The Bernanke Put Is A Lie

Many people believe that because Bernanke once talked about dropping money out of helicopters to fight deflation that he literally meant that he would do this if push came to shove. He didn’t. The whole thing was a bluff meant to prop up the markets: the famed Bernanke Put.

Truth be told, this bluff is probably the smartest thing Bernanke ever did. By threatening to leave a paperweight on the “print” button, he convinced the market and all of Wall Street that the Fed would always be there to step in and save the day.

Let’s say the Fed just hits “print” and prints TRILLIONS of dollars to monetize everything under the sun. If this happens then the bond market will implode taking down the US financial system with it (85% of the $224 trillion in derivatives sitting on US bank balance sheets are related to interest rates).

Moreover, it’s not as though “printing” solves a solvency crisis. Instead it results in a loss of faith in the underlying currency, which causes hyperinflation (this is exactly what happened in Weimar). Most people forget that hyperinflation is the SAME as defaulting: in both situations the underlying currency becomes worth much less if not worthless.

So printing is ultimately a useless concept. But what about debt monetization? Couldn’t the Fed just print tons of money to buy Treasuries and other debt instruments?

The last time the Fed instigated QE, food prices went through the roof resulting in riots and civil unrest around the globe. Today, food prices are already soaring due to severe droughts. The Fed’s hands are tied here.

If the Fed engages in QE, the political consequences would be severe. QE 2 alone made the Fed front page news in a BAD way, resulting in the Fed going into major damage control mode: op-eds about Bernanke being a regular guy, town hall meetings, etc.

Finally, one has to question… does the Fed really want to be draining Treasuries and Agencies from the banks’ balance sheets? After all, the big banks, which sit on over $200 TRILLION worth of derivative trades, only have $7.12 trillion in assets.

If the Fed were to engage in QE it would suck some of these assets out of the banking system resulting in the banks being even more leveraged and susceptible to collapse.

Bernanke knows this. He even admitted it recently, saying, “If the Fed owned too much TSYs and Agencies it would hurt the market.“

So the Bernanke Put is a lie. The markets will be realizing this in the coming months if not sooner. When they do, we’ll see the REAL Collapse: the one to which 2008 was just a warm-up.

Mr. Bernanke's Postponement Strategy?

Economics / US Economy
Aug 03, 2012 - 06:18 AM
By: Ian R Campbell

On Wednesday, August 1 Chairman Bernanke provided an update on the Federal Reserve's position on the U.S. economy. He commented briefly in a negative tone on U.S. GDP growth, unemployment, consumer spending and the housing sector. He said the Fed's U.S. inflation expectations remained stable. He reconfirmed the Fed's policy of reinvesting in U.S. treasuries until December 2012.

Mr. Bernanke did not announce the further quantitative easing the financial markets were broadly thought to be looking for, and that is said to be one of the primary reasons those markets have declined somewhat over the past two days.(The DJIA closed up 217 today)

My comments:

* if the financial markets indeed are instantaneously influenced (positively or negatively) by the addition or non-extension of U.S. quantitative easing I think that:

* in these uncertain and volatile economic times this confirms the financial markets today to be largely trading markets; and,

* this is highly worrisome because I see quantitative easing as simply an extension of the 'over-levered postponement game' that has been played out since 2008;

* that 'over-levered' postponement game' has succeeded to date in doing little but keep the U.S. (and to some degree World) very leaky economic boat afloat, but hasn't propelled it to meaningful economic growth - and hence has not propelled it to meaningful economic recovery;

* the Federal Reserve presumably has only 'so many arrows in its quiver'. Its lack of introduction of new quantitative easing at this time may be nothing more than it playing a waiting game to see what plays out in the Eurozone. Who wants to run out of bullets before a war is over?; or,

* in the face of continued U.S. monthly trade deficits, ever increasing National Debt, and all the other negative economic issues currently facing the United States as (or perhaps better said, 'some of which were') articulated by Mr. Bernanke in his Wednesday update, perhaps the Federal Reserve doesn't have as many bullets in its arsenal as some would have us all believe.

Yes, the markets are running to great extents on propaganda. That includes the many articles and broadcasts in late spring or early summer two years running: efforts to pressure fuel prices down and the dollar up for tourism. Government is getting more ~~money~~ debt each year from somewhere, though--some of it from the foolery delivered to bond investors (fund managers, that is) and the rest...from the excess, stealth printing, of course.

Currencies of net energy exporters with adequate manufacturing are beginning to hold up a little more (not so much "risk"). As for us, it appears that we'll be running mainly on agriculture and some energy production (not enough to support anything like the economy that we grew up with). Hello, fellow peasants.

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