Monday, September 23, 2013

Bernanke's successor will be caught between reality and a hard place!

Which 'lucky' economist will be the winner of the Bernanke Replacement Derby? 

The United States financial system is long into a Fed induced economic infusion of dollars that has run into the trillions and had limited if any success.

There has been tepid growth of the economy, below normal creation of jobs and little improvement in the unemployment rate due to anything beyond a sinking labor force participation rate.

That said and in light of last weeks announcement that signaled no immediate end to QE was in sight, was Larry Summers crazy like a fox when he took his name out of the running to replace Ben Bernanke as Federal Reserve Chairman?

In other words whether it's Janet Yellen or Janet Jackson who ultimately is chosen to replace Bernanke, will their appointment be like trying to replace the captain of the Titanic at the exact time the ship is running into an iceberg ripping a whole in the great ships hull that would ultimately send it to the bottom?

In simpler terms, will replacing Bernanke be like the unlucky contestant who is the last one standing in a game of musical chairs when the music finally stops?

Last week when Bernanke's Fed announced that his organization would not be tapering and instead would maintain bond purchases to the tune of $85 billion a month, did this decision actually have to do with the condition of the economy? If so it would be entirely plausible but is there more taking place behind the curtain?

It would be somewhat plausible because despite whatever Obama and his mainstream media pundits tell you about economic improvement in America, those of us outside of Washington and on the front-lines of Main Street know that the good times are really not rolling! They are simply limping along at a low level!

On-the-other-hand, was the Feds decision due to the fact that Obama's fiscal fighters have painted themselves into a monetary corner they cannot get out of without major and devastating implications?

If you have been listening to Chairman Ben in his post-Fed decision announcement news conferences you will likely have come to the same observation as I have that this Fed academician and historian with no practical real-life experience is lost!

Lost as it relates to the steps to take that would extricate the U.S. from this quantitative easing spiral without plunging the economy into some type of even worse spiral.

As the Obama administration has made crystal clear in its five-plus years in power every decision or non-decision can and typically will have serious and potentially long-lasting unintended consequences.

This massive fiscal experiment with global implications is certainly no exception and may actually be the most significant of all!

As you will read below, when the terms Federal Reserve and Weimar Republic are compared in the same breath, danger may be looming on the horizon!

A sampling of thoughts about QE and tapering from around the WWW!

  • '...Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago. Like the Weimar Republic, the U.S. economy is also struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt. Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic chose. The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it. But quantitative easing worked for the Weimar Republic for a little while too. At first, more money caused economic activity to increase and unemployment was low. But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today...' (Source)
  • '...They are called derivatives and in the interest rate arena alone there are $441 trillion in bets outstanding around the globe (Read 'Derivatives 101 through the prism of a beer hall!' here). And sharp moves in rates, like the one we have experienced the last month or so, are not likely factored into the models created by the highly paid MIT quants who create the derivatives contracts. The result, if this degree of volatility persists, could be losses on a mammoth scale. This spike in interest rates is one of the many potential unintended consequences that could occur due to the huge amount of money that has been printed by the U.S. government along with the artificially low level of interest rates that has been engineered by the Federal Reserve's Ben Bernanke...' (Source)
  • '...The danger with addictions is they tend to become increasingly compulsive. That might be one moral of this week's events. A few days ago, expectations were sky-high that the Federal Reserve was about to reduce its current $85 billion monthly bond purchases. But then the Fed blinked, partly because it is worried that markets have already over-reacted to the mere thought of a policy shift. Faced with a choice of curbing the addiction or providing more hits of the QE drug, in other words, it chose the latter...' (Source)
  • 'The Fed's failure today to announce some sort of tapering of its QE program, despite the consensus of an overwhelming percentage of economists who expected action, once again reveals the degree to which mainstream analysts have overestimated the strength of our current economy. The Fed understands, as the market seems not to, that the current "recovery" could not survive without continuation of massive monetary stimulus. Mainstream economists have mistaken the symptoms of the Fed's monetary expansion, most notably rising stock and real estate prices, as signs of real and sustainable growth. But the current asset price bubbles have nothing to do with the real economy. To the contrary, they are setting up for a painful correction that will likely be worse than the one we experienced five years ago...' (Source)
See also: $3.39T Quantitative Explosion: Fed Owns More Treasuries and MBSs Than Publicly Held Debt Amassed From Washington Through Clinton

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