Thursday, November 4, 2010

Ben puts $600 Billion on Black and What would You do with $1 Trillion? If You are Just Printing Money, Why Spend it on Bonds?

11/4/2010 Portland, Oregon – Pop in your mints…
Today Ben Bernanke and his band completed their encore, they effectively placed the fate of the US Dollar on a roulette wheel, betting $600 Billion that bond markets will trump the currency markets for the time being.  Ben and Co. believe that the bet is simple, red or black, and it has landed on red for over two years, so black seems like a reasonable choice.  What Ben doesn't realize is that regardless of where he places his bet, the casino of the US dollar system is falling down all around him.  As for the piddly sum of $600 billion, don't worry bond market participants, we'll get much more than $1 Trillion before this fiasco known as QE2 is finished.  But really, who is counting?
That is the point.  Why count something that doesn't really exist anyway?  Does the FED really have $600 billion sitting in a vault somewhere in the same way the US carries a strategic oil reserve in caverns in Texas and Louisiana?  Don't be silly, dear reader, we are giving them too much credit, as if they had planned for this sort of contingency.  A study of Zimbabwe's recent currency debacle informs us of the ultimate results of this sort of "unconventional monetary policy", the kind you don't find in textbooks.  At a certain point counting dollars will become as meaningless as counting raindrops in the air.  It is only meaningful if it hits the ground.  Right now, most of the FEDs stimulus is evaporating before it gets down to us.  But the air is getting thick and the pressure increasing.  Rain is on the way. 
 Another question that both haunts and delights us at the same time is this one: If you are just printing money anyway, and you are the first to get to use it, why in the world would you purchase US bonds with those funds?  I mean, if your goal is to stimulate the economy, why not directly buy houses, cars, or whatever else is currently being produced in mass that nobody else wants?  Come to think of it, when you put it in that way, US Bonds do fit the description!  The FED already owns 12% of the outstanding national debt and some estimates see this round of QE taking that sum up to 27%.  If printing $600 billion to buy US bonds really helped the economy, why stop there? Why not buy all $14 trillion worth and simply push the reset button on the whole insane system?  Didn't it work in Zimbabwe?
Grocery Shopping in Zimbabwe
Of course you and I know that printing money won't make people more prosperous, but judging from the US election results, it certainly seems to make them angry!  The FED, in its "unconventional wisdom", may bring the casino down sooner than we think!
Stay Fresh!