[A-List] Fwd: Mike Whitney: "Monetary Shock and Awe" - The Fed Prepared to Launch Most Radical Intervention in History

[Suzanne de Kuyper]

What China might do now that it is aware of the long term plans to
utterly control it is another bag of worms.  The longer it waits to
begin selling U.S. debt the less likely would be surviving the sell
off.   I assume.   Suzanne


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From: Global Research E-Newsletter <crgeditor at yahoo.com>
Date: Sun, Aug 29, 2010 at 1:05 PM
Subject: Mike Whitney: "Monetary Shock and Awe" - The Fed Prepared to
Launch Most Radical Intervention in History
To: suzannedk at gmail.com


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"Monetary Shock and Awe": The Fed Prepared to Launch Most Radical
Intervention in History
Bernanke's "Nuclear Option"

By Mike Whitney

URL of this article: www.globalresearch.ca/index.php?context=va&aid=20801

Global Research, August 28, 2010

The equities markets are in disarray while the bond markets continue
to surge. The avalanche of bad news has started to take its toll on
investor sentiment. Barry Ritholtz's "The Big Picture" reports that
the bears have taken the high-ground and bullishness has dropped to
its lowest level since March ‘09 when the market did a quick
about-face and began a year-long rally. Could it happen again? No one
knows, but the mood has definitely darkened along with the data.
There's no talk of green shoots any more, and even the deficit hawks
have gone into hibernation. It feels like the calm before the storm,
which is why all eyes were on Jackson Hole this morning where Fed
chairman Ben Bernanke delivered his verdict on the state of the
economy on Friday.

Wall Street was hoping the Fed would "go big" and promise another
hefty dose of quantitative easing to push down long-term interest
rates and jolt consumers out of their lethargy. But Bernanke provided
few details choosing instead this vague commitment:

“The Committee is prepared to provide additional monetary
accommodation through unconventional measures if it proves necessary,
especially if the outlook were to deteriorate significantly."

Check. There's no doubt that Helicopter Ben would be in mid-flight
right now tossing bundles of $100 bills into the jet-stream like
confetti if he had the option. But Bernanke is fighting a rearguard
action from inside the FOMC where a fractious group of rebels want to
wait and see if the recent downturn is just a blip on the radar or
something more serious, another tumble into recessionary hell.

This week, the markets were blindsided by two days of dismal housing
news, grim durable goods orders, a slowdown in manufacturing, and
modest gains in employment. 4 years later, and housing is still mired
in a depression. When does it end? Households and consumers are buried
under a mountain of debt; personal bankruptcies, delinquencies,
defaults and foreclosures continue to mount while politicians threaten
to tighten the purse-strings putting more pressure on families who can
barley put food on the table let alone pay the mortgage.

Just months ago, 57 out of 57 economists surveyed predicted that the
economy would avoid a double dip recession. Now they're not so sure.
Stock market gains have been wiped out and the S&P 500 has dropped 14
percent from its high in April. All of the main economic indicators
are testing new lows. The so-called "soft patch" is looking like
another hard landing. The fear is palpable. On Thursday, the Dow
slipped another 74 points by the end of the session. It could have
been worse. The markets have been holding on by their fingernails
hoping that Bernanke will bail them out. But it's going to take more
than the usual promise of low interest rates for an "extended period"
to boost enthusiasm. Wall Street is looking for the "big fix", a
trillion dollar resumption of the Fed's bond purchasing program (QE)
to pump up flaccid asset prices, electro-shock demand, and raise
consumer inflation expectations. The big banks and the brokerage
houses want Bernanke to rout the Cassandras and the gloomsters and
pump some adrenalin into sluggish indexes. The Fed chairman promised
to help.....but not just yet, which is why the markets continue to
seesaw.

Bernanke takes the threat of deflation seriously. His earlier speeches
laid out a deflation-fighting strategy that is so radical it would
shock the public and Wall Street alike. Here's an excerpt from a
speech he gave in 2002 which illustrates the Fed boss's willingness to
move heaven and earth to fend off the scourge of pernicious deflation:

Ben Bernanke: “My thesis here is that cooperation between the monetary
and fiscal authorities in Japan could help solve the problems that
each policymaker faces on its own. Consider for example a tax cut for
households and businesses that is explicitly coupled with incremental
BOJ purchases of government debt – so that the tax cut is in effect
financed by money creation. Moreover, assume that the Bank of Japan
has made a commitment, by announcing a price-level target, to reflate
the economy, so that much or all of the increase in the money stock is
viewed as permanent.

Under this plan, the BOJ’s balance sheet is protected by the bond
conversion program, and the government’s concerns about its
outstanding stock of debt are mitigated because increases in its debt
are purchased by the BOJ rather than sold to the private sector.
Moreover, consumers and businesses should be willing to spend rather
than save the bulk of their tax cut: They have extra cash on hand, but
– because the BOJ purchased government debt in the amount of the tax
cut – no current or future debt service burden has been created to
imply increased future taxes.

Essentially, monetary and fiscal policies together have increased the
nominal wealth of the household sector, which will increase nominal
spending and hence prices....from a fiscal perspective, the policy
would almost certainly be stabilizing, in the sense of reducing the
debt-to-GDP ratio....

Potential roles for monetary-fiscal cooperation are not limited to BOJ
support of tax cuts. BOJ purchases of government debt could also
support spending programs, to facilitate industrial restructuring, for
example. The BOJ’s purchases would mitigate the effect of the new
spending on the burden of debt and future interest payments perceived
by households, which should reduce the offset from decreased
consumption. More generally, by replacing interest-bearing debt with
money, BOJ purchases of government debt lower current deficits and
interest burdens and thus the public’s expectations of future tax
obligations." (Some Thoughts on Monetary Policy in Japan, Governor Ben
S. Bernanke, The Federal Reserve Board Tokyo, Japan, May 31, 2003)

Yikes! This is monetization writ large. Anyone who thought Bernanke
lacked cohones should reread this passage. The Fed chair is prepared
to launch the most radical intervention in history, monetary Shock and
Awe. But will the bewhiskered professor be able to persuade congress
to follow his lead, after all, the fiscal component is critical to the
program's success. They're two spokes on the same wheel. Here's how (I
imagine) it would work: Congress passes emergency legislation to
suspend the payroll tax for two years stuffing hundreds of billions
instantly into the pockets of struggling consumers. The Fed makes up
the difference by purchasing an equal amount of long-term Treasuries
keeping the yields low while the economy resets, employment rises,
asset prices balloon, and markets soar. As the economy accelerates,
the dollar steadily loses ground triggering a sharp increase in
exports and sparking a viscous trade war with foreign trading
partners. Then......it's anyone's guess? Either Bernanke's "nuclear
option" succeeds in resuscitating the comatose economy or foreign
holders of dollars and dollar-backed assets dump their gargantuan
trove of US loot in a pile and set it ablaze. It's all a roll of the
dice.


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