Friday, March 20, 2009

Fed Head Strikes Again / Keep Your Eye On Gold


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

The numbers were hard to follow, and 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 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 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. (more)

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