The Dawn of Perennial Easing

George Rebane

[This is the transcript of my regular KVMR commentary broadcast on 27 September 2013.]

Something happened this week that will change the course of our country and our lives, something that few people noticed.  It happened while we were all in a lather about defunding Obamacare and funding government; while we worried about Iran’s nuclear bomb building and Syria’s civil war; while realizing that today Al Qaeda is stronger than ever, and while we are forgivably exercised about the sophomoric foreign policy and demonstrated ineptness the Obama administration has shown us during the last years.  And rightly so, but going forward, that is not what will trouble us most.

First, let’s put a bow on Obamacare.  The Republicans’ attempts to defund that legislative debacle will go nowhere.  The Senate will not pass anything that calls for such a castration, and the President will not relegate himself to sing soprano for the remainder of his term.  All the Republicans can do is to make themselves the scapegoats should it ever come down to a government shutdown.

But we do note that Obama’s continued refusal to negotiate legislation funding the government, on the excuse that we should always pay bills due through congressional commitments, is disingenuous to say the least.  His message is that such a negotiation would be the height of impropriety in governance.  Never mind that precisely such negotiations have been conducted by presidents of both parties for decades.  However, that point is not accessible to our government educated citizens.  These folks, enlightened by the current lamestream media, will never hear of it.

Eighty years coming, Obamacare remains the fulfillment of the entitlement state.  It is the natural add-on to Social Security, Medicare, Medicaid, and a slew of other entitlements.  If Obamacare works, then the US is on a one-way road to socialism - no ifs ands or buts.  And there’s the rub and reward of letting that unaffordable Affordable Care Act swing into operation as planned.  Americans will never renounce the socialist path if Obamacare is defeated by a complex congressional vote.  They need to see it swing into action unimpeded.  And when it then crashes and burns, then the resulting pain across the land just may convince us that socialism is not the future for America.

But let’s get back to the important stuff.  The Open Market Committee of the Fed met this week, and chairman Bernanke calmly announced that all the talk of ‘tapering off QE3’, or the current quantitative easing, is history.  You will recall that during the past year the Fed has been pumping about $85B a month or over $1T a year of new fiat money into the economy.  That is in addition to the multitude of new Obama taxes, and the ongoing borrowing that continues to increase our nation’s debt.

What the Fed really did this Wednesday is announce that we now have a new, ongoing, and permanent national policy.  Economics professor and investment pundit Ben Hunt puts it into sharp focus – “What Bernanke signaled this week is that QE is no longer an emergency government measure, but is now a permanent government program. In exactly the same way that retirement and poverty insurance became permanent government programs in the aftermath of the Great Depression, so now is deflation and growth insurance well on its way to becoming a permanent government program in the aftermath of the Great Recession. The rate of (the Fed’s) asset purchases may wax and wane in the years to come, and might even be negative for short periods of time, but the program itself will never be unwound.”

The Federal Reserve, historically charged only with maintaining stable prices, has donned a new mantle, or should we call it an ermine robe.  It will now become the final arbiter – judge, jury, and executioner – of the country’s economy in a manner that only an agent that can print unlimited paper dollars can assume.  We rejoice that the federal government will never again run short of cash, no matter the condition of the economy or how much it decides to spend.  QE3 is forever - debt and deficits be damned.

My name is Rebane, and I also expand on this and related themes on NCTV and georgerebane.com where the transcript of this commentary is posted with relevant links, and where such issues are debated extensively.  However my views are not necessarily shared by KVMR.  Thank you for listening.

Comments

[Michael Anderson]

Good one, George. I never did like the Federal Reserve, going back 4 decades, when I first understood what it was.

But what is the alternative? Who gets gas and brake? Riddle me that, Batman, and we will sail off together into the sunset with bells on our toes.

[George Rebane]

MichaelA 234am - The alternatives to the Fed are legion. Depending on your proclivities, you can pick any of them by just googling 'alternatives to the Federal Reserve'. Have a favorite?

[Todd Juvinall]

One scenario. The Federal Government will do to itself what it did to GM and Dodge. The bond holders will get screwed, the debt will decrease, there will be some blowback for a while and it will start all over.

We saw the demise of the USSR from their inability to keep up with the spending by us and they went the way of the DoDo. But as we have seen, the ruble has somewhat recovered, the new Russia and its Federation have stabilized somewhat and their currency is now excepted by the international community. They had hyper inflation for a while as well.

Also, the lesson from PostWar WW1 and the overnight changes their treasury made to stabalize their currency might be something talked about in those smoke filled rooms in DC.

[Michael Anderson]

I like Todd's 923am. And after a quick read, the Yeager-Greenfield System might be the way to go, as long as gold is a small portion of the bundle.

[Walt]

And all the while LIBS are claiming the "economy is healing just fine". So.... Just wait till the ink barrel runs dry.
The free money is going top stop sometime. Then what? Blame Conservatives?
In some dark room at the FED, someone sits at a computer adding
more zeros to the government's bank account. " See? we have plenty of funds."

The other thing that isn't getting much attention is the record tax revenue hauled in by "O" and Co., yet they still cry hunger,
demand more money to spend, AND more taxes.

The FED is buying up all this debt. With what? Where are they getting the "money", other than from the printing press?

The more we go down this road, the closer to " Atlas Shrugged"
we get.

[George Rebane]

ToddJ 923am - Do you really think that holders of Treasuries will be treated like holders of GM and Chrysler bonds were? That would be much more dramatic and send our credit rating into the toilet. The usual approach to screw national debt holders is to just inflate the nominal value of the bonds to an appropriate level of insignificance. As I have pointed out elsewhere, inflation is a government tax just as sure as the tax we pay to the IRS.
http://rebaneruminations.typepad.com/rebanes_ruminations/2008/05/investing-while.html#more

The real return R% from investment earnings E% when inflation is I% is given by R = (E-I)/(1+I). When taxes T% are paid on the earnings, then the real after-tax earnings RT% are calculated from RT = [E(1-T)-I]/(1+I). Here we see that the government hits you twice when it decides to inflate. You can also play with these formulas to see why it pays to borrow when the inflation rate is higher than the interest you pay on a loan.

[Todd Juvinall]

George, who ever thought the President could toss GM and Dodge bondholders into the toilet. Perhaps we need to think outside the logic box and think like unscrupulous politicians? What would happen if they simply monetized the debt? Print 17 trillion bucks and pay off the bonds? How about simply default? The USA is still here, there would of course be trauma in the economics but with half or more of the sheeple living day to day and/or have such a great love for the left what is the downside? I of course cannot tell the future but I think a hyper inflation will be the worst thing for people and perhaps cause them to rise up quicker. Default or monetization would be harder to pinpoint (at the supermarket) and so their political anger may not be as bad. I guarantee you the pointy heads like Reich, Summers and Geithner are studying all these things and working with the politicians in the White House.

[George Rebane]

ToddJ 207pm - I'll pick monetizing the debt over default at least 100:1. Default would put the economy into the toilet because our interest rates would go sky high and that would have a horrendous effect on business borrowing. Additionally, the debt service to budget/GDP ratio (the important one no one talks about) would quickly become unmanageable. At that point the feds and the Fed would have no choice but to run the printing presses from here to Weimar. So they might as well start the sub rosa monetization sooner than later. Does this make sense?

[Todd Juvinall]

Yes it does George. I have thought all along that they would monetize the debt which is the least physically disruptive. Besides, an economy and its money are what the people think it is.

[Bill Tozer]

Dr. Rebane may be correct in that we are stuck with the Fed and will be stuck with QE 1-129, then QE The Sequel, parts 1-47. It won't stop.

Noticed two days BEFORE the Fed decided to keep the pedal to the metal, Japan, Korea, heck, all of Asia took a tumble. Just the thought of easing put Governments and markets from Britain to South Africa in a tailspin and especially our friends that make our cheapo nick-knacks in India and The People's Republic of...(fill in the blanks).

We have become the World's bank. The old expression "when the US sneezes, the world catches cold" is no longer true. Its more like if the US even thinks of sneezing, the whole world is calling Suicide Hotline simultaneously.

Of course the US economy is still in the tank. Housing, which showed strength during the summer has reserved directions again. Countless jobs are not coming back, period. Well, maybe if millions start clamoring for new buggy whips or steam engines, then manufacturing will pick up...for a brief quarter or two.

Problems in Greece, Spain, Portugal, Italy, France, Ireland, Iceland, Russia, the entire non-Israeli Middle East, Africa, and Bumfu7k simply did not go away. Nor even Hawaii's problems, a friendly country to the west.

Nope, the Fed will keep on keeping on, especially considering what Obamacare is doing TO our economy. Even the unions are screaming foul as Obamacare caused consequences are "destroying the 40 hour work week", quote unquote straight from the AFL-CIO's mouth.

We cannot pay what we owe, we cannot ever ever pay our credit card debt. Minimum payments aren't even cutting it anymore.

Fiscal policy just wouldn't cut it. Had our chance but no political will. Brown bagging your lunch and skipping a Starsbucks coffee every now and then won't solve massive mind blowing National Debt. The only thing this Administration/Congress will do is to keep raising the credit card limit.

The only thing this Fed will do is to keep papering over the underlying stink. Need more money? Just print it. Numbers no longer mean anything. We are addicted to the printing press to pay for the ride. Monopoly money is all it is. 'Just say no' is now incomprehensible. No is such an easy word to say. A complete sentence. Just two letters. May never hear it again, even when the train runs out of track.

[fish]

Dr. Rebane may be correct in that we are stuck with the Fed and will be stuck with QE 1-129, then QE The Sequel, parts 1-47. It won't stop.

It will be interesting though when we start having bold issuance/sale failures and the FED really becomes the whole market. To those a little better schooled on the nuance of money creation.... isn't it at this point that the charade really starts to unravel?

[George Rebane]

fish 757am - You nailed it. And it's already headed that way since there have already been about $1T worth of Treasurys and mortgage backed securities that could not be sold to the market at the artificial prices paid by the Fed.

[Bill Tozer]

Yep, readers that follow the Fed are getting downright pessimist. A gloomy lot we have become....for good reason.

This whole thing is akin to check kiting. You are flat broke so you write a check from your BofA account and deposit it your Wells Fargo ATM and punch out 40, hoping to cover that before it bounces. If one is really really bold, he then 5 minutes later writes a check from his Wells Fargo account and deposits it in his BofA ATM and punches out 60.

I am not a prophecy gloom and doomer, but somewhere in the Old Testament is a passage about curses and blessings for countries. The blessed country will be a borrower from none and lender to many. A thousand will flee at the sound of one of the blessed. The cursed country will be a borrower from all and flee from a few of the enemy.

The Fed and the Gov't have a nice kite writing scheme going. The US is now the world's largest borrower. To borrow more, it sells IOU's known as bonds. The Fed buys up the IOUs with money that grows on trees. The Gooberment continues to sell IOUs to the Canadians, the Germans, Chinese, Japanese, Swiss, pension funds and little old ladies from Pasadena. The Fed then buys up the IOU's so the checks don't bounce, allowing the Gov't to continue to write more checks and issue more IOU's.

What me worry? Yes. Even having 72 virgins in the afterlife won't solve this one. Besides, that's a ton of estrogen that would be a curse as well, lol.

What possibly could go wrong.

[fish]

The blessed country will be a borrower from none and lender to many.

Your "blessed" lender may just find himself holding an empty sack Bill!

[fish]

....bold issuance/sale failures

Bold issuance? Bond issuance!

Proofread fail!