Guest blog: a letter from John Bartlett who contributes to this blog and monitors economics and finance, a place he knows well after retiring from Commerce Trust in St. Louis
September 21, 2012: For what it’s worth
There seems like so much to say, but at the same time so little. In my note of August 2, I ended with the statement, “We may be getting close to ‘put up or shut up’ time.” Well, it looks like the central banks of the world, particularly the U.S. Federal Reserve, have “put up.” And just in time for the U.S. elections, I would note.
Mr. Bernanke, mimicking Mr. Draghi of the ECB, said essentially he also will do “whatever it takes.” Not only is the Fed going to continue to maintain the zero interest rate policy until 2015, the Fed will begin to expand its balance sheet again by purchasing $40 billion MBSs every month. Note, there is no limit in time or total amount! If that is not enough, the Fed declared they will continue this policy well into an economic rebound. (Read, we are going to create inflation!) We are in totally uncharted waters, and no one knows where this will take us. As Jim Grant said yesterday on CNBC, “we are lab rats in this experiment.”
In the meantime, again, savers and retirees are screwed, as are ordinary citizens (the 99% everyone seems so concerned with) because of likely rising food and energy prices. The benefits flow mostly to the investment banks and to the “so called” 1% who have most of their wealth in financial assets, have the knowledge and flexibility to take advantage of free money, and are better able to hedge against any coming inflation. And, of course, the other winners are the politicians who think their deficit spending has no cost because Bernanke is covering their ass through interest rate manipulation. We are facing one gigantic misallocation of capital which will penalize the economy in the longer run as the Fed blows another bubble. Otherwise, it’s all great!
Plenty more could be said about this and what the ECB is doing, but, as I noted at the outset, there is also so little to say. Why? Because this was all so predictable. As I noted back in my note of June 15:
In any event, central banks cannot solve a structural problem with more money. They might, of course, start printing money like crazy to inflate away the mass of debt, and they might try (“QE to Infinity” as Jim Sinclair would say). In the end, however, that would only create more problems. There is no realistic way this situation can be resolved easily in the near-term. “There will be blood.”
QE to infinity is indeed here, and I doubt it will end well. As Jim Grant said in that same CNBC interview, “We are all living in a land of speculation and manipulation.”
I remember one of my best investment recommendations (well, one always remembers the correct calls!) to an endowment client back in 1982. In light of the inflation problems of the day, they wanted to buy gold and I stated, “I would sell gold and buy bonds.” Today, sell bonds and buy gold!!
And, if you think the central planners of the world are only concerned about the economy and the welfare of the people, think again. As reported today by Reuters, the EU-IMF report regarding more bailout money for Greece is being delayed until
after the U.S. elections in order not to potentially rock the financial markets. One of the European sources cited states, “As far as European leaders are concerned, they don’t want Romney, so they’re probably willing to do anything to help Obama’s chances…”
So, move on and let’s all just keep pretending there is nothing going on here! Have you heard the one about Egypt, Libya, and a video?
Be careful out there!
You can ignore reality, but you can’t ignore the consequences of reality. – Ayn Rand