Federal Reserve Chairman Ben Bernanke and his army of monetary economists have now had four months to observe the lay-of-the-economic land since winding down their massive $1.2 trillion in mortgage bond purchases.
How do things look? Based on the Chairman's recent comments, not good.
The Mother of All Bullets
To answer the above question we have the luxury of being able to refer back to the verbatim text of a speech Ben Bernanke delivered in 2002 titled Deflation: Making Sure "It" Doesn't Happen Here (which I've written about previously).
QE2: No Longer a Question of If, But When
On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.
Market Timing QE2
With QE2 fully baked when precisely will it begin?
November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.
In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.
Meanwhile, In Government Debt La-La Land...
In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"
Uh, yeah.
The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.
Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.
Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".
There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.
How do things look? Based on the Chairman's recent comments, not good.
Peer Pressure, Washington Style
When the economic going gets tough and then stays tough for a protracted period there is one institution politicians can be counted on to turn towards for help, and that institution is the nation's central bank.
In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).
With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so."
In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).
With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so."
What 'bullets' are Jim and Ben referring to?
The Mother of All Bullets
The economic problem du jour just so happens to be deflation. In the speech, Bernanke outlines detailed steps the Fed could take to combat deflation, which is basically a widespread decline in prices. The last time the U.S. experienced this was during the Great Depression, an area of economic history which Dr. Bernanke is considered to be one of the pre-eminent experts.
Bernanke's most oft-quoted line from his 2002 speech: "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."
Put simply, Dr. Bernanke's deflation prescription is to print a 'ton-o-money'.
How much money? Given that the nearly $2 trillion printed since the inception of the 2008 financial crisis hasn't created significant inflation concerns, estimates as high as an additional $5 trillion may not be beyond consideration.
On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.
One interpretation of Bullard's comments is that the Fed is laying the groundwork for 'QE2', the shorthand label which has attached itself to the Fed's latest scheme.
Market Timing QE2
With QE2 fully baked when precisely will it begin?
November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.
In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.
Meanwhile, In Government Debt La-La Land...
In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"
Uh, yeah.
The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.
Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.
Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".
There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.
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