``We have seen that each new control, sometimes seemingly innocuous, has begotten new and further controls. We have seen that for governments are inherently inflationary, since inflation is a tempting means of acquiring revenue for the State and its favored groups. The slow but certain seizure of the monetary reins has thus been used to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic direction of the entire economy. Furthermore, government meddling with money has not only brought untold tyranny into the world; it has also brought chaos and not order. It has fragmented the peaceful, productive world market and shattered it into a thousand pieces, with trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates, currency breakdowns, etc. It has helped bring about wars by transforming a world of peaceful intercourse into a jungle of warring currency blocs. In short, we find that coercion, in money as in other matters, brings, not order, but conflict and chaos.”-Murray Rothbard, What has Government Done To Our Money
No investor today can rely on traditional metrics to ascertain investment themes since the financial markets have been living on government steroids.
Government has fundamentally usurped the role of gods as they determine the winners or the losers or which industries or businesses deserve to live or perish.
Such evolving shift towards the consolidation and expansion of government’s power in the marketplace or ‘state capitalism’ will mold a new risk environment from which will determine risk capital’s rate of return and how capital resources would be deployed overtime.
Yet most of the current policies applied are designed to impact immediate concerns and appear to be shrouded with unintended consequences. Hence, any serious investor would need to read into government actions and project their repercussions to the investing sphere.
Government actions today appear to be in unison with the goal to combat threats of “deflationary” recession. The collective belief is that the slack in ‘demand’ prompted by falling asset prices will induce the public to hold onto cash instead of generating consumption via the restoration of the credit cycle.
Thus government policies led by the US appear to be directed at patching up the lapses from an imploding bubble.
The Bernanke Doctrine
The direction of policy actions or what I would call as the ‘Bernanke doctrine’ has been telegraphed to the public since 2001 and has been his deflation fighting manual. I guess most central bankers have adopted his strategy so the seeming “collaborative” and “concerted” efforts.
The US Federal Reserve recently cut interest rates from a fixed target to range between 0 and ¼% which it expects to hold “for sometime”. And now that the US central bank has moved rates to near zero level (Zero Interest Rate Policy-ZIRP), which leaves them limited room to use interest rate as ammunition, they are left with the terminal option of balance sheet management. The Fed recently announced that they would:
1) purchase assets directly from the market- “will purchase large quantities of agency debt and mortgage-backed securities” and “evaluating the potential benefits of purchasing longer-term Treasury securities”,
2) provide credit directly- “will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses” and
3) expand the use of the printing press “consider ways of using its balance sheet to further support credit markets and economic activity”.
Notice that these endgame tactics involve the short circuiting the banking system which basically has not been different from Zimbabwe’s Dr. Gideon Gono’s strategy of using the printing presses aided by the an expansive government.
The aforementioned FED monetary policies, combined with the present fiscal package and the purported $850 billion inaugural program for the incoming President Barack Obama, which are allegedly aimed at jumpstarting the economy, seems headed for such direction.
And the buck doesn’t seem to stop here.
``The biggest fear is that people will do too little…like a start-up that fails because it didn't do enough”, the Wall Street Journal quotes an anonymous Democratic leadership aide on President Obama’s inaugural stimulus program.
This captures what we’ve been saying all along…political motives will shape policy decisions more than economic concerns. Officials will use the cover of popular demand to continually spend taxpayer money organically meant to keep afloat its US dollar standard fractional banking system even to the point where Ben Bernanke could resort to the nuclear option of the printing press based currency devaluation to inflate away the unsustainable debt levels.
The desire to print money to solve economic ailments can only lead to further financial or economic disorders.
Bernanke’s Asymmetric Playing Field
Yet the shift from interest rate to balance sheet or money supply management policy comes with many unknown effects.
One, the directives of US monetary policy seems to revolve heavily towards Ben Bernanke. This makes him, unknowingly to the public, the most powerful man in the world, an unelected official. Remember, the world operates around the US dollar standard system from which Bernanke’s clout has been strengthening.
As we pointed out in Is Ben Bernanke Turning The US Federal Reserve Into A Dictatorship?, the concentration of powers towards the center, by bypassing legal requirements or procedures and circumventing organizational hierarchy in the decision making process, could signify as consequence to the ongoing policy directional shift from ZIRP to the money supply.
According to Economist Bob Eisenbeis of Cumberland Advisors, ``The size of the Fed’s balance sheet is largely dependent upon the Board of Governors and its lending programs and is not the province of the FOMC”, and since balance sheet management involves day to day decisions ``it is neither feasible nor practical for the Reserve Bank Presidents to move to Washington and meet daily.” Thus, the FOMC would probably be “mothballed” until ``the return of normalcy to policy formulation.” This explains the rational behind the apparent arrogation of power by Ben Bernanke.
Thus, the fate of the US and the world’s financial system (markets and banks) and even the economies now resides in the palms of Mr. Bernanke, see figure 1; ironically the same person who wrongly predicted the containment of the subprime crisis.
Two, informational changes in the size and composition of the balance sheet or Bernanke’s present actions will be critical to market participants. The assets which the Fed buys today or in the future will give undue advantage over the assets it won’t be buying. Thus the fate of the markets depends on Mr. Bernanke’s biases, values or priorities (marginal utility). As we always say, inflationary policies always favor those with closest ties to the government.
Three, since the Fed relies on 17 primary dealers (including some foreign affiliates) to implement its purchasing activities, the said institutions will have “real informational advantage” (since they have access to Fed activities) or an information asymmetric edge over most market participants. Essentially, such developments makes markets today tilted towards an insider’s game.
In all, Ben Bernanke has altered the global financial market’s landscape into a casino like environment by playing with a loaded the dice, constantly changing of rules in the middle of the game to suit his predispositions and fostering an uneven playing field-where he assumes the role of the house. His newly assimilated omnipotent powers will likely shape world markets, economies or even implicitly political developments which could be laden with a minefield of unforeseen consequences. Hence, the risks are that policy mistakes made by omission or by commission will exacerbate further suffering to the world.
Global Central Banks Adopt The Bernanke Doctrine
The switch from interest rates to balance sheet policy management isn’t a development restricted to the US as Japan and Switzerland has also joined the trend of consolidating central bank power to wrench open the spigot of money supply with the goal to “stimulate” their respective economies.
The Bank of Japan (BoJ) cut rates from .3% to .1% last week and declared that it would increase purchases of government bonds, including inflation-linked bonds, floating rate bonds and 30-year bonds, aside from commercial paper. It will likewise consider buying corporate debt products (forextv.com).
The Swiss National Bank (SNB) also slashed rates by half a percentage point, last week, from 3-month Swiss franc LIBOR rate of 0.50-1.50 percent to 0.00-1.00 percent, its fourth cut in two months.
With policy rates at zero levels, the SNB is said to consider “quantitative easing” (running printing press) through unsterilized currency intervention by possibly buying ``Swiss franc bonds to lower borrowing costs or try to weaken the franc either by verbal or physical intervention.” (IHT.com).
According to Morgan Stanley’s Joachim Fels (highlight mine), ``the may choose to implement QE partly through unsterilised currency intervention, i.e., buying foreign currency without offsetting the impact on their balance sheet through open-market sales of other assets. The reasoning behind this is that for small open economies like Switzerland, the exchange rate is a more important driver of the economy than mortgage rates or other interest rates, and in the case of Japan, currency intervention might help to stem the recent sharp appreciation of the yen.”
Both the SNB and BoJ basically will be utilizing the same Bernanke’s textbook approach!
So as global central banks become more desperate they are likely to resort to their home printing presses aimed at devaluing their currency against everyone else. This raises the risk of a currency war or a tumultuous upheaval in the present monetary system, especially when Mr. Bernanke opts for the nuclear option.
Again this reminds as again of Ludwing von Mises who presciently wrote in Human Action, ``The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”
The currency markets will be the natural release valve for all these accrued government actions in 2009.
Welcome to the Mises Moment.
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