Related topics: economy, Federal Reserve, Ben Bernanke, Treasury, Bill Fleckenstein
As I noted last week, one of the big-picture questions on my mind lately has been how much the next round of quantitative easing (aka QE2) by the Federal Reserve had already been written into stock prices.
I suggested that if the market did not deem the Fed's actions to be "just right," there could be a sell-off in various markets or even across the board.
Well, on Nov. 3, the Fed dropped the other shoe, and we got the official announcement about its plans.
QE-eww
With a wave of his magic wand, Fed Chairman Ben Bernanke committed to creating $75 billion a month out of thin air through June by buying government paper (or roughly $600 billion in all). That, combined with other buying the Fed is engaged in, comes to a total of almost $900 billion over nine months.
But, you may ask, how does the Fed create money? Isn't that the Treasury's job?
Bill Fleckenstein
In a nutshell, the Fed "prints" money by participating in the bond market. It buys Treasury bonds from other large financial institutions and pays for them by adding credits to the sellers' accounts at the Federal Reserve (as opposed to transferring actual cash). Poof! New money.
How can the Fed do this? There isn't room here for the long answer, but the short answer is: Because it is the Fed.
In any case, not only was there no major sell-off in any particular market, markets everywhere surged higher, which leads me to believe there is still a good bit more volatility (in both directions) in our future.
Bernanke moonlights at the Defense Department
If you didn't think the Fed was irresponsible enough with its money-out-of-thin-air policies, all doubts should have been laid to rest Nov. 4, when Bernanke took the unusual tack of defending his moves in a Washington Post op-ed piece headlined "What the Fed did and why: Supporting the recovery and sustaining price stability."
I am not going to go through his entire worthless apologia for the Fed's actions, but I do want to cover two points: first, his bass-ackward thought process regarding inflation, and second, the Fed's targeting of stock prices to achieve its goals (and possibly for validation of its policies).
Bernanke states in the article, "Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run."
That is complete nonsense. Under a sound and sane monetary regime, we could actually have deflation and real economic growth at the same time. As James Grant of Grant's Interest Rate Observer has noted in several articles over the years, that outcome has occurred many times over this country's history. A 2% inflation rate ensures nothing except that if that is your target, you will almost certainly get more. In fact, we already do get more, since anyone with a brain knows the Consumer Price Index completely understates inflation, given the hedonics, substitution and other fiddles.
A nonproductive argument
Bernanke goes on to say: "Although low inflation is generally good, inflation that is too low can pose risks to the economy -- especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation."
