Welcome To Bernankeville, The City Of Jokernomics

Dr. Bill Chitwood / Canada Free Press

“Where were you when the dollar died?”

That’s a question people will be asking you in the not-too-distant future. The past few weeks have seen several events transpire that spell the inevitable ruin of the dollar. As usual, only some of these events have been reported in the mainstream press, leaving most Americans blissfully clueless about the catastrophe roaring towards them.

Most people are aware that Federal Reserve Chairman Ben Bernanke recently announced the Fed would begin “purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.” Additionally, the Fed “will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” Taken together, the Fed will “increase the Committee’s holdings” of long-term securities to the tune of $85 billion per month, at least through the end of the year. And then? The Fed “will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases”, use its “other policy tools” until such time as the labor market—read “unemployment rate”—improves “substantially”. How much is “substantially”? Mr. Bernanke didn’t say. For all practical purposes, this third round of Qualitative Easing (QE3, as it’s being called) will go on and on and on…until Mr. Bernanke says “enough”. So, at least in theory, QE3 will obviate the need for QE4, QE5, QE6 and so on…because it’s QE “Until”.

Of course, the markets and banks rejoiced! The Fed will save us! Viva le Fed! Viva le Keynes! Viva le Bernanke! Viva le…wait a minute! Did you say…QE THREE? Whatever happened to QEs 1 and 2?

QE1 occurred in late 2008, when the Fed bought 1.25 trillion dollars worth of mortgage-backed securities (minus 61 cents) from banks in an effort to shore up a weak economy. It got the money to do this literally out of thin air: “…the mortgage team would decide to buy a bond, they’d push a button on the computer—“and voila, money is created.”” That, of course, is a special power the Fed has—to will money into existence with the push of a button. So…where did all that money go? It “remains in bank reserve accounts collecting interest and dust. The Fed reports that the accumulated excess reserves of depository institutions now total nearly $1.6 trillion.” Oddly enough, that $1.6 trillion dollar figure is almost exactly the amount of the Federal Budget deficit for that year! “So here we have the anomalous situation of a $1.6 trillion hole in the federal budget, and $1.6 trillion created by the Fed that is now sitting idle in bank reserve accounts. If the intent of “quantitative easing” was to stimulate the economy, it might have worked better if the money earmarked for the purchase of Treasuries had been delivered directly to the Treasury. That was actually how it was done before 1935, when the law was changed to require private bond dealers to be cut into the deal.”

And QE2? That ran from November 2010 until June 30, 2011. It only involved $600 billion dollars of magic computer money, but strangely enough, the government never actually GOT that money! It went “straight into the reserve accounts of banks, where it still sits today. Worse, it went into the reserve accounts of foreign banks, on which the Federal Reserve is now paying 0.25-percent interest.”

So, we had QE1 and QE2, yet now we need QE3? Also, if $1.25 trillion (minus 61 cents) followed by $600 billion (give or take a few pennies) hasn’t given us robust economic growth, full employment and a lemonade spring on every lawn, why will a paltry $85 billion a month do anything? Because Mr. Bernanke and all of the Federal Reserve governors, except for that malcontent Jeffrey M. Lacker (President of the Federal Reserve Bank of Richmond, VA), agreed that it would, of course!

Only…not everyone is convinced that the Fed is doing the right thing. Another well-known malcontent, Ron Paul, has been saying for years that other countries will abandon the dollar as the world’s reserve currency of choice unless we start backing it with something real, like gold. In an article dated Sept. 3rd of this year, Dr. Paul said “If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies. If not, the rest of the world will abandon the dollar as the global reserve currency.”

Dr. Paul’s concerns are shared by Bill Hassiepen, VP and co-manager of Egan-Jones’ ratings desk. Hassiepen believes that the Fed’s “money printing” has not “really contributed to the improvement in the general economy” thus far. Instead, all it has done is “increase inflation and the cost structure in the general economy”. He “expects a ‘rapid uptick in gasoline and food prices’, which will affect households’ disposable income”. Unfortunately, “we have a Federal Reserve that simply does not recognize the inflationary impact of food and energy prices any longer”. Furthermore, “the United States’ financial flexibility is almost gone given $16 trillion in debt”—which is 104% of GDP—and there is no real plan to bring “the fiscal house under control”.

Jeff Cox of CNBC has pointed out four ways in which QE Infinity (as he calls it) can go wrong: Moral Hazard (Washington style), Moral Hazard (Wall Street version), Hurting Confidence, and “It may not work”. To Cox, the notion of Moral Hazard means “the rewarding of bad behavior”, which then naturally leads to more bad behavior. But, “it also extends to the notion that somebody will be there to support you no matter what”. In the case of Washington, the fear is that Congress and the White House will use this as an excuse to continue their profligate ways and put off getting the nation’s fiscal house in order “until”. For Wall Street, it means supporting the notion that the Fed will be around to make it all better regardless of the nasty booboos, giving Wall Street a chronic “sugar rush”—as evidenced by the immediate 200 point spike in the Dow Jones that followed the Fed’s announcement. In terms of confidence, QE Forever pushes the Fed’s balance sheet beyond $3 trillion, with no real end in sight. The good news: the Fed is willing to take extreme measures to pump up the economy. The bad news: the economy needs it, even after QEs 1 and 2. Given the need for QE3, people are starting to wonder just how much will finally be enough? That wondering, in and of itself, is enough to make some people nervous. That brings up the last point: what if this round of QE doesn’t work? What then? What other tricks can the Fed use to get the engine of the economy going?

The scary thing is…the answer is “not much”. If this doesn’t work, then there’s very little left for the Fed to try. In fact, this round of QE may be one round too many. Michael Pento of Pento Portfolio Strategies isn’t enthusiastic. “This is the nuclear option for them. This is a never-ending weapon that is being fired at the middle class.” He is concerned with the effects QE is having on future inflation and on savers who are getting no interest on their deposits. “If the unemployment rate stays elevated, as I know it will, and inflation eclipses (Bernanke’s) 2 percent target, what is his next move? What part of the Fed mandate takes precedence?” Pento’s bottom line? “Economic growth comes from more people working and more people becoming productive, and all the Fed can do is destroy our currency’s purchasing power.”

Pento isn’t the only one. Remember that ‘Sugar Rush’? Writing in the Telegraph of London, Liam Halligan, Chief Economist at Prosperity Capital Management, regards the latest round of QE as “the launch of a $1,500 billion funny money missile”, roughly the size of QE1 (albeit spread over a longer period of time). He writes: If “insanity” is doing the same thing again and again and expecting a different result, then it’s difficult to describe Bernanke’s latest initiative as anything other than insane. By focusing on MBS (Mortgage-Backed Securities) purchases, the Fed is trying to re-inflate America’s real estate bubble, in the hope that rising prices will encourage home-owners to spend more by re-mortgaging and getting even deeper into debt. America has done this before, repeatedly, and it always ends in tears.” Not only will this policy further damage America’s credit rating, but “…QE3 will do far more harm than good. By undermining the dollar and fuelling future inflation, it will discourage household spending by further debasing wages and pensions. By putting upward pressure on the cost of living, QE3 will eat further into real disposable incomes, forcing American consumers to retrench even more.”

The really interesting thing is that, unlike QE1, this time around Bernanke wasn’t facing a banking collapse or the possibility of deflation. No, the general consensus seems to be that it was done not to stave off another “Lehman moment”, but rather to please the politicians (especially Barack Obama, fighting a close race against Bernanke unfriend Mitt Romney) and the Banksters on Wall Street.

QE today, QE tomorrow, QE forever!

But, what’s done is done. QE today, QE tomorrow, QE forever! That really wasn’t the most interesting news in the world of finance to come out this month.

The most interesting announcements came a week before Mr. Bernanke gave us all QE ad infinitum. On September 6th, China announced that, from that day forward, any nation wishing to buy, sell or trade crude oil with them can do so using yuan, not dollars. The next day, Russia announced that they would supply China with all the crude oil they need, regardless of the amount, and that oil would not be sold or traded in dollars.

This wasn’t exactly sprung on the world out of the blue. At least as far back as 2007, it was reported that “Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme (to supplant the dollar with another currency), which will mean that oil will no longer be priced in dollars.”

Once again, a bit of historical review is appropriate. After the (Un)Civil War, the United States effectively went on the gold standard. This limited the money supply while easing trade with others nations that also used a gold-based money, such as the UK. However, many people believed a more flexible, larger money supply would be beneficial to the nation. These people by and large support a bimetallic standard in which silver and gold would share the burden of backing the nation’s currency. The situation simmered for some time—the country’s early experiences with bimetallism demonstrated the difficulties inherent in a fixed 15:1 silver to gold ratio, and the Panic of 1893 didn’t help—and ultimately resulted in William Jennings Bryant’s famous “Cross of Gold” speech at the 1896 Democratic Convention. Despite what is widely considered to be one of the great political speeches in American history, Bryant lost the election. In 1900, the United States formally established the gold standard.

continue at Canada Free Press:

http://www.canadafreepress.com/index.php/article/49842