bernanke Fed might be the
unfortunate invitation of such a market challenge. Look for Bernanke,
despite talent and Princeton pedigree, to be challenged outside
his field of expertise, namely price inflation. Bernanke will
take over the USFed helm when it faces a "unique confluence
of domestic and international imbalances, the asset bubble, and
current account nexus." In other words, he instantly
must face a housing bubble and monster trade gap. By condoning
and creating one bubble after another, in true inflation engineer
fashion, Greenspan has led the United States into negative savings
territory. A case in point is 401k pension accounts. The average
401k account is a paltry $57k. For workers over 55 yrs of age,
only 26% have over $100k saved in a pension, and fully 34% have
under $50k saved in a pension. That condition induces households
to rely upon home equity for spending. The 1990 decade piggy
bank was the stock account. The 2000 decade piggy bank is the
homestead. These are nauseous Greenspan symptoms. That condition
includes the federal budget also, since foreigners provide over
40% of capital funding to the USGovt for its operations. Such
is the foundation and framework of the Greenspan legacy.
Expect price inflation targeting
to fail, and to become a futile exercise, as seen in Canada,
Australia, and certain European nations. Such targeting is essentially
a quasi price control. Like other controls, such practices lead
to shortages. If the measure of price inflation is fallacious
and a poor reflection of reality, then targeting against it will
surely lead to inadequate credit supply. For a nation whose
economy depends critically upon lax credit, such targeting would
choke the economy. Which particular market will his policy focus
on for assessing the price target, as so many exist, most in
confusing cross currents? More likely is a grand challenge of
his willingness to debauch, undermine, and dilute the USDollar
monetary base with a flood of monetary inflation. His cavalier
words on fighting secular deflation by printing press activity,
devoted to a slew of markets, these might quickly be the bluff
called by financial markets.
THE BERNANKE STRATEGY
Rest assured that for
price inflation guidance, the Bernanke Fed will focus as usual
on the narrowly defined urban consumer prices for products, dominated
by imports. This will likely remain to be the lowest among the
many price components which truly matter. The other ignored areas
are tangible assets like housing, financial assets like stocks
& bonds, labor as in wages, material supplies like commodities,
and energy as in gasoline, diesel, heating oil, and natural gas.
Each group has had its own unique market, sure to continue to
feel the swirling vortex of monetary inflation mixed with the
capital flows in and out of the United States, versus Asia as
well as Europe and the Middle East. The only way the Bernanke
Fed can realistically target price inflation levels is to keep
raising interest rates, with no end in sight. That is because
the US Economy depends on unlimited credit growth, in place of
legitimate income.
Bear in mind that even the
moronic incompetent Treasury Secy John Snow believes the USDollar
must go into decline next year. Last summer, he urged the Chinese
to raise their currency, and thus our import prices. Late in
October, at a joint economic meeting between Japan and the United
States, Snow announced the need for the USDollar to fall. When
wondering why any finance minister would make such a comment,
note that the US debt must eventually be monetized from the printing
press. Asia has essentially halted USTBond support, which
is not reported in the press & media. That is the only
way our debt can be serviceable in future years, given the deficit
in reality has approached $1 trillion. Snow periodically utters
some of the grandest stupidity in my memory. He once called a
currency strong "if it is difficult to counterfeit"
curiously. He recently said "There is little wonder why
the American economy is the envy of the world. There can be no
doubt that the American economy is an adaptive and resilient
marvel." This man is a fool and an idiot, and can be
called incompetent at best.
Bernanke is known to have said
"managing the economy is like trying to repair a car
while the engine is still running." In November 2002,
Bernanke made his position on accommodation very clear. He said
"When inflation is already low and the fundamentals of
the economy suddenly deteriorate, the central bank should act
more pre-emptively and more aggressively than usual in cutting
rates." He refers to urban consumer prices (CPI),
not credit supply growth and not money supply growth, when he
talks about inflation. He is very aware that downward momentum
on a sagging economy can gain speed and mushroom into a highly
damaging situation. His well-known statement about the effective
alternative plan to drop money onto household lawns by means
of helicopters points out how contradictory his methods are with
both the claim of being an inflation fighter, and the goal of
targeting price inflation. In order to alleviate economic slowdown
and market weakness, he is on record as being extremely willing
(and soon able) to employ the printing press. His methods are
highly likely to produce higher price inflation systemically,
even with some stagnant conditions within the US Economy.
The risk to the system is for
the Bernanke Fed tightening, if it continues, to bring down housing
prices. That would in all likelihood force a painful recession.
The slowdown might gather speed quickly, and have difficulty
in achieving stability. The risk is for the new Fed to tighten
to bring down energy prices, which would in all likelihood not
only harm housing again, but also discourage the necessary incentives
for energy deposit exploration and development. The risk is for
the new Fed to tighten in such a manner that costs continue to
head higher, from the borrowing cost side. This would force a
monumental squeeze on businesses, since material costs are likely
to remain high. Any housing stall or decline would force a monumental
squeeze on households, since home equity extractions might end
soon. They have granted numerous reprieves on credit card abuse
and frivolous spending patterns.
My alternative view of the
US Economy is that it is a multi-headed hydra. If officials attempt
to target one market to achieve stable prices, they must ignore
other markets. Case in point, the stock market was restored in
2001, but in order to achieve that feat, it was necessary to
create the housing bubble. To keep commerce going, we installed
zero percent finance terms. The engine is always running. In
fact, multiple engines are always running. The Asian outsourcing
phenomenon has changed the labor market, in a manner which directs
control outside our nation where foreign engines are at work.
Those external engines are operated by foreign governments, sometimes
in conflict with our objectives, sometimes in conflict with our
geopolitical directives. China wants a more influential seat
on the geopolitical stage. So they will be at odds with our objectives
for managing our economic engines.
The US Economy is a many-faceted
beast, whose financial sector tail has been wagging the real
economy dog for many years. A brief walk through history is called
for. When Alan Greenspan took the USFed helm in August 1987,
he immediately faced a challenge in the USDollar leading up to
Black Monday for the great stock bust. The clownbuck had
sold off for several consecutive months. Interest rates rose
steadily to 10% leading into the autumn. The stock market acted
in oblivious fashion in full denial of the impact of both a worsening
US$ currency and worsening US Treasury market. Finally we saw
Black Monday in October 1987. Could such a sequence of events
unfold for the year 2006? You bet, heck yes.
GREENSPAN EULOGY & CRISES
A visceral level of
personal disgust is felt when eulogies are recited for Chairman
Greenspan. An endless parade of boot licking can be recited from
business leaders and elsewhere. Jack Welch, formerly of General
Electric, gives high grades. Most business school leaders and
financial sector titans give him high grades. An interesting
assessment was given by former Labor Secretary Robert Reich.
His high grade for the 1990 decade overlooks the condoned stock
market bubble from easy money and faulty analysis of technology
& productivity. His low grade for the 2000 decade to date
acknowledges that same easy money policy, but directed to save
the system from the damage from the previous decade errors.
In fact, hedonic nonsense lifts
that productivity figure by 2% to 3% via hidden games. Business
investment occurs in Asia. Greenspan justified high stock valuation
in the late 1990 decade, from high information processing speed
and high productivity. This is childlike. Lastly, his reliance
upon "flexibility" in international financial markets
(really foreign central banks) to relieve the pressures of extreme
trade imbalances is moronic, motivated to give himself a passing
grade on yet another failure. All we have is a temporary reprieve
from foreign wrath, revenge, and corrections. Greenspan would
lead you to believe the US Economy is strong, vibrant, and healthy
as he exits his long reckless tenure. The truth is that he presided
over a massive Middle Class squeeze and vanishing act. Consumer
spending is up 3.5% versus wage gains of only 1.4% in the last
12 months. Prior years tell the same story. In fact, Q3 wage
gains of 2.3% make for the smallest annual change since 1981.
The households of America extracted $600 billion in home equity
in 2004. This is the Greenspan Legacy spiraling debt and
Middle Class hardship.
Former Chairman Paul Volcker
issued a clear warning. He starts by conceding that the US Economy
is doing well "as a result of our proclivity to consume."
He points out that the necessary capital comes from outside our
shores. "It is all bridged by money flowing to the United
States from Japan, from China, and so forth. I do not know how
long that can go on because we are spending, consuming, and investing
6% to 7% more than we are producing. And I think in the long
run that is unsustainable... The key part is will people maintain
confidence in the dollar." Finally comes his urgent
warning, which should be heeded by all and paid close attention.
Volcker is the last USFed Chairman to deal with rampant inflation.
He did so before the China era, a critically different landscape
indeed. The US Economy must deal with inflation mainly evident
on the cost side, when Asia has put a ceiling on prices. The
result is a grand profit squeeze on businesses and households
alike. Here is his warning, which few heard. "One thing
you can say very clearly is that there is some sense inflation
is getting out of hand, and the United States better watch out.
He urges Congress first, but also the White House, must make
a higher priority to reduce the federal budget, in order to prepare
for the "inevitable time" when the economy falters.
He is on record as giving us a 75% chance of an eventual monetary
crisis.
My personal assessment is that
Greenspan is the most incompetent central banker who ever reigned
in the modern era, if your criterion is for responsible monetary
policy to prevent rampant inflation and its downstream ravages.
However, if your criterion is for feeding the system from
a high octane inflation diet and geared inflation regimen, he
has been without question the in a class by himself at the pinnacle.
He has managed to direct monetary traffic in a difficult environment
without experiencing a clear fiasco. However, he has done so
by permitting one bubble after another to appear on the horizon,
and has earned the label of "serial bubble engineer."
Unfortunately, the current system might have exhausted all remaining
potential bubbles. Gold might be the final bubble, but these
guys will force a recession rather than permit a gold bull to
run rampant. We are left with cost inflation and commodity inflation
as the last vessels to christen and send into the inflationary
sea lanes. He has led people to ignore the historical truth that
the roaring inflation beast bites or eats all in its path. My
other assessment is that Greenspan has cleverly set expectations
on monetary policy and economic reporting to become as muddy
as possible. That might actually be a desirable goal, since
the USS America is a bankrupt ship listing badly. We should not
want the world, our creditors, to comprehend this fact in full
light. He has managed to confuse the entire nation on what
inflation is, how it should be measured, and what its consequences
are. In this sense he has done the nation a tremendous disservice.
My old CEO at Staples, Thomas Stemberg, put it well when he said
"[Greenspan's successor] needs to be more of an educator
than Greenspan was on the economic realities of current fiscal
measures and the ramifications to our children." Without
saying so, he accuses Greenspan of grand confusion and outright
mis-education, both of inflation generally and deficits specifically.
In my opinion, Greenspan is
desperate to cling to both his legacy and sterling reputation.
The effort has the appearance more of a salvage operation. His
true legacy is a series of crises bearing his signature, while
his reputation is an undeserved master. He has carefully attempted
to put distance between himself and an irresponsible Congress
on spending matters. He has attempted recently to put distance
between himself and the Fanny Mae collapse, which subjects the
housing industry to great peril. Without the housing bubble,
an ironic badge of honor to him, the US Economy would have plunged
into a recession in 2002.
The Greenspan legacy is a twisted
trail of crises and a series of bubbles, each applauded by a
misguided crowd which cheers him on, eager for the next round
of easy money. Instead of crediting him for successfully managing
crises, would it not be better for our nation and society if
he were credited for avoiding crises? By the way, his
signature is on each crisis. No, he is the chief architect
of crises, some of which are in progress right now. Some sick
people want the next crisis to arrive quickly, so that easy money
can once more by provided. After his "irrational exuberance"
declaration in 1996, he caved in to pressure for easy money,
permitted a stock market bubble, set the stage for the Asian
Meltdown in 1997, and ensured a US stock market crash in 2000.
He sanctioned a strong dollar which exported our manufacturing
base to Asia, and along with it our legitimate wealth making
apparatus. In fact, the Greenspan legacy is one of inflation
and debt. Our nation has been coerced to rely upon inflation
for wealth, as Asia relies upon work. The United States, under
the aegis of Chairman Greenspan, has badly degenerated into a
dangerous debtor nation, whose tactics might now be to annex
what we need, regardless of foreign nation sovereignty. By
annex, one can read "wage war" and rely upon seizure.
Greenspan might have actually led our nation toward war footing
for survival. Our nation has been coerced to lean on debt to
bridge the difference between a standard of living desired and
afforded. Under his aegis as chairman, the money supply has grown
3-fold in 18 years, while the US Economy has grown much less
than 100% in that same time.
BERNANKE SHOULD BE GREAT FOR
GOLD, A TRUE TEST FOR THE USDOLLAR.
HOUSEHOLDS SHOULD HEDGE WITH
MINING & ENERGY STOCKS. INVESTING IN CANADIAN STOCKS RIDES
THE ENERGY TRADEWINDS. THE HAT TRICK LETTER COMBINES MACRO
ANALYSIS WITH INVESTMENTS.
Nov 11, 2005
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
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