Bernanke’s Stunning Plan

Wham! For a while, investors didn’t seem to know what had hit them. They were dazed…dumbfounded…awe-struck…

The Bernanke Fed announced a “stunning” plan to save the world from depression on Wednesday.

The numbers were hard to follow, but they were big:

$300 billion, was the number Bloomberg reported

$1 trillion, said the New York Times.

$1.2 trillion, countered the Washington Post.

It turned out that all these numbers were correct. The Fed was going to buy $300 billion of U.S. Treasury bonds…and more of other securities – notably bonds from Fannie and Freddie.

“Quantitative easing,” the papers called it.

“What’s that?” investors wanted to know.

So, it took them a while to put two and two together. But when they’d done the math they began to see what we’ve been warning about.

“This is a very powerful and aggressive move,” said the chief economist at Bank of New York Mellon Corp., speaking with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”

Bloomberg continues: “With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.”

What do we know? Maybe Ben Bernanke will be able to do what no central banker has ever done before: put in just the right amount of inflation…not too much, not too little. In the past, they tended to overdo it. There are not many examples. France, England and America in the 18th century. Practically no examples we know of in the 19th century (they’d learned their lesson!). And in the 20th century – only marginal countries…or countries with nothing left to lose…engaged in ‘quantitative easing.’ Germany did it in the 1920s, because her war reparations burden was greater than she could sustain. Argentina did it in the 1980s, because it owed too much money to too many foreigners. And Zimbabwe did it in 2003-2009, for reasons of its own.

There are not many examples because the consequences of over-doing it are so horrible, central bankers have generally not done it at all. Quantitative easing was always a possibility…but it was always a last resort…like blowing up the powder and spiking the guns; it was something you did when you knew you’d lost the battle already.

But here is the world’s biggest economy and its oldest (arguably) and most successful government…doing something that used to be done only by desperadoes…

What does it mean? Where does it lead?

We don’t know. But we don’t think we want to go there.

Investors didn’t seem to want to go there either. They sold off stocks and bought gold.

Gold shot up on Wednesday, after the Fed announcement. Then, it just kept going…adding another $70 yesterday. We wondered why the price hadn’t already hit $1,000. It looks like it soon will…this morning it is back over $960 an ounce.

Meanwhile, oil rose above $50, the dollar took a big drop and the Dow finished down 85 points. The greenback slipped to $1.36 per euro.

As to the stock market, whether this is a pause in the rally…or a reversal, caused by the Fed announcement…we don’t know. Our guess is that it’s just a pause. The rebound is still unfinished business. Besides, investors aren’t running scared like they were a few weeks ago. Sentiment seems more relaxed. “We’ll muddle through this somehow,” investors tell themselves.

And the news appears more positive…at least, if you stand on your head and look up it.

Jobless benefits, for example. They’re getting paid out to a record number of recipients. But not as many as economists had expected.

The leading indicators are down 0.4% in February – but not as much as expected.

And consumers are spending less money – but not as much less as expected.

And, of course, there’s the money flowing from Washington. The auto suppliers just got $5 billion. Obama’s budget will probably reach $2 trillion in deficit this year. And this extra $1.2 trillion from the Fed is not exactly small change. And that’s in addition to the $11.7 trillion the feds have already ponied up in their fight against a free market. Investors are going to look at this flood of cash from the Fed and figure that it has to go somewhere. Some of it is bound to go into the stock market.

Now, we turn to our friends in Baltimore to see what the have in store for us…

“The larger [monetary] story,” opines Rob Parenteau, lending a The 5 Min. Forecast a hand today, “can be found in the deleveraging effort of households, which accelerated in the fourth quarter of 2008.

“We have never seen such a sustained buildup of credit flows to the U.S. household sector like the one that began in the late ’90s. Nor has the U.S. economy experienced such a reversal of household credit flows since the Great Depression.

“Policymakers, investors and entrepreneurs need to grasp this essential piece of the puzzle:

“There are good reasons why the household sector is are paying down debt in an environment of declining asset prices and personal income. Falling asset prices reduce wealth faster than households can pay down debt.

“We believe this has a number of very important implications, not the least of which is for the restructuring of global growth away from a growing dependence on consumer debt binges in Anglo-American developed nations. Not to mention the policy objective of renewing lending to the private sector… it’s misguided.”

And yet, it’s the very core of the justification for the TARP bailout and the broader Congressional stimulus plan. Rob unpacks this phenomenon in the latest issue of the Richebächer Letter entitled “Deleveraging Demystified”.

The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill with more thoughts…

“Fed’s decision to put more money into the financial system reflects its worry that the U.S. economy is plagued by excess capacity,” says the Wall Street Journal.

As we keep saying, the economically correct thing to do would be to let the excess capacity sort itself out. People lose their jobs – and get new ones. Factories close down…and open up again, producing something else. Companies go broke…and new companies spring up to take their places. That’s what needs to happen. Then, after this restructuring, the economy can begin rebuilding on a more solid foundation.

But the Fed doesn’t listen to us. Ben Bernanke is determined to stop a Japan-style depression from happening in the United States – at all costs. And the only way he can possibly stop it – by his logic – is by increasing demand. Putting more money into circulation gives people more money to spend. It also raises prices – giving them a reason to spend it now.

“Will it work?” was the question put to our little band of analysts this morning.

“It depends on what you mean by ‘work’,” was the answer.

Bernanke has set the blaze…broken the glass…and pulled the alarm. Now, the sirens whine and the crowds form. He has no choice but to follow through. What that means is that he must continue fanning the flames…inflating the money supply (monetizing the debt)… until consumer prices rise (reflecting an increase in demand).

We don’t know how long that will take. But in that sense…it will work…sooner or later. Prices will rise…people will spend.

But what else? Do prices suddenly go wild? Or, do they gently rise…giving the feds time to get out the fire extinguishers before the whole economy burns down?

We don’t know. But here is a guess: between the time the flames shoot up out of the roof…and the time the feds have the conflagration under control…you’ll see gold over $2,000 an ounce.

*** Poor Tim. The U.S. Treasury Secretary is “out of the loop,” says one source. He’s “on thin ice,” says a member of Congress.

He appeared on TV and said he couldn’t stop the AIG bonuses. Then, the next day, his boss goes on the air: “Yes we can!” says he.

“US moves to take back bonuses,” says today’s Wall Street Journal headline.

Geithner has only been on the job a couple of months. And he’s had to deal with bailouts, meltdowns, regulatory restructuring. It’s a “crushing workload,” says the New York Times.

But it’s the bonus sideshow that gets people’s attention. And poor Tim is on the wrong side of the story.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to