Chief Hooligan Shows Up
The Russian press just reported that Russia's prime minister and former president Vladimir Putin has a rather low opinion of the policies of the Federal Reserve and the people running it. Reports RIA Novosti:
"Russian Prime Minister Vladimir Putin accused the US of hooliganism on Monday over the US government's efforts to ease its financial problems by injecting hundreds of billions of dollars into the economy.
"Thank God, or unfortunately, we do not print a reserve currency but what are they doing? They are behaving like hooligans, switching on the printing press and tossing them around the whole world, forgetting their main obligations," Putin told a meeting of economic experts at the Russian Academy of Sciences.“
We confess that we have a soft spot for the ex-comrade, for one thing because he has spoken up in defense of free market capitalism in the past, but also because he has this very undiplomatic tendency not to mince his words. The practice of shrouding everything into euphemisms and politically correct terms is refreshingly alien to the man. By our standards for evaluating politicians, he has very high entertainment value indeed. It is amusing that he apparently doesn't quite know whether he should be relieved or concerned that Russia isn't printing a reserve currency, but the fact that the US dollar still is the world's foremost reserve currency understandably creates a certain degree of consternation vis-a-vis the practice of 'QE' among its chief holders.
Shortly after Putin delivered this harsh verdict, the leader of this alleged flock of hooligans showed up at the semi-annual Congressional hearing in order to deliver his assessment of the state of the US economy and to explain what the central planners at the Fed are aiming to do about it. One could actually safely skip the official statement by simply looking at the intraday move in gold futures.
Gold bulls are probably happy with the Helicopter pilot – he helped add some zest to the recent rally.
Gold, daily – it has gone up for seven days in a row, in the process achieving a new all time high. Probably a pause is due after this long string of up days, but it seems every day a new reason to buy gold presents itself, from the collapse in euro area sovereign debt markets to Ben Bernanke hinting at more money printing.
A Change of Tune
We previously noted that the markets hated the June FOMC statement and Ben Bernanke's subsequent performance during his press conference. As an aside, these desperate attempts to improve the Fed's crumbling public image by purportedly 'increasing transparency' are bound to backfire: since the organization is not truly transparent by its very nature, chances are that press conferences will only undermine its image further, even though journalists tend to lob nothing but softballs at the good chairman.
Anyway, during said press conference in June, Bernanke seemed to say, 'yes, the economy is weak, but there's nothing more we can do about it.' He even seemed to distance himself from his critique of the Bank of Japan and its 'self-induced paralysis' as he once put it. These days, so he opined, he had more sympathy for paralyzed central bankers.
We sort of suspected that this performance was specifically designed to counter the growing political headwinds the Fed faces over its policies. After all, more and more people are wondering: if QE is really such a good idea, where are the results?
The same can of course be said of deficit spending, which according to everyone from Bernanke to the president and his economic advisers is absolutely necessary to help the economy escape from its extended 'soft patch' (generally known as 'the depression' on Main Street).
As NFIB (National Federation of Independent Business) chief economist Bill Dunkelberg recently remarked in this context:
“Small-business owners are registering a vote of ‘no confidence’ in the federal government,”
said NFIB Chief Economist Bill Dunkelberg.
“Between the deluge of new regulations and a Washington policy agenda that is largely ignorant of Main Street needs, stubbornly low consumer spending, and grave concern among small firms about the federal budget, there is not much to be optimistic about as a small-business owner. Who can blame the prevalence of pessimism when administration officials are telling Congress that small businesses need to pay more in taxes to support government spending programs?”
While Dunkelberg mainly refers to the problem of Ricardian equivalence here – the fact that economic actors regard splurges in deficit spending as nothing but deferred taxation – the Fed is an arm of the government as well, and we may safely assume that monetary policy hasn't impressed small business owners either – not least because they're not interested in borrowing anyway. As the NFIB survey notes:
“Nine percent [of business owners] reported that not all of their credit needs were satisfied, 53 percent said they did not want a loan and 13 percent did not answer the question and might be presumed to be uninterested in borrowing as well.”
Small business confidence index – headed back down again in recent months, after bouncing to a level roughly commensurate to previous recession troughs.
In his press conference, Bernanke came very close to admitting that the money printing exercise has simply failed. He did admit that he 'did not understand' what was happening.
As ABC reported at the time:
“The economy's continuing struggles aren't just confounding ordinary Americans. They've also stumped the head of the Federal Reserve. Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.
"We don't have a precise read on why this slower pace of growth is persisting," Bernanke said. He said the weak housing market and problems in the banking system might be "more persistent than we thought."
It was the Fed chief's most explicit warning yet that the economy will face serious challenges next year. For several months, he had said the factors working against economic growth appeared to be "transitory."
All in all, Bernanke seemed to say, 'things are bad, but we don't know why, and there's not much we can do about it'. This seemed a bit odd, considering his often enunciated strong convictions regarding the efficacy of central economic planning, Fed-style. We have always believed that what ensured his promotion to the post of Fed chairman in the first place was his famous 'anti-deflation speech' of 2002. In this speech he listed the policies the Fed would likely employ to counter the widely feared deflation bugaboo, which to his mind is automatically associated with an economic slump.
A first hint that the Fed has not yet given up on money printing was delivered with the publication of the most recent FOMC minutes a few days ago. Although the Fed seemed 'divided' as Bloomberg reported at the time, the key takeaway was this:
“A few members noted that, depending on how economic conditions evolve, the committee might have to consider providing additional monetary stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run,” the Federal Open Market Committee said in the minutes of its June 21-22 meeting, released today in Washington.”
On Wednesday, Ben Bernanke confirmed that he hasn't given up on the idea either. What has presumably swayed him were the recent poor employment data. It does not matter that 'QE' has so far failed to produce results – his conclusion is based on the misguided theory that what the economy needs to grow is 'more and cheaper money'. If it doesn't work, that is not evidence of failure, but evidence that even more of the same is needed. The underlying mental condition that produces such trains of thought is colloquially known as 'insanity'.
The decisive passage from the prepared remarks follows below:
“Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.
On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.”
(emphasis added)
Well, what do you know, there was his list of possible options to combat the (entirely imaginary, so far) deflation threat again – albeit a somewhat shortened version thereof. 'Operation Twist' remained unmentioned, and so did some of the other, more exotic proposals from his 2002 speech.
