America’s Leaning Tower of monetary policy


WASHINGTON, June 7, 2012 – Short column this morning, as we’re unavoidably writing it just after the market’s opening which, thus far, is quite nice with the Dow up well over 100 points. We’ll see if it holds. Yesterday’s blowout, short-covering rally did. But there’s no guarantee of a positive two-bagger in this market.

Presumably everyone is waiting today with baited breath (whatever baited breath actually is) for Helicopter Ben to drop another big money bomb from the Fed’s secret UAV, which is currently hovering, invisibly, over the Department of the Treasury. For the uninitiated, the market wants the Fed to either hint at or even formally announce another round of Quantitative Easing (QE) which the less sophisticated among us quaintly defines as running the government’s paper money printing presses 24/7 to keep stocks up and interest rates down to the point of nonexistence.

Such actions would be great news for those laden in debt that they can never hope to pay off. But it would also be continued disaster for those living on fixed incomes or fixed income investments whose returns have hovered near zero since circa 2009. Our economic well being increasingly resembles the Leaning Tower of Pisa. It’s still standing, periodically needs to be shored up, but one day will probably collapse anyway.

America’s own “Leaning Tower,” near Chicago’s O’Hare Airport. Kinda symbolic of today’s monetary non-policy. But this tower actually holds water. Or did.

As we’ve mentioned in this and our companion column many times, but to no avail, it irritates us mightily to hear Republicans routinely denounce Ben Bernanke’s “Keynesian” response to the—oh, hell, let’s just call this the Great Depression II since it’s never really shown signs of ending, just deepening.

When an economy or economies persistently decline toward zero growth, persistently high unemployment, and commodity deflation, you need to take two steps to first stem and then reverse this disastrous tide. The first is running the printing presses, flooding panicking markets with so much liquidity that financial fears begin to reside and credit gradually becomes easier again for more and more people.

That’s what the Fed has been doing for nearly four years running. But to little result. Every time the Fed tries to put an end to QE policies—which it knows it eventually must do—the market takes a dive. But that’s because the second step toward ending the current debacle has never been taken, in spite of Ben Bernanke’s constant pleas for help from, you guessed it, a do-nothing Congress and a do-nothing President.

Democrats have, for three years running, absolutely refused to put any budget in force, as budgets might have to deal with serious, persistent issues and as candidly dealing with such issues might endanger incumbent Democrats. Therefore, the Democrats’ strategy, such as it is, has been to coast on the backs of the Fed’s easy money policy while refusing to go on record supporting any policy at all.

The Democrats’ hope, periodically borne out, is to have the Republicans advance a realistic budget; at which point the Democrats denounce and demagogue it to death as “tax cuts for the rich,” “racist,” and “unfair.” The object of the game is to vilify enough Republican targets to regain control of Congress in 2013.

But this is a cynical game, as the Democrats also refused to pass a budget when they were in complete control. The name of the game here is power. The Democrats no longer can explain to you just why they want the power. They just want it. And if the voters don’t give it to them, well, fine. They’ll just spend another X years blustering, refusing to allow budgets to pass, and letting the country and its citizens go straight to hell because, thus far, there have been no consequences to be paid for doing this.

In short, Congressional Democrats more closely every day have come to resemble a pack of willful school kids or teenagers in a snit. We’ll do it their way, or it simply won’t be done. And this is what passes for “representative democracy” in America 2012.

The President himself is even worse. It seems that this White House, bored to death by details of any kind, slaps a tome together every February that they call the “President’s Budget.” It never makes any sense, and even the President’s own party opening scorns it, but this Administration ritually throws such a “budget” over the transom every year to have it voted down—this year in a Senate vote of 99-0, a stunning display of unusually bipartisan contempt.

Which gets us back to the Fed. To solve our problems, we need to couple an easy money stance by the Fed with responsible budget priorities directed by a prudent Congress and put into action by an efficient White House team. But step two has never happened, nor will it happen under this administration. Which is why what Chairman Bernanke is doing is not quite working but which is also why he has no other choice in the matter, something conservatives don’t really seem to grasp.

We’ve been preaching this for what seems like—and probably has been—half a decade now, but we’ve never been sure that anyone has been facing up to the truth of the matter. Now, fortunately, we’ve discovered one who has, as was reported yesterday via one of our investment services, the ETF Digest. Dave Fry’s Wednesday evening column noted the following:

“Below is a quote in the conclusion of Richard Fisher’s (Dallas Fed President & non-voting member) speech which was little noted but struck a nerve nonetheless with yours truly:

“’And there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress. I believe that were we to go down the path to further accommodation at his juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington.’”

This comment by Richard Fisher is the best (and most brutally correct) short synopsis of the current political conundrum we’ve seen yet. It accurately sums up the recent performance of a batch of politicians for whom re-election is far more important than the well being of the constituents they allegedly represent.

Bottom line for today’s markets is this: If Chairman Ben makes nice noises today, yesterday’s brief but intense rally may continue for awhile, with the market melting up on relatively low volume as the remaining shorts are blown out of the water. But then it will sink yet again, due either to the latest European blunder—new French Prez, Socialiste d’Hollande, has just dropped France’s official retirement age once again to 62 from M. Sarkozy’s marginally more prudent 62!—or due to a continuing inability to create a coherent budgetary, tax, and business policy on the part of Congress and a brain-dead President.

So let’s enjoy what fun we may today as we continue, like yesterday, to wait for the arrival of Godot. Goodness this is getting boring.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.


Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17


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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17