Our heroine, Angela Merkel, made the front-page news yesterday. She stood up against almost every mainstream economist, politician, and central banker in the world – and gave them all hell.
“What other central banks have been doing must be reversed. I am very skeptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she said at a conference in Berlin.
“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.
“We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”
You go girl!
“This lady is currently the only person among all of our mighty and famous whom ordinary taxpayers in the western world can look to in order to hope for any protection of their interests,” says a letter writer to the Financial Times.
Of course, the professional economists and the earnest press all replied with the typical blah, blah, blah…
“Ms. Merkel’s intervention may be a political ploy and will probably come to nothing,” says the Financial Times editorial page. “But it is, nonetheless, harmful…”
“Ben Bernanke, the chairman of the United States Federal Reserve, said Wednesday that he “respectfully disagreed” with Angela Merkel, the German chancellor, about her recent criticism of efforts by the Fed and other central banks to stabilize Wall Street and the banking system.
“The US and the global economies, including Germany, have faced an extraordinary combination of a financial crisis not seen since the Great Depression, plus a very serious downturn,” Mr. Bernanke told lawmakers Wednesday morning at a House Budget Committee hearing, after being asked to respond to the chancellor’s remarks. “In that context, I think that strong action on both the fiscal and monetary sides is justified.”
“I am comfortable with the policy action the Federal Reserve has taken,” Mr. Bernanke said Wednesday. “We are comfortable we can exit from those policies at the appropriate time without inflationary consequences.”
Ha! That’s the question. Like Bill Gross, we don’t think the US can get out of its inflation-causing positions. It won’t want to act too soon – that’s the lesson Bernanke thinks he learned from the Japanese. And then, when it finally does act, it will be too late. It may want to unwind its positions by then, but the market winds will be against it. Bond prices will be falling – inflation will be responsible for that. The feds won’t want to dump more bonds onto a falling market.
Then, traders – especially the same Wall Street institutions that they are subsidizing – will take advantage of them. In effect, the feds will have a massive short position in bond yields. When yields rise, they will have to cover…and shrewd traders all over the world will know it. They’ll stick it to them…selling bonds ahead of the feds’ massive selling.
Finally, the feds will be hung out to dry…like Long Term Capital Management, but with no one to bail them out.
Until next time,
for Markets and Money