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RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Ambrose Evans Pritchard, International Business Editor
The Telegraph

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.

It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?

Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.

Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.

Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.

The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.

Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.

At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.

We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.

There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.

Heckuva A Job Bennie

Time magazine has named Ben Bernanke as it's Person of the Year and now the rest of the sycophantic media is left to come up with something positive to say about the guy and failing miserably in the attempt.

Some of the choicer nuggets.

From Reuters:

Bernanke, 56, a former Princeton University professor, is an expert on the Great Depression.

So much of an expert apparently that is trying to recreate it.
From the AP:

Other previous winners have included Bono, President George W. Bush, and Amazon.com CEO and founder Jeff Bezos (BAY'-zohs.)

How much did it hurt them to mention former president Bush? But it is kind of weak putting Bono and the founder of Amazon on the same list. I don't think Ben is much of a singer and since he has spent all of his time in the world of academia he really doesn't have a lot of real world experience in how the real business world works.
From CNN this:

Time called Bernanke " the most powerful nerd on the planet."

Uhmm, I think somebody like Bill Gates of Microsoft or Steve Jobs at Apple would better fit that bill.

The poor media is tying themselves in knots trying to come up with something nice to say with one article even pointing out that hey, he was appointed by a Republican. The bottom line is this is some guy who has taught economic theory all his life and has no first hand experience at the actual application of those theories until now, and what has it given us?

I don't even know how much our debt has risen anymore, double, triple? At the rate that congress is charging on the credit card who can keep up. His big plan to dole out all the TARP funds, while it may have been created in good faith, resulted in nothing more then a chance for the progressives in Washington to exert control over the financial business sector, something they have realized and are now working furiously to get out from under. That in itself is turning into another debacle since congress thinks all that money being paid back can simply be used for whatever other socialist agenda they want to push. The dummies don't realize that the money needs to go back from whence it came, meaning the federal government coffers of the taxpayers where it came from.

Decision Time for Bernanke

Ben Bernanke is having a tough time deciding whether or not to put his foot on the economic gas pedal or step on the brake, so he's doing a bit of both.

Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day meeting, will probably maintain its assessment that “tight” bank credit is impeding growth. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflects Fed orders to banks to raise more capital and toughen lending standards, analysts say.

A failure to restore the flow of bank credit carries the risk that the economic recovery will be slower than the Fed anticipates, or even that the U.S. lapses into another recession, economists say. That would make it more likely the Fed will keep its main interest rate close to zero for a longer period.

“They would be absolutely delighted if banks went out and raised a lot more private capital and then began to lend more,” said former Fed Governor Lyle Gramley, now senior economic adviser with New York-based Soleil Securities Corp. “Until that happens, the Fed has to continue to try to encourage economic growth through easy money.”

The reason why the banks don't raise a lot of private capital and do more lending is that if they do the payoff is likely to get hammered by Congress and get their pay cut. This is where the game-playing and political posturing by Congress is really causing problems. If you are a banker, why take the risk? If it works out, you get hammered. If it does not, you get worse. You can't win.

In the meantime, Bernanke tells the banks to tighten their capital and lending practices, and has to keep things moving with the near zero policy on the discount rate. All the while GDP continues to shrink and unemployment grows.

Obama's Inflation Storm Clouds

The storm clouds of inflation are starting to gather.

Treasuries fell for the first time in three days after Federal Reserve Chairman Ben S. Bernanke said stress tests conducted on the 19 largest U.S. banks yielded “encouraging” results, damping demand for the safety of debt.

The yield on the 10-year note increased two basis points to 3.19 percent as of 9:40 a.m. in Tokyo, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 fell 1/8, or $1.25 per $1,000 face amount, to 99 14/32.

It was just a few short weeks ago that 10-year treasuries were yielding about 2.70%. They are going to have to flood the market with debt to pay for Obama's dinner tab, and that forces interest rates up. Very soon you will start hearing about the concept of "crowding out" private investment demand by so much government spending. Expect to see a relatively high unemployment for quite some time to come (at least 3.5 years by my estimate).

As inflation starts to heat up, listen close to how the MSM blames Bush for everything even though Obama is borrowing about 50 cents of every dollar the government will spend this year.

Good News: Chuckie Schumer Wants to Expand Government Loans

You'd think this guy would lay low for awhile considering he and his pals Chris Dodd, Barney Frank, Maxine Waters et al. are primarily responsible for the mess we're in.

But no, enough government intervention is never enough for Chuckie Schumer. God help us.

Sen. Charles Schumer is calling on the federal government to protect college students and their families from the credit crunch by expanding the economic bailout to include student loans.

"We have to build a wall around the student loan market to protect our kids from the credit crisis," Schumer said at a news conference yesterday in Massapequa outside Plainedge High School, where students from a senior government class peppered him with questions about college costs and loan availability.

"My parents tell me I have to be realistic about where I want to go, and money is nearly as important as how good my grades are," said Marianne Kennedy, 17, of Seaford, who is applying to both public and private schools. "They don't want me having huge debt when I graduate."

Maybe it would be better if a qualified money manager went to speak to these little urchins rather than a profligate spender with zero accountability.

The Wall Street bailout legislation passed by Congress last week gives the federal government authority to buy up bad student loan debt as well as bad mortgage debt.

In a letter to U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke yesterday, Schumer (D-N.Y.) asked that they "pay special attention to the student loan market" as they carry out the bailout plan. He also wrote to every college and university in New York State, asking those that do not participate in the federal Department of Education Direct Loan student aid program to reconsider. Nationwide, 1,369 of more than 4,000 colleges and universities participate, according to a Schumer spokesman.

Schumer also is proposing that a commission be established to determine whether the federal loan program has enough resources if private loan programs dry up.

Great, another commission, likely to be stacked with a bunch of big-government leftists like ... Charles Schumer.

Wonderful.

This is what's know as chutzpah, boys and girls.

Well, no one ever accused Sen. Chuck Schumer of letting any sense of shame hold him back.

Ditto for irony.

Still, it was a bit surreal to see Schumer - one of the prime apologists for the faulty federally backed mortgages now dealing body-blows to the US financial system -laying the groundwork yesterday for yet more government meddling in the loan business.

"We need to build an impermeable wall around the student-loan market to protect our kids from this financial crisis," he said at Stuyvesant HS in Manhattan.

It's unclear exactly what such an "impermeable wall" might look like, though Schumer said he had asked Treasury Secretary Hank Paulson to pay "special attention" to student loans - which, like most other credit, have dried up recently - as he executes the $700 billion federal rescue.

Schumer also called for a commission to figure out how the federal government can expand its loan program.

But one thing's for sure: This kind of talk should make taxpayers exceedingly nervous.

Schumer, after all, was a chief cheerleader for the feds' last major attempt to protect a sector of the economy from the rigors of the market.

That, of course, was the housing market - inflated to unsustainable heights, largely by the irresponsible mortgages given implicit government backing through Fannie Mae and Freddie Mac.

And that recklessness was given what amounted to a congressional stamp of approval by legislators smitten with the idea of increasing poor and minority home ownership.

Or as Schumer himself put it back in 2003: "My worry is that we're using the recent safety and soundness concerns . . . as a straw man to curtail Fannie and Freddie's mission." Oops.

For a guy who would hold a press conference to announce a can opening, it's amazing he never seems to realize his statements are actually preserved for posterity. But when most of the media overlooks such a history, it's not hard to see how he thinks he can get away with this nonsense.

Congress Plans Financial Fix, Markets Rally

The Treasury, the Federal Reserve Bank and Congress are working on a deal to take over many of the bad bank loans in a workout arrangement.

Top U.S. financial officials emerged from a briefing with congressional leaders Thursday night with an agreement to work quickly toward a broad-ranging fix for the crisis roiling U.S. and world financial markets. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke briefed House and Senate leaders to hash out a solution to the massive downturn in global markets and the failure of several financial firms. Treasury spokeswoman Brookly McLaughlin said in a prepared statement that Paulson, Bernanke and congressional leaders "began a discussion ... on a comprehensive approach to address the illiquid assets on bank balance sheets that are .... the underlying source of the current stresses in our financial institutions and financial markets." The talks are expected to continue through the weekend, McLaughlin said. She offered no additional details.

The issue is that the mortgage backed securities are nearly impossible to value at this time cause the value of the underlying mortgages is changing all the time. This risk factor then makes these securities untradeable, no one will buy them. Actually, most of the securities are probably still good, but it will take a long time to figure out their true worth, time the banks and the financial houses do not have. So the logic is to create a Federal loan work out mechanism to take on these securities and work through the detail to determine a true worth, while at the same time relieving the financial sector from the paralyzing unknown risk of all this.

The jump in the market this afternoon as word of this plan tells you that the market looks very favorably on this. Right now banks are holding onto all their cash cause they are afraid of the future, so the credit market has dried up. That has to stop.

If this plan is not worked out, look for another massive drop in the market next week.

Meanwhile this morning the markets are soaring.

Bernanke Seeks Expanded Fed Powers

Federal Reserve Bank Chairman Bernanke is looking for more regulatory powers for the Fed.

Federal Reserve Chairman Ben Bernanke said Tuesday that the Fed should have additional powers to prevent and limit financial market turmoil.

Congress should consider giving the Fed power to set standards for capital liquidity holdings and risk management for investment banks, Bernanke said.

In the past, the Securities and Exchange Commission has been the primary regulator of broker dealers.

In addition, Congress might give the Fed broad power to promote financial market stability, Bernanke said.

I am in favor of this suggestion by Bernanke. Over the years, the financial markets have changed, become more complex and the lines between banks (traditionally the regulatory jurisdiction of the Fed) and broker/dealers (traditionally the regulatory jurisdiction of the SEC) have become blurred. I believe that the oversight arms need to be updated to keep pace.

And just recently, the Fed did make some creative moves to provide some liquidity to the brokerage house sector:

Bernanke said the Fed is considering extending its emergency loans to broker-dealers beyond 2008.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end," he said.

In March, as market conditions worsened, the Fed established two lending facilities for brokerages. One allows them to swap a range of illiquid assets for Treasury securities. The other facility provides cash to broker dealers in a system that is similar to its discount window for banks.

I would expect to see the SEC eventually become an arm of the Federal Reserve Bank. Very clearly, their activities need to be coordinated.

Cancel That Depression

I keep reading in the mainstream media about how the U.S. economy is in recession, in a depression, is crumbling, and so forth. Lets look at the facts.

First, the definition of "recession" varies, but generally it means at least two consecutive quarters of no economic growth or economic contraction. While we are seeing a slowing of economic growth in the U.S., right now we are not seeing economic contraction.

The Federal Reserve Board Chairman Bernanke is set to give more testimony to Congress today about the state of the economy and the markets are reacting already.

U.S. stock futures edged lower on Wednesday after the eighth-biggest one-day point rally for the Dow industrials, with attention turning to testimony from Federal Reserve Chairman Ben Bernanke on the economy, interest rates and the credit crunch.

While there has been a lot of volatility for a variety of reasons, yesterday was, as the story points out, the eighth largest jump in the Dow Jones Industrial Average in history. Just to be clear, that is a good thing, although you would not know it based on the MSM. But continuing on, later in the story is buried this little nugget:

The International Monetary Fund now expects the U.S. economy to grow by only 0.5% in 2008, while European growth is set to slow to 1.3%, news reports said, citing leaked documents. The IMF in January had trimmed its 2008 U.S. forecast to 1.5% and projected European growth of 1.6%.

So, amidst all the gloom and doom, the U.S. economy is still expected to continue to grow, albeit by a small 0.5% rate. But that is still growth nevertheless, even during all the current negativity and volatility. Therefore, if that holds true, the U.S. is not in a recession despite all the wishful thinking by the anti-U.S. MSM that this be true.

The moral of this story is do not let the media tell you what to think. Glean facts and data from them as best you can, and then draw your own conclusions.

Spooked Fed Signals More Rate Cuts

It looks like Fed Chairman Ben Bernanke is a bit spooked.

Bernanke says more rate cuts coming

SAN FRANCISCO (MarketWatch) -- Federal Reserve Chairman Ben Bernanke said Thursday that more interest rate cuts are on the way, as the U.S. central bank wrestles with a deteriorating economy brought on by a struggling housing market, high energy prices and a weaker stock market.

In an unusually blunt speech, Bernanke said the economic outlook has taken a turn for the worse in the early days of the new year and that the Fed stands ready to act aggressively to ward off further weakening.

"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in a speech to a business group in Washington."

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," the Fed chairman said.

Several comments.

First, I would expect the Fed to do a 50 basis point cut at their next meeting.

Second, that combined with Europe's decision so far to stand pat with their interest rates means the dollar will depreciate even more and the Euro will appreciate.

Third, given that the role and mission of the Federal Reserve Bank is to maintain a stable currency, liquidity and a solid banking system, I find it a bit odd that Bernanke keeps talking about growing the economy. Bernanke's comments are more Keynesian than monetarist in nature.

I think it's been so long since we've had an appreciable recession, some folks are getting spooked as the macroeconomy inevitably slows down.

Fed Taking Risky Path

All signs point to another discount rate cut by the Fed's this week.

Fed expected to lower rates despite raging inflation

In a glorious bit of timing, the Federal Reserve is expected to cut interest rates on Tuesday for a third straight meeting, just days before government data are released showing some of the highest inflation rates in decades.

That's all you need to know about the Fed's balance of risks: Policymakers are much more worried about the illiquid credit markets and the possible hit that the credit squeeze could have on the economy than they are about the risks of inflation breaking out.

"Don't look now, but while we're in the midst of an easing cycle, the U.S. is facing a 4% inflation rate," wrote Avery Shenfeld, an economist for CIBC World Markets. "But for now, none of this matters, as both bonds and the Fed are focused on the credit crunch and its growth threat."

In other words, the Fed is worrying about a recession now and will worry about inflation later. It is the classic trade-off of the Phillips curve, which suggests that you can either have low inflation or low unemployment.

I think, however, that this anticipated move by the Fed's is a risky strategy, and is a departure from general Fed policy of the last 25 years.

Prior to the early 80's, the Fed managed monetary policy with a Keynesian view; i.e., used the Fed's policy moves to shift the aggregate demand curve in or out to try to maintain full employment. This unfortunately created some volatility (similar to oversteering a car on ice) which contributed toward the stagflation in the 70's.

With the arrival of Paul Volcker in the 80's, the Fed shifted policy moves to a monetarist view. Specifically, they have managed the money supply to keep a stable price level along the lines of the Simplified Quantity Theory of Money. The macroeconomic performance since that shift in policy view has supported the wisdom of that approach.

However, the current leaning toward more rate cuts to forestall a recession implies a that the Feds are either admitting that they really screwed the pooch with their previous rate increases, or there is a shifting back toward a Keynesian approach for policy making.

Under the Quantity Theory of Money, the only way the Feds should be considering a rate cut right now would be if inflation (mainly energy cost) is flat. But given the current increasing inflation rates, the Fed's should be thinking of standing pat or contracting the money supply to choke off even higher inflation down the road, not expanding money supply further with a rate cut.

Therefore, I have to conclude that Ben Bernanke is taking a big gamble that inflation will slow down on it's own. For that to happen, energy costs have to stop increasing soon, which is very unlikely. The Feds could be igniting a future inflationary period that will be very hard to stop down the road.

So far, I am very disappointed with Bernanke's decision making.

Wall Street Buzzing Over Rate Cut

Wall Street is abuzz with anticipation of Fed action later today. The only debate is will the Fed cut the discount rate by 25 basis points or 50?

25 or 50? Bernanke's Fed faces a key test

Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some are attracted to the somewhat strong move of a half-percentage point.

"While the arguments favoring a bold move are compelling, we believe the chances of a 25 basis point cut carry a higher probability," said Michael Moran, chief economist at Daiwa Securities America Inc., in a note to clients.

The Fed's are not exactly what you would call bold decision makers. Therefore, I say they will cut the discount rate 25 basis points while also quietly expanding the money supply via open market operations (which most of the public does not understand), and then they will sit back and see how things go.

Regardless of all the analysis and computer modeling they do, the Fed's will almost always just tweak rates by 25 basis points at a time and then see what happens.

By the way, this also presents a tasty profit opportunity out there for anybody who knows how to set themselves up correctly to take advantage of a rate cut.

Markets Continue to Lose Steam

The stock market continues to lose steam as the economy slows down.

Markets fall after dip in US jobs

Global stock markets fell sharply after shock US jobs data ignited concerns about wider economic prospects.

The surprise 4,000 reduction in the US workforce in August sent the main Dow Jones index down 250 points to 13,113.

Several thoughts come to mind. First, I would look for the Fed to continue to ease interest rates.

Michael Metz, chief investment strategist at Oppenheimer & Co in New York, reacted to the latest employment figures with gloom.

"It's dreadful ... it seems to me almost inevitable we're heading for recession," Mr Metz said.

The figures will add to pressure on the Federal Reserve to lower interest rates.

Fed chairman Ben Bernanke has stated that he is prepared to act to prevent credit difficulties sparked by the sub-prime crisis from damaging the US economy.

Second, that would mean a further lowering of the dollar value on the international market. That is not at all a bad thing, as it encourages exports to to other countries. But it will also make imported crude oil more expensive.

Third, one item that has been lost in all the recent economic news has been the change to the "uptick rule." The "uptick" rule was put in place by the SEC in 1938 and required short sellers to close out their short market positions after an uptick in the stock price.

That rule kept short seller speculators from spreading rumors and trying to drive the market down to make more money off their short positions.

Well, the SEC cancelled the uptick rule on July 6 of 2007. Consider the volatility we have experienced in the market since early July. I'm not saying all the market drops since July are due only to the elimination of the uptick rule, but it sure did not help.

I think the SEC may need to reconsider their change to the uptick rule.