The weekend and this morning actually brought a revelation: there is intelligent life out there. Starting Friday afternoon, a few commentators began saying things like, "Hang on, what does this new Fed action really accomplish and are there any downsides?" Rhetorical questions both as the answers were stated as being, "not very much," and "there could be quite a few." The great unwashed (with the possible exception of Little Paulie Krugman) have begun to figure this out; the Fed isn't the problem nor is it the solution, but if they continue the debasement of the currency it will have startling negative effects not to mention the inevitable inflation (thank God food and fuel don't matter) followed by rise in interest rates when the markets finally say, "enough already!"
Did you know that the deficit has grown by almost 7 TRILLION dollars since 2007? It is hard to fathom such a figure. At yet, interest rates have come down because of the safe harbor offered by the U.S. Safe harbor? In a political sense, yes, but should interest rates rise (the 10 year is up to 1.84% from 1.46% a few months ago) even in the face of operation twist and now QE III the cost of servicing this Hydra will become unimaginable. And yet, on goes Mr. Bernanke with nary a dissent from his colleagues. And now people are beginning to notice but notice in time? I fear not. Be it the truth or not Mr. Bernanke is now being perceived as having cast his lot with the administration and if the perception remains past the election the institution, in spite of whichever party wins the White House, is probably forever and fatally damaged. And with reason.
As if this was not bad enough a result, there is even a worse one waiting in the wings. My generation has been severely damaged. Oh not me, I'm OK--not great but OK--but if you are retired and on a fixed income with no defined pension plan(s) you are in bad shape unless you have considerable wealth. You've probably lost a bundle in a stock oriented retirement plan (although the markets have come back) you are scared to death of the stock market and rightfully so, you earn nothing from a bank and bond yields probably don't cover the cost of living unless you don't eat and don't buy petrol which of course the government doesn't think you need. In short, you are not a happy camper.
The other guy who isn't happy are those members of our society called money managers which means they invest other people's money either by way of large co-mingled funds or through personal contact with their clients. They get paid in the first instance by the increase in the size of the asset pool they manage and in the second instance by the size of the pool itself. Now I'm weird; everything I have--more or less- is in energy or in one bank stock (at a very low entry price) but old folks are not like me. They want and need safe, conservative investments and today, safe, conservative investments yield nothing. Or to put it another way, nobody gets paid, neither the investor nor the investment manager. And therein is the biggest danger of all.
I was with my son's father-in-law this weekend and ran into a friend of the latter's. Retired, ran a small business for almost 50 years, knows nothing of "high" finance but thrifty and cautious as only a small business man could be. And yet, upon receiving a cold call from a guy at a recognized investment firm, he was ready to write out a check for $200,000 because this fund the cold caller was touting returned 8.87% last year. 200 large on a COLD CALL! Why? No interest, no income. We went over his house and looked at the papers he had received and claimed he didn't understand. The return was real all right; the gearing was nearly 40x. How the hell could you sell a man nearly 80 years old something like this? But how could anybody buy it?
What this mob in Washington has done is to create entirely new risk parameters for everyone not just those who can tolerate high risk but for many out of the necessity to survive. And they talk to us about predatory lending? How about suicidal investing created by their unbridled hubris and monumental stupidity. We are creating another bubble of unsustainable borrowing and impossible pay-back and where this one ends I have no idea. I kinda hope the Big Trader keeps me around just long enough so I have the opportunity to brace one of these fools and say, "I told you so." I'll go happily and quietly after that.
Unintended consequences? Yup. Read this paper(Ulta-easy monetary policy and the law of unintended consequences) from William White of the Dallas Fed. He used to be the chief garden gnome at the BIS in Basel.
ReplyDeletehttp://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
From the conclussion:
"it is argued in this paper, that the capacity of such policies to stimulate “strong, usstainable and balanced growth” in the global economy is limited. Moreover, ultra easy monetary policies have a wide variety of undesirable medium term effects ‐ the unintended consequences. They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the “independent “ pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign debt problems ina timely way, and redistribute income and wealth in a highly regressive fashion. While each medium term effect on its own might be questioned, considered all together they supportstrongly the proposition that aggressive monetary easing in economic downturns is not “a free lunch”.