Assets meet caulk!
Posted on 04/12/2011 6:13:53 PM PDT by expat_panama
When Federal Reserve Chairman Ben Bernanke this month kicks off regular press briefings, he'll likely face uncomfortable questions about whether his ultra-easy policies risk creating a new round of asset bubbles.
Critics inside and outside the Fed have taken aim at Bernanke's aggressive strategy and its long-term effects on bonds, commodities, stocks and more. They recall that the central bank's cheap money helped inflate the housing bubble whose debris has yet to be fully cleared.
"We are seeing the signs of all the intoxication that typically takes place when we have the ambrosia of cheap and readily available capital," Dallas Fed President Richard Fisher said in a recent speech.
Kansas City Fed chief Thomas Hoenig said current policies "almost certainly" will stimulate inflation and asset values. He specifically cited agricultural land values and junk bonds as frothy.
Fisher cited the re-leveraging of private equity as an ominous sign.
Rob Arnott, chairman of Calif.-based Research Affiliates, with $73 billion under management, sees bubbles in gold, commodities and U.S. stocks. Fed policies, he says, have pushed investors into these riskier assets.
Arnott says the Fed is "disingenuous" when it cites deflationary risks as a rationale.
"Commodity prices are reflecting the expectation of renewed inflation, not deflation," he said.
A Feature, Not A Bug
To a large extent, Bernanke believes inflating asset prices isn't a bug in his policies, it's a feature. He has touted stocks' rally in recent months as proof his second round of quantitative easing — $600 billion in Treasury buys — is working. He isn't very worried about commodity prices. And falling home values justify keeping borrowing costs low.
(Excerpt) Read more at investors.com ...
“his ultra-easy policies risk creating a new round of asset bubbles”
Paging Capt. Obvious
However I found this piece from IBD to be sane and informative. Enjoy guys!
It's not all the Fed, though, and it's not all the Democrats. Deregulation, particularly the loss of Glass-Steagall, combined with an increasing propensity for “novel” financial instruments created a high velocity, poorly understood monster as well, one that furthermore rode the back of the asset bubble created by all those years of easy credit.
It was going to unravel eventually and there was no one willing or able to clamp down on abuses that were readily apparent to even laymen observers. Revisit FR in the 2005-2006 time frame and you'll see quite a bit of “prescience” that was actually just the common sense so sorely lacking in those individuals entrusted with authority and responsibility.
It's no mystery why so many people are prone to accepting wild theories as to just why this occurred as it did. All the so-called smartest people in the room made out like bandits and left the financial system of the world in a complete shambles, with the US in particular being bled dry and still being bled dry.
--and the back of a Tylenol bottle warns of risking blindness, heartburn, death, flat beer, and dandruff. The question we really have to deal with is whether these "ultra-easy policies" are a good idea and worth the risk now.
Tell you what I’ll do. I’ll send 10 truckloads of caulk to the Fed so they can start inflating bubbles in their assets that have something more than air that could escape when the caulk runs out.
Will that work?
the so-called smartest people in the room made out like bandits and left the financial system of the world in a complete shambles,
Kind of sounds like Barney Frank saying the free market caused the problem and the government has to solve it. My take is the other way around, that government regulation (eg. affirmative housing action) caused the problem and the free market (eg. less tax'n'spending) is the answer.
Maybe so, but by the time the bubble was getting ready to pop the financial industry was making loans to people all up and down the economic ladder that couldn't afford them...
... and that would be the easy credit that began my response. It took two to tango. The government certainly isn’t blameless, far from it. The epic fraud in MBS alone indicts a fair amount of the financial industry, though. No oversight and no regulation meant fraud, trillions of dollars of it. Maybe that flies in Panama, and maybe you’ll always get the upper hand in fraudulent dealings. Good luck with that.
It’s a that we need less tax’n’spending and fewer experts in Washington controlling out money, and it isn’t affected by our individual situations whether it’s my paying US taxes in Panama or you doing what, living off them in North Carolina?
If you happen to believe in a Christian God, you probably should not overlook the enormity of the hubris committed by the Federal Reserve and the Treasury Department as they style themselves after the Creature. The new money is not printed, but spoken into existence in exactly the same manner as God created the heavens and the earth in Genesis.
However, unlike God’s creation it has no substance at any time. In spite of that people do exchange items of real value such as labor, cars, and food for words spoken over a phone by a twenty something Fed bond trader. This person calls a company such as Goldman Sachs that has an inventory of securities purchased from the Treasury Department, and pays let’s say $1 billion for ten year notes. Until the trader speaks “$1billion”, the money to pay for the notes does not exist.
One analogy to explain the looming inflation might be to consider a flood control dam. The water that builds up behind it during the winter and spring could be considered QE1, QE2, QE3, etc. The face of the dam would be the current moribund economic activity causing a very low velocity of money as indicated by such questions as “Why do I want to borrow if no one wants to buy? or “Why do I want to buy when I don’t have a job?” Now stagflation happens when the reservoir gets so full with QE’s that some water just has to go over the top, even though economic activity remains anemic.
But when economic activity picks up unexpectedly, and the velocity of money multiplies the QE’s shatter the face of the dam. Now just as a wall of water scours out the stream bed and washes all before it, inflation rages through the economy and destroys people’s financial asset values.
The thing that changes here is the velocity of money with increased economic activity. Typical of all central bankers, Bernanke believes his macro-economic models provide the necessary information for precisely timed money supply adjustments allowing him to identify and react to this increase in velocity. He would sell bonds and reduce the money supply with a precision that prevents inflation from taking hold or a recession from occurring. He would proceed in such a manner as to concurrently allay any fears of a Congress and an Administration in an election year. This result has probably not been achieved since the seven years of plenty and famine in Egypt when Joseph obeyed the word of God from his dreams.
Now all this seems fairly insane, until you realize that every member of the G-20 behaves in much the same way. Since all currencies have about the same connection to reality, finding one or several of sufficient magnitude to replace the dollar as a worldwide medium of exchange or store of value becomes perplexing. An individual country might think they have a solution, but they know they must also survive during the resulting chaos as all countries seek similar solutions. I imagine something like the final scene in “The Good The Bad and the Ugly”. The members of the G-20 are standing in a circle with open graves behind them. They are all contemplating how they are going to successfully outdraw the other nineteen members.
The Good The Bad and the Ugly: http://www.youtube.com/watch?v=sXldafIl5DQ
G. Washington beginning the first term as America’s first president created dollars into existence too. Tell us in as few words as possible why Washington’s money creation was good and today’s money creation isn’t.
Up to WW II any creditable currency was pegged to a gold standard, which would have included the money of Washington’s time as President. During the Revolution the Continental Congress tried printing paper currency not backed by real assets to pay for the war, and hence the tern “not worth a Continental”.
When WWII destroyed most economies of the world the United States prospered. The only way to restart international economic activity was for the U.S. to take the lead, which it did with the Bretton Woods Agreement. Every currency would have a fixed value in relation to the dollar, and the U.S. would keep everything functioning by buying and selling gold at $35 an ounce. Therefore, once again there was a U.S. gold standard and the dollar became the world’s reserve currency.
The U.S. unilaterally abrogated the agreement in August 1971, allowed the dollar to float in relation to the trading whims involving other paper currencies. Also, up until about 1968 people could still trade their Silver Certificates and Federal Reserve notes for the silver coins that quickly disappeared from circulation.
The problem at the present moment is that the dollar is backed by the full faith and credit of the government and nothing else. When much of the world looses faith in the U.S. as a reliable engine driving the world economy, then the dollar’s status as a reserve currency is jeopardized. Without any real asset backing the dollar, people are troubled by this country’s behavior and can decide the dollar is “not worth a Continental”.
It's strange how so many people say that, and all of these same people turn right around to use and trust dollars in their daily lives. Nobody's running to cash every check they get to buy something immediately for fear of lost buying power. Admit it or not, everyone acts like they expect dollars to retain their value enough that they don't mind keeping a few hundred bucks in an account paying 2 or 3 percent interest.
The reason dollars are so stable and dependable is because they are in fact backed by hard assets. We're not talking printed currency here because that's just a couple percent of the money supply. We're talking about how most dollars are created in banks when people hand over title to their farm/home/business. Dollars are created by --not the falsely accused Fed-- banks, every time they make loans on held collateral. These dollars are backed by mortgaged collateral.
Works for me.
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