Jackson Hole: Bernanke as a Magician
by Gary North: Your
Portfolio of Lies
appeared on MarketWatch on August 23: Get Ready for a Jackson
tough going in global markets and a raft of dismal economic reports,
investors and institutions around the world are looking to the
Tetons for Fed Chairman Ben Bernanke and the cavalry to ride to
the rescue yet again.
This is no
doubt true. The investment world really does await an announcement
of an economic cure-all. But what can the Federal Reserve do that
will restore the lost productivity? What can restore the weak recovery
that never did get off the ground on Main Street? The world answers:
"Federal Reserve digits." The investment world desperately
wants more fiat money. Its plans call for fiat money. The world's
experts are convinced that only a new round of fiat money can save
this stock market.
is in magic: the magic of something (economic recovery) for nothing
As the Fed
conclave begins this week, the question on everyone's mind is
will it be, as Yogi Berra said, déjà vu all over
again? And how can one position a portfolio of exchange-traded
funds for either a "yea" or "nay" on more
Fed action coming from Jackson Hole?
of a new round of quantitative easing say that the Fed will have
to act to try to avert what could quickly become a double dip
recession. Certainly the recent spate of dismal economic reports
would indicate that the soft patch in this economy just got longer
dismal was last week's shocking decline in the Philadelphia Fed
Index to -30.7 from a previous +3.2. This indicator has never
been at this level without a recession going along with it, not
to mention that it's the lowest reading in this indicator since
How will Federal
Reserve inflation reverse this? The FedFunds rate is at near zero.
Fear of recession had driven down longer rates. What can additional
monetary expansion accomplish? Businesses are not expanding. They
are not borrowing. They haven't in two years. Why will another round
of expansion persuade small business owners to borrow to expand?
On the other
side of the debate, analysts point out that inflation is on the
rise which limits the Fed's options while the Fed,
and Bernanke in particular, have become political targets of the
recent statements and positions of presidential candidates Texas
Gov. Rick Perry and Congressional members Ron Paul and Michelle
is no price inflation. Second, there really is public criticism
of the FED by people running for President. This has never happened
in American history. It is a positive development. It puts Bernanke
on the defensive.
So, on the
one hand, the investing public believes in the FED, believes in
digital salvation. These are the smart people. The voters to whom
Perry, Paul, and Bachmann are appealing to have lost faith. Conclusion:
the best and the brightest believe in magic. Common people know
ill for the future of the country. The common people are not in
charge and have not been ever since 1913.
new round of quantitative easing is likely not to be met with
approval from the emerging world, particularly China, or other
large holders of U.S. Treasurys and U.S. dollar-denominated assets.
We can safely
forget about them in a recession. They are mercantilists. They are
stuck with their own programs of monetary inflation. They will continue
to buy U.S. Treasury debt and European debt. They are trapped by
their own policies of inflation and subsidies for the export sector.
They can talk tough, the way Merkel talks tough. It's all for show.
To get an
idea of what may happen, one needs only to look at the history
of this Fed and its most recent statement. which said, "The
Committee will regularly review the size and composition of its
securities holdings and is prepared to adjust those holdings as
appropriate ... It will continue to assess the economic outlook
in light of incoming information and is prepared to employ these
tools as appropriate."
So, we are
expected to believe that this statement is important. OK, I will
now take him up on his challenge. I will look at the history of
the press releases of the Federal Open Market Committee over the
last five years.
will continue to monitor the economic outlook and financial developments
and will employ its policy tools as necessary to promote economic
recovery and price stability.
will continue to monitor carefully the size and composition of
the Federal Reserve's balance sheet in light of evolving financial
market developments and to assess whether expansions of or modifications
to lending facilities would serve to further support credit markets
and economic activity and help to preserve price stability.
will continue to assess the effects of financial and other developments
on economic prospects and will act in a timely manner as needed
to address those risks.
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North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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