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Crossing the Rubicon into the World of QE-2Gary Dorsch “Imagination is more important than knowledge,” the brilliant Albert Einstein used to say. Imagine for just a moment that the Dow Jones Industrials has become a key instrument of national economic policy, and that by “actively managing” its direction, the Federal Reserve could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. By ramping up the money supply, and slashing interest rates to zero percent, in order to inflate stock market bubbles, the Fed could in theory, fuel an economic rebound. Former Fed chief “Easy” Al Greenspan used to pursue an “asymmetric” monetary policy, - that is to say, - always quick on the trigger to slash interest rates whenever the stock market was melting down, but very slow to lift interest rates, when stock markets were booming. Traders coined the term – the “Greenspan Put,” to describe the Fed’s propensity to rescue the markets with huge injections of liquidity. Under Fed chief Ben “Helicopter” Bernanke, speculators have celebrated the easiest monetary policy in history, which earned Mr Bernanke the designation of Time magazine’s “Man of the Year,” in 2009, because of his love affair with running the printing press at maximum speed. After the Fed slashed the federal funds rate to zero-percent in December 2008, the Fed unveiled its nuclear weapon, “quantitative easing,” (QE), in order to jig the stock markets higher.
Conspiracy theorists have long talked about the clandestine activities of the “Plunge Protection Team,” (PPT), - a shadowy group of agents, acting at the direction of the Fed and US-Treasury, that coordinates the targeted buying of billions of dollars in stocks and stock index futures to cushion the stock-market during sell-off’s, and to prevent outright meltdowns. The PPT operates 24-hours per day, and often, buying spree kicks in during the last hour of NYSE trading, and thinly traded Asian hours, creating a short squeeze on bearish speculators. But now, with the implicit guarantee of the “Bernanke Put,” backed by the promise of zero-percent borrowing costs for years to come, it’s increasingly apparent that the Fed is in the business of rigging the stock market. It’s simply not wise to “Fight the Fed.” The conspiracy theories about the mythical PPT, were given an added degree of credibility on Nov 3rd, when Bernanke wrote in the Washington Post, that jigging-up the stock market, was in fact, the Fed’s key mechanism for bringing down the jobless rate, and spurring an economic recovery. “Easier financial conditions will promote economic growth. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,” Bernanke wrote, describing the “wealth effect.” Absent an economic recovery by early next year, bond dealers are already forecasting $400-billion for QE-3.
On Nov 5th, Professor Bernanke traveled to Jacksonville University in Florida. He tried to explain to a class of students, the basic principles of “Bubble” Economics. “We see an economy which has a very high level of under-utilization of resources and a relatively slow growth rate. The standard considerations suggest we should be using expansionary monetary policy, and that’s the purpose of QE-2. This sense out there, that QE is some completely far removed, strange kind of thing, and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy, quite the contrary. This is just monetary policy,” he said. Recounting his famous “Helicopter” speech in Nov 2002, Bernanke explained, “If pernicious deflation does take hold in the economy, there is a way out of the trap. You see, US-dollars have value only to the extent that they are strictly limited in supply. And 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. By increasing the number of US-dollars in circulation, or even by credibly threatening to do so, the Fed can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.” “If we do fall into deflation, we can take comfort that the logic of the printing press must assert itself, and sufficient injections of money will ultimately always reverse a deflation. Under a paper-money system, a determined government can always generate higher spending and hence positive inflation. A principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition,” Bernanke concluded.
Eight-years since Bernanke delivered his trademark “Helicopter” speech – his theories are being put into action. QE-1 and future QE-2 have lifted the Dow Jones Industrials above the 11,400-level, recouping all of its losses, following the default of Lehman Brothers. Likewise, the US-dollar has tumbled to below parity with the Australian and Canadian dollars and sunk to a 15-year low of 80-yen. Gold soared above $1,400 /oz, and silver hit $29.25 /oz, its highest in 30-years. While the Fed can unleash a tsunami of liquidity, it can’t always direct where the money flows. One of the students at Jacksonville, commented that even before the radical QE-2 experiment officially begins, there’s already been an upward explosion in the prices of a wide array of commodities, including crude oil, corn, cotton, copper, cattle, gold, heating oil, gasoline, rubber, nickel, tin, palladium, silver, soybeans, rice, and wheat. The Continuous Commodity Index (CCI) is skyrocketing in a V-shaped parabolic rally and is +84% above its Dec 2008 low. Perhaps, these forward looking market signals could become a harbinger of an outbreak of virulent inflation? To read the rest of this article, please click on the hyperlink below: http://sirchartsalot.com/article.php?id=147 ### Gary Dorsch 321gold Ltd |
