QE3 Can Never End

September 23, 2013

Back in June, as the official government unemployment rate continued to fall, Federal Reserve Chairman Ben Bernanke indicated to the public that the Fed might begin to scale back its easy money policies sometime before the end of this year.  As the Fed met this past week, many economists and analysts expected it to announce that the central bank would indeed begin tapering its current $85-billion-per-month bond buying scheme known as Quantitative Easing 3.

But, these are also the same pundits who have been claiming for five years that the U.S. economy is in a state of recovery.  They are either disingenuous or totally clueless.

This commentator had no doubt the Bernanke Fed would not begin tapering QE3 now.  In fact, QE3 may never end.

In the first place, for five years now the Fed has injected over $2 trillion into the economy through QE 1, 2, and 3 and the real unemployment rate is still north of 14 percent. More Americans are on food stamps than ever before.  Middle class incomes are down and poverty is up.  At this point, Bernanke’s largess is a life support system for the economy.  It will not cure the patient; just simply prolong the agony until the day of reckoning.

And the day of reckoning will come when long-term interest rates climb to the level where the current QE induced housing and stock market bubbles pop.  The carnage from that, however, will be minor compared to the destruction left behind from the mother of all bubbles – Treasury Bills.  The point is, in June when Bernanke simply mentioned the Fed might begin tapering the stock market tanked 550 points and T-bill and mortgage interest rates instantly rose.  Imagine the impact if the Fed really pulled the plug on the economy’s life support.  Additionally, because T-bill and mortgage interest rates have been rising that could mean Bernanke has lost control of long-term rates.  The only tool he has for combating rising rates is more stimulus.  Thus, instead of taper talk, analysts should be asking when the Fed will increase the amount of bond purchases per month.

Lastly and perhaps the biggest reason why the Fed may never be able to cut back on its monetary stimulus is because to do so would accelerate the insolvency of Uncle Sam.  Realize that even though the current national debt is almost 3 times what it was in 1996, interest payments on the debt after adjusting for inflation are lower today than they were then.  The difference is the rate of interest the federal government is charged.  Bernanke has no choice but to keep printing.  If he tapers, rates will go up, interest payments will become a bigger share of federal expenditures and he will have to print even more to keep things going.  The hyperinflation that will result will finish off what’s left of the U.S. economy.

Many will say the above is nothing more than doom and gloom.  But, the above scenario is real.  Ben Bernanke steered Fed policy down a dangerous path in 2008.  Instead of allowing the market to liquidate the mal-investments from the preceding boom, Bernanke chose the politically correct way by attempting to re-inflate the bubble.  Instead of letting those that were reckless and brought on the crisis lose their shirts; Bernanke launched a massive program of bailouts and bond purchases.  He has printed himself (and us) into a corner and thrown away the key.  To keep things from crashing he has no choice but to continue printing.  Even then, the end will ultimately come and the devastation will be so much worse than 2008’s crisis.


Here We Go Again

June 26, 2013

The week before last, Federal Reserve Chairman Ben Bernanke emerged from a Federal Open Market Committee (FOMC) meeting and proclaimed that the FOMC came to the conclusion that it may be “appropriate to moderate the pace of (bond) purchases later this year” if the economy continues to improve.  Mind you, he didn’t say the Fed would syphon liquidity out of the economy, simply that it might cut back on its buying of bonds if conditions warranted it.

What happened next was remarkable.  The price of gold dropped $100 an ounce, silver was down 8 percent, the yield on 5 year U.S. Treasury bonds surged by its largest percentage ever, and over a two day period the Dow lost more than 500 points.

Arguably, Bernanke and the FOMC are America’s version of the old Soviet Politburo – central economic planners that thwart the will of the market.  By having ultimate and unfettered control of monetary policy this small economic oligarchy has practically complete control of our economy. The question is, why do we tolerate this?

It’s not just what the Fed chairman says that is a problem; it’s what he does that is even more intolerable.

Albert Einstein use to say, insanity is “doing the same thing over and over again and expecting different results”.  Under this definition, Bernanke is insane.

He has made no bones about the fact that his policies since 2008 were meant to make Americans feel more prosperous so they would start spending again and stimulate the economy back to good health.  In essence, his goal was to re-inflate the housing and stock market bubbles.  According to recent statistics he has done just that.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011.  This marked the greatest year-over-year price increase since the fourth quarter of 2005.

Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

There is even a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.

In terms of the stock market, it’s no secret that the Dow has surpassed its previous high.  Given Bernanke’s remarks and the subsequent crash of the Dow last week, there is clearly causation between Fed pumping and stock market performance.

But, in all of this “good” news there are reasons to believe that Bernanke’s policies are leading us to another crisis.  Unemployment and underemployment are still high and incomes are down, so where is the money coming from to cause real estate prices to rise dramatically?    It is from speculators and Wall Street firms eager to invest the cheap money they’ve gotten from the Fed.  The problem is that all that cheap money will cause over-investment in the housing market – the production of more homes than are needed.  Once that happens and interest rates rise the bust will come leaving mom and pop homeowners once again holding mortgages against falling property values.

And there is a big reason to be concerned about the booming stock market.  Buying stock on margin reached an all-time high in April at $384.3 billion.  Historically, whenever margin debt has exceeded 2.25 percent of GDP the market has crashed.  This happened in 1929, 2000, and 2007.  Does this mean the market will crash soon?  No one knows for sure, but one thing is certain, Bernanke’s easy money has clearly re-inflated the stock market bubble, setting up mom and pop investors for another dramatic crash.

Thus, Bernanke has been successful in attaining his goal of re-inflating both the housing and stock market bubbles.  However, his policies have not produced an economic recovery as he believed.  In fact, they have brought us to the brink of another crisis.  It’s no wonder since he employed the same approach that produced economic crisis in the past.

The Dow is an Indicator of Price Inflation

March 17, 2013

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy.  For their part, Keynesians have been highly critical of Austrians for this prediction claiming that current government fiscal and monetary policy will not lead to price inflation.  They claim we have had 4 years of stimulus spending (however not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government like Keynesians do, you will follow its rigged statistics without asking questions.  Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated.  For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics.  Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent.  However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent.  If it was calculated the way it was between 1980 and 1990 the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges.  Washington has changed the parameters of the measure making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high.  In nominal dollars the Dow is at an all-time high.  But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example.  Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level.  But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000 when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you?

Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas.  That sum would keep any troop of monkeys occupied for a while.  But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods and an increase thereof is the most harmful to the working class.  Once again, price inflation can be seen by comparing the Dow’s current high with its previous value.  At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S.  This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points.  The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong.  There is significant price inflation in our economy that has been caused by Obama’s prolific spending and Bernanke’s reckless money printing.  In fact, the numbers are indicative that price inflation has been with us for a lot longer time.  When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

Article first published as The Dow Is an Indicator of Price Inflation on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

This Time it’s Bernanke’s Housing Bubble

February 19, 2013

“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”  These are the simple, yet exceedingly relevant for our times, words of the famous English writer Aldous Huxley.

If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.

For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent.  As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history.  Then, like all fake boom phases, when interest rates rose it came to an end.  The necessary correction phase started and all the mal-investment of the boom phase was no longer sustainable under higher rates.  Foreclosures increased.  As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere.  Many still find themselves unemployed and destitute.

Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets.  Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.

Some economists believe Chairman Bernanke’s policies have created a housing recovery.  These economists believe this because they haven’t learned from history, especially recent history.

But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble.  He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011.  This marked the greatest year-over-year price increase since the fourth quarter of 2005.

And there are local pockets of even greater price increases in real estate going on.  There is a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.  Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

It is ridiculous to believe that what we are seeing is anything other than another housing bubble.  Unemployment and underemployment are still very high.  Many employed middle income buyers are still reeling from the last bust.  The huge price increases we are seeing is the work of speculators fueled by Bernanke’s easy money policies.

The bust will come when rates rise, the mal-investments of the boom become unsustainable at the higher rates, and the speculators liquidate their positions leaving small investors holding the bag.  It will be 2008 all over again for many, except this time it will be Ben Bernanke’s Housing Bubble.

Article first published as This Time it’s Bernanke’s Housing Bubble on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The So Called Presidential Debates are a Waste of Time

October 10, 2012

Like most Americans, I didn’t watch the staged media spectacle better known as the Presidential Debate.  It is not just because I didn’t have a dog in that fight; it is because to me the quadrennial political mini-series is nothing more than a rigged, wasteful use of an hour and a half of prime time television.

First of all, it is not really a debate but a glorified press conference.  Journalists hurl softball questions at the candidates giving each the opportunity to regurgitate their perfectly rehearsed sound bites.  Wouldn’t it be more worthwhile if Obama and Romney were allowed to go toe to toe by stating their positions, asking each other questions, and arguing the merits of their positions without any filtering from an aloof journalist moderator?  Better yet, wouldn’t it be more worthwhile if other candidates were allowed to participate and give Americans a chance to hear views other than the sanctioned Establishment line.

Then there is the fact that once again the major parties have nominated two candidates for president who are quite similar.  Whether it’s Social Security, corporate bailouts, endless wars, or government spending, Obama and Romney agree more than disagree on most issues.  Isn’t it time that other views besides the one that has gotten us into our economic mess, endless wars, and erosion of constitutional liberties be allowed to be heard?

Lastly, as is always the case in the debates, several important issues were totally avoided.  What about our military’s continued drone war that has left hundreds of civilians dead in Pakistan?  What about the failed War on Drugs that has made America the number one jailor in the world?  Okay, the first debate’s focus was domestic policy, so killing innocent foreigners was outside that realm, but the violence engendered, the lives ruined, and the constitutional liberties destroyed by Washington’s decades’ long insane drug policy could have been broached.

Then there was the avoidance of the gravest issue currently facing our country – namely the role the Federal Reserve plays in our economy.

“Give me control of a nation’s money and I care not who makes the laws.”

Mayer Amschel Rothschild, founding father of international finance (see below)

And yet, in an hour and a half debate on domestic policy, the Federal Reserve, Ben Bernanke, and quantitative easing were not mentioned a single time.  The Federal Reserve, the institution whose job it has been to protect the value of the dollar, has been responsible for the greenback losing 95 percent of its value since 1914.  Ben Bernanke, who has perhaps more influence over the economy than anyone else in Washington, doesn’t seem to have a clue about how the economy works.  He has a history of totally missing the mark with predictions.  This includes everything from, “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”, on March 28, 2007 to Fannie Mae and Freddie Mac, “…will make it through the storm” to his stating that “The Federal Reserve is not currently forecasting a recession” on January 10, 2008 as the economy was spiraling into a massive downturn.  These were not little misses.

But perhaps the greatest dereliction of presidential debate moderator Jim Lehrer in the debate was not asking the candidates anything about the Fed’s failed quantitative easing programs.  How can that be since Bernanke just announced that QE3 will last in perpetuity?

The Fed has already expanded the size of its balance sheet by 223 percent so far by buying financial assets from banks.  In so doing, it has injected trillions of dollars into the reserve accounts of those banks.  But, these purchases have not produced a healthy economy like Bernanke predicted.  In fact, Philadelphia Fed President Charles Plosser expressed a negative view of Bernanke policy recently when he indicated that, “Inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy”.  For his part, Bernanke has always maintained that he possesses the know-how and tools to siphon out excess liquidity to prevent inflation when the time comes.  But, Plosser doubts the Fed will be able to act boldly enough since it has “absolutely zero experience” unwinding what has been put in place.

Given the state of continuous quantitative easing that our economy has been subject to, its utter failure to accomplish its stated goal, and the dour forecast by the Philly Fed Chairman as to what will result, how was this not an important area of inquiry for Lehrer to pursue with Obama and Romney?

At the end of the day, the so-called presidential debates are a waste of time.  Run by the bipartisan Commission on Presidential Debates, no candidates other than their own Republican and Democratic nominees are permitted to participate.  Given that both are usually quite similar in their positions, the American people are provided with little choice.  Finally, because many critically important issues are avoided, the debates contribute very little to the national dialogue on what needs to happen to turn our country around.  For that hour and a half we would be better off if the networks had aired reruns of the most popular mini-series instead.

(Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee on Banking and Currency and one of the sponsors of the Federal Reserve Act, National Economy and the Banking System, (Washington, D.C.: U.S. Government Printing Office, 1939), p. 99. This quotation could not be verified in a primary reference work. However, when one considers the life and accomplishments of the elder Rothschild, there can be little doubt that this sentiment was, in fact, his outlook and guiding principle)

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Bernanke is Killing the Working Class

September 21, 2012

It is really quite amazing that anybody would believe anything that emanates from the mouth of Federal Reserve Chairman Ben Bernanke.  Quite frankly, the fact that Barack Obama nominated him for a second term as Fed chairman and the Senate confirmed him is proof that our leaders are either as incompetent as all get out or proof for at least one conspiracy theory – namely that the Anglo-American power elite really does run the world and wanted him to continue being their front man.

Let’s be honest.  Bernanke’s statements and predictions since assuming the helm at the Fed in 2006 have been, to be harsh, full of mistruths, to be polite less than stellar.  His absurd statements range from “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”, on March 28, 2007 to “The Federal Reserve will not monetize the debt”, on June 3, 2009.  His predictions have been even more remarkable.  Just two months before their collapse he predicted that Fannie Mae and Freddie Mac, “…will make it through the storm.”  And as the economy was spiraling into recession on January 10, 2008 he indicated incredibly that, “The Federal Reserve is not currently forecasting a recession.”

Well, old habits do die hard.  Last week Bernanke gave a press conference to answer questions about the Federal Open Market Committee decision to purchase $40 billion of mortgage backed securities per month into the indefinite future.  What was astonishing was not his defense of the purchases, but his addressing of three concerns that have been expressed about Fed policy since the Great Recession started in 2008.

The first concern he sought to ease was that Fed purchases of long-term securities are comparable to government spending.  He claims they are not because the Fed is buying financial assets, not goods and services and ultimately the Fed will sell them off when unemployment eases.  He may be technically correct, but does it matter?  The buying and selling of assets is one means the Fed uses to manipulate the money supply.  When it wants to inflate the supply of money it exchanges new money for assets and when it seeks to slow the growth of money it sells assets to mop up excess reserves in the economy.  In the end, Fed asset purchases are comparable to the Fed monetizing the debts of the federal government which of course are required because of deficit government spending and both will ultimately cause higher prices generally.

Next, Bernanke addressed the concern of those receiving very low returns on interest bearing accounts.  While he acknowledged that the Fed’s “accommodative” monetary policies were responsible, he stated that, “Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.”

Two points need to be made about Bernanke’s comment.  First off, when are those low interest rates going to produce a healthy and growing economy?  The Fed Funds Rate has been at 0-.25 percent since December 2008 and unemployment is higher now than it was then.  Secondly, is Bernanke suggesting that older Americans on fixed budgets who are getting extremely low returns on their savings just need to be patient until the values of their homes come back so they can sell them to eat? Or is it that he thinks borrowing against equity on one’s house is a sign of prosperity?  The fact is Bernanke’s policies discourage savings and those that have saved are seeing their wealth eroded and their standard of living diminished.

Which brings us to the last concern addressed by Chairman Bernanke, namely that the Fed’s “accommodative policies” will produce higher price inflation down the road.  To quell fears of price inflation he indicated that overall price inflation has been about “2 percent per year for quite a few years now, and a variety of measures show that longer-term inflation expectations are quite stable.”

All one has to do is venture to the supermarket or fill their tank with gas to know that the chairman’s claim about price inflation is hogwash.  Gas prices alone are up 7 percent year over year.  Higher energy prices mean the cost of other goods has increased as well.  Bernanke’s inflation number is absurd.  John Williams at Shadow Government Statistics produces inflation numbers based on the way they use to be calculated.  According to his calculations, if the Bureau of Labor Statistics (BLS) were figuring inflation like it did in 1980 the rate would be 9 percent.  If the BLS were using the 1990 method the rate would be 5 percent.  The point is that both calculations are much higher than Bernanke’s figure and with the Fed about to embark on infusing $40 billion per month more into the economy for an indefinite period of time, price inflation will go even higher.

Federal Reserve Chairman Ben Bernanke has a long history of making absurd predictions and statements.  His attempt to ease concerns about Fed policies at last week’s news conference was no exception.  Perhaps he is out of touch with reality or maybe there is something else at play.  At the end of the day, his policies have hurt and will continue to hurt the middle and lower classes in America.  What’s startling is that these groups are the very constituencies that President Obama and members of the Senate claim to care about, yet both gave Bernanke a second term as Fed chairman.  Perhaps the president and those 70 senators that gave Bernanke a second term are incompetent or perhaps the Anglo-American power elite wanted him to continue as their front man?

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Bernanke’s Publicity Stunt

March 23, 2012

Federal Reserve Chairman Ben Bernanke has taken his defense of the Federal Reserve System on the road.  In response to recent critics of the central bank, notably Republican presidential candidate Ron Paul, Bernanke is scheduled to deliver four classroom lectures at George Washington University.  In his first discourse, Bernanke was Bernanke, extolling the virtues of the Fed while criticizing calls to return the dollar to a gold standard.

One of Bernanke’s criticisms of a return to the gold standard is that it is not practical.  By that he means “it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the Federal Reserve Bank of New York’s basement”.  But, the benefit of using gold to back currency is precisely because it is scarce and difficult to dig up and transport. Otherwise, it would have little value and be about as valuable as paper money.

A more significant criticism lodged by Bernanke against the gold standard is that it doesn’t prevent “short-term volatility”.  According to the Fed chairman, “Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy”.  By short-term volatility, Bernanke must be referring to those periods in the 19th Century when the Second Bank of the United States and the federal government from time to time allowed banks to suspend payment in species thus enabling widespread currency inflation and financial volatility.  The fact is that under a true gold standard short-term volatility would not exist.  Prices would be stable and the artificial booms and inevitable busts caused by Fed monetary price fixing would not happen.

But, to his credit, Bernanke did acknowledge that historically countries using the gold standard have experienced long periods of price stability.  In fact, in the United States from the mid-Nineteenth Century until 1940 prices in the United States actually fell on average from year to year – the main exceptions being during war years.

So while even Bernanke admits that the gold standard is an effective means to produce stable prices which after all benefit the poor, the elderly, and others on fixed budgets, why is he still so resistance to a return to the gold standard?  The key is in the answer he gave to one student’s question about why Fed critics are pushing hard to return to a gold standard. Bernanke indicated that they want to remove some “discretion” the Fed has over the economy.  It is this “discretion” that Bernanke and his monetary oligarchs used to dole out trillions of dollars in secret loans to their bank buddies who nearly brought the whole financial system to its knees.  Many of them got a piece of the action – Citigroup – $2.513 trillion, Morgan Stanley – $2.041 trillion, Merrill Lynch – $1.949 trillion, Bank of America – $1.344 trillion, Barclays PLC – $868 billion, Bear Sterns – $853 billion, Goldman Sachs – $814 billion, Royal Bank of Scotland – $541 billion, JP Morgan Chase – $391 billion, Deutsche Bank – $354 billion, UBS – $287 billion, Credit Suisse – $262 billion, Lehman Brothers – $183 billion, Bank of Scotland – $181 billion BNP Paribas – $175 billion, Wells Fargo – $159 billion, Dexia – $159 billion, Wachovia – $142 billion, Dresdner Bank – $135 billion, and Societe Generale – $124 billion.  You see with a gold standard these loans and other Fed schemes to benefit the bankers would not be possible.  Thus, when Bernanke criticizes the gold standard it is more than just professorial theorizing, it is a defense of the current corrupt banking cartel in America.

In the final analysis, Bernanke’s lecture series at G.W. is nothing more than a publicity stunt and not a very good one at that.  The Federal Reserve is an indefensible institution.  Compounding his problem are arguments he is attempting to make against the gold standard which served our country well for so long.  Anything he says cheats the students of valuable educational time.  Perhaps the powers that be at G.W. should invite Ron Paul to debate Bernanke.  Only then will the students get their money’s worth.

Article first published as Bernanke’s Publicity Stunt on Blogcritics.