THE FED: “STAND BY YOUR (MARKET)”

9/5/14

Wall Street’s perennial favorite parlor game has been trying to get into the head of whoever is Fed chairman and deciding when s/he will be adjusting monetary policy one way or the other.   See, for example, TAPER TALK, THE FEDAND THE FINANCIAL MEDIA:   WHAT WOULD JESUS SAY?, 12/19/13.  The last few years, and even the last few months, have seen this game in full swing.  Yours truly may as well join the fun since he is as likely as anybody else to be right…or wrong.

It’s general consensus that the Fed won’t be raising short rates until sometime next year, probably around the middle of next year, after winding down its quantitative easing (“QE”) on the long end of the curve by the end of this year as scheduled.   Yours truly suspects, though, that the consensus might be early on the increase in short rates.  Yes, today’s jobs number indicate that the economy remains shaky and still needs the methadone of the Fed’s easy money policy.  But further contributing to my belief that we might be waiting until 2016 to see the end of what I referred as Ben Bernanke’s (and now Janet Yellen’s) War on the Elderly is the dollar’s amazing strength.  As the financial media are nearly constantly pointing out, the dollar is now trading at its year to date high against the euro.  But the greenback is also at or very near year to date highs against the British pound and the yen as well.   This economy can’t take sustained currency strength against our trading partners/financial rivals, or so the popular wisdom, which this Fed rarely defies, would have it.  Hence rates will stay low a long, long time, especially since the European Central Bank (“ECB”) seems to have jumped on the “toss the paper out of helicopters…go on, it’s good for you!” bandwagon yesterday.  

This enthusiasm for competitive debasement of currencies doesn’t look like it will end well, but old codgers like yours truly have been saying that for years now and, so far, we haven’t been right.  For now, the party continues; the hangovers are tomorrow’s problems.

INVESTORS: HERE’S WHAT TO DO WHEN THERE’S NOWHERE TO GO or…

6/20/13

The S&P took a 2.5% dump today.   The Dow and the NASDAQ experienced similar debacles.   Commodities all took gas.  And bonds got pounded.   Rough day for the longs, indeed, especially coming after a similarly rough day yesterday.  Fortunately for the home team, I had some effective shorts (long put positions) in my trading account, but, as I have said in the past, that account is so small as to be laughable; it exists only to focus my thinking for these posts and my usual discourse with friends.   Like everybody else, I took a beating today in the real money accounts, as did everybody else; there simply was no place to go to be long.

What was especially interesting, and somewhat painful for the home team, was that emerging markets stocks performed even more poorly than “domestic’ stocks, whatever the latter might be, but that is grist for another mill.   Some have speculated, in fact, that the cause for today’s worldwide stock market debacle was not so much the Fed as troubles in the financial system of China, the uber emerging market.   I like that theory, though, as I have said in the past, opining on why a market did what it did is nearly as foolhardy as calling the direction of markets.  

Whatever the reason, emerging markets got pounded today more heavily than U.S. markets and have been having a difficult time of it for a lot longer than the last few days.  As someone who has outsized exposure to emerging market equities (roughly 30% of my equities are in emerging market indices), yours truly is especially feeling the pain of the emerging markets.  My problems are being compounded by a relatively heavy exposure to gold and other precious metals, which have also been taking on water of late.  My far greater exposure to Treasury Inflation Protected Securities (TIPS) (See my 2/2/13 post, YES, I’M STILL HOLDING ONTO MY TIPS, only the latest post in which I expressed misgivings regarding TIPS but decided to hold onto them.), which aren’t getting beaten up nearly as badly as stocks but are showing some very stock-like downside, compounds the problem.

So what am I going to do in response to the market moves of late?   Regular readers know the answer to this question:   NOTHING outside my insignificant trading account.   No one knows what the market is going to do; as I said in my 4/16/13 piece S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS.

My important point regarding stocks is that no one knows where stocks are going in any run but the long run and anyone who tells you s/he knows where stocks are going hasn’t been around long enough, or been sufficiently humbled by his or her hubris, to be entrusted with your money.

That point can easily be expanded beyond stocks to bonds and commodities.  So the only way to approach investing is, as I said in my 5/9/13 post OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.

Calling markets, especially in the short term is, as I have said many times in the past, is very difficult.  There ratio of people who can call short term markets to those who think they can call short term markets is nearly microscopic.  So, at the expense of sounding like a broken record, the best approach to investing is a balanced approach.  Hold some stocks, hold some bonds, hold some precious metals, and hold some cash.  Dollar cost average if you can.  REBALANCE REGLIGIOUSLY.   Let the market do what it’s going to do.  Leave the trading to those who can do it…and those who think they can do it.   Let them provide the liquidity you need to function as a long term investor. 

Nothing that happened today, yesterday, or in the last month or year has changed my long term risk preferences or my long term perceptions of what types of investments would best meet my long term investing goals consistent with those risk preferences.   TIPS, emerging market stocks, high dividend paying domestic stocks, the broad stock indices, precious metals, and some cash all make sense for me and thus all have a permanent, or near permanent, place in my portfolio.    So I will hold them all and REBALANCE, RELIGIOUSLY, from those that are doing well in a given period to those that are doing poorly in a given period.   I will thus achieve my long term goals and save myself a lot of anxiety, of which I have more than enough in other aspects of my life.

Investing can be difficult if one wants to make it difficult by trying to prove how smart one is.  If one is happy staying out of trouble while making decent returns on one’s money and one can display even a modicum of patience, investing is not that difficult.   Remain calm, don’t chase your tail, take a balanced approach, and REBALANCE RELIGIOUSLY.  And if one is not in the business of investing, paying little or no attention to the financial media, at least as it relates to your portfolio, would not be a bad idea, either.

DO WE ALL LIVE IN GOVERNMENT SUPPORTED HOUSING?

6/10/13

This morning’s (i.e., Monday, 6/10/13’s, page A2) Wall Street Journal contained an article by Nick Timiraos discussing the bull and bear cases for the housing market.  The bulls argue that demographics, primarily increasing household formation and falling inventories of housing units, and affordability should spur something of a housing boom.  The bears argue that the end of the one-time boosts to consumption that came about as a result of the broad introduction of two-income households and the democratization of credit should hobble housing.  The bears argue further that home financing will be harder to come by as banks tighten standards and first time home buyers are hobbled by student debt.

Given my normal predispositions, I tend to favor the bear case.   There is still too much household debt in the economy (See, inter alia, my 4/23/13 post THE ATTACK OF THE McMANSIONS FOR SALE:  A SECULAR BRAKE ON THE HOUSING MARKET for some statistics.) and incomes are not growing at a pace that will alleviate the burden of servicing that debt.  Banks, and investors, are understandably reluctant to lend to people who can’t pay back their debts.

Therein lies the problem currently plaguing the prospects for reinvigoration of the housing market, to wit, banks are reluctant to lend to less than creditworthy buyers and so the government, though Fannie Mae, Freddie Mac, or the FHA, still guarantees the overwhelming majority of mortgage loans made in this country.  The last I saw, the percentage of new home loans that are guaranteed by the U.S. government was about 90% and I suspect the number still hovers somewhere in that unprecedented, until the credit debacle of 2008-09, level.

Add the government being the ultimate guarantor of just about all new housing loans to Ben Bernanke’s War on the Elderly, i.e., the Fed policy of keeping interest rates low across the curve, that itself is designed in large part to support housing and you have a housing market that is nearly completely dependent on government support.  We talk about a stock market that is being propped up by Fed policy; the housing market is at least as dependent on Fed manipulation of interest rates to make housing “affordable.”

Add to that the argument I made in the aforementioned 4/23/13 post and yours truly finds little reason to be sanguine about the housing market.

THE FED’S EVOLVING APPROACH: REDUCING UNCERTAINTY BY INCREASING UNCERTAINTY

5/11/13

The Fed is apparently seeking to unwind its brobdingnagian stimulus program in an orderly, gradual manner.  Fed Chairman Ben Bernanke and his minions would also like to avoid upsetting the markets and hence is planning to provide something of a road map of the path it will follow back to what might be described as monetary normalcy if we had any idea what such normalcy is after all several years of monetary stimulus and de facto Fed economic management.   As Dallas Fed President Richard Fisher, one of the saner Fed figures, put it Friday

“We don’t want to go from wild turkey to cold turkey,”

especially in an environment in which the markets look to every Fed utterance for direction at best and for reasons to overreact at worst.

So the Fed says that it is concerned about sending mixed and confusing signals to the market.  However, at its last post-meeting statement, just a few days ago, the Fed stated that it is

“…prepared to increase or reduce the pace of its purchases” according to its view of the economic outlook.”

Philadelphia Fed President Charles Plosser said in an interview on Friday that the aforementioned post-meeting statement was designed

“…to remind everybody” that the Fed has “a dial that can move either way.”

“Increase or reduce the pace of its purchases”?   “A dial that can move either way”?

Do such utterances and references from Fed estimables sound like part of an effort to provide guidance and reduce market uncertainty?  

It is, of course, deleterious to have a monetary authority that has said that, in an effort to reduce uncertainty and provide the markets with guidance, it will decrease, but maybe increase, or, on the other hand, perhaps just pause its monetary stimulus in accordance with its outlook for the economy.  But the Fed’s seeming efforts to provide guidance by saying it will do whatever it feels like doing is especially dangerous in this era in which the Fed has been vested, by the government, the financial community, and itself, with powers that transcend monetary policy.  The Fed has become more than a regulator of banks and the instrument through which monetary policy is conducted; the Fed has become something of an economic czar, a central planner for the markets and, to a lesser extent, for the financial system and the economy.   See my 2/16/13 post CZAR BERNANKE’S DIKTAT:   BONDS MUST BE RICH, STOCKS MUST BE CHEAP.  When such an economic Wizard of Oz says that it has a “dial that can move either way,” and that policy will be adjusted according to the whims of perhaps three or four economic shamans, the markets, and consequently the financial system and the economy, are in a lot of trouble.

Contrary to much of the blather one hears in the financial media, the markets cannot, and should not, demand certainty; see my 1/14/13 post in the now defunct Rant Finance titled MARKETS DO NOT HATE UNCERTAINTY!, which is reproduced below for your convenience.   But a lack of certainty is one thing; an economic uberjuggernaut that deliberately sows confusion in the name of averting confusion is another.

PROMISED REPRODUCED POST:

MARKETS DO NOT HATE UNCERTAINTY!

1/14/13

Today I heard today, for about the millionth time in the last few years, an eminent investment expert say that

“Markets hate uncertainty.”

This utterance was the proverbial straw that broke the camel’s back.   I’ve been wanting to write this piece for months, if not years, and this last vocalization of this inane thought pushed me over the edge.  Perhaps I am picking nits here, but such an argument hurts the ears of this investment maven who’s been around longer than he’d like to admit and has invested more profitably  than most of the eminent experts.  

Markets don’t necessarily prefer uncertainty, but they don’t hate uncertainty.  To say that markets hate uncertainty seems to imply that there is some “normal” time during which there is no uncertainty, a period of, well, certainty to which the markets are accustomed.  

But there is NEVER a period of certainty in the markets.   If there were certainty, where would be the risk?   And if there were no risk, where would the potential for return? 

Markets might prefer periods of less uncertainty, depending on the price paid, in terms of potential returns foregone, for the marginal reduction in uncertainty.  But markets would never prefer a period of absolute certainty.   If such a supposedly halcyon state of affairs were to exist, why would we need markets?   And where would risk, and return, seeking investors go?

Markets constantly operate in an environment of varying degrees of uncertainty; the markets are an exercise in and a mechanism for dealing with and pricing uncertainty.  Risk is in the very nature of markets.   Markets cannot hate their very nature.

CAR LOANS: TAKE MY MONEY…PLEASE!

5/6/13

This may not come as a shock to those of you who have been shopping of late for cars and financing for those cars.   However, since I have not shopped in earnest for the former and never shop for the latter, I was floored…

I was talking to a guy the other day who will remain nameless but whom I trust implicitly; he wasn’t BSing me.   He had just bought a (slightly) used car and had no intention of borrowing any money to pay for it.   However, when the dealer offered him a loan at (Get this.) 2.25%, and practically begged him to take the money, he felt compelled to borrow at least a portion of the purchase price. 

2.25%???!!!!

Note that this wasn’t some kind of incentive deal; this was the rate at which the lender with whom the dealer was working was lending money on cars.

So I asked my friend what term we were talking about.  He said it didn’t matter.   The lender would have let him borrow at 2.25% for 36, 42, 48…up to 72 months.

2.25% for 72 months on a used (albeit very nice and not inexpensive) car???!!!!

I have long felt that the go-go car sales we have seen of late were largely the result of very cheap and available money; note my 4/25/13 piece IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8 in which I said

All this talk of pent-up demand and the age of the fleet has some surface validity, but you can be sure that if money were not so cheap and readily available for vehicle financing, and payments thus so low, people would be able to satisfactorily, and perhaps happily, drive their old cars for many more miles, given how well cars are built nowadays.  In other words, if financing cars were not so cheap and readily available, so called pent-up demand would stay pent-up.

 

News of this very cheap and very available money, even to a guy, like my buddy, with stellar credit, only confirms my suspicions that

1. Cheap money is propping up the car market, just as it is propping up the housing, stock, and bond markets.
2. We may be in for some rough time when (if?) the Fed ever pushes itself away from the table, even if ever so slightly.
3. While student loans remain the most likely candidate for the next big blowup (See my 5/5/13 post, TAMMY DUCKWORTH’S “ROUNDTABLE” ON STUDENT LOANS:   AIN’T THAT A KICK IN THE HEAD?) one suspects that car loans present another potential source of, er, unpleasantness.

BUYING THE 10 YEAR AT 1.66%: THE NEVER ENDING SEARCH FOR THE GREATER FOOL

4/29/13

Holly Liss, ABN AMRO Clearing’s director of Global Futures was on Bloomberg Radio just a few minutes ago talking about the upside potential of the 10 year treasury.   Ms. Liss is one of the brighter traders out there, or at least one of the brighter traders who appears on the financial media, so I generally try to listen when she speaks.

Ms. Liss likes the 10 year treasury, which currently yields 1.66%.   While she says that she can’t see the 10 year trading to a 1.00% (Gulp!) yield, as some bond bulls are arguing, she said she could easily make the case for a 10 year yield in the 1.30% to 1.40% range.   Her argument is straightforward:   the economy remains slow, Fed quantitative easing (“QE”) action will continue and will be skewed heavily toward the long end of the curve, a skew that will be exacerbated by the continuation of Operation Twist.   As regular readers know, I don’t feel equipped to make short term calls on any market (See my two 4/15/13 posts, GOLD:  YES, I’M SCARED…BUT I’M STAYING and SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?) and suspect that most people have a similar shortcoming, including, perhaps especially, those who claim the degree of acumen necessary to make such trading calls.  Nonetheless, it’s hard to argue with Ms. Liss’s logic, especially when she was careful to argue that she is not advising anyone to buy a 1.66% ten year and hold it to maturity; she is advising only a trade at 1.66%.   If she is right and the 10 year does trade to the 1.30% to 1.40% range, this trade will, of course, prove to have been very lucrative.

But think about this for a moment….

Again, Ms. Liss is not advising buying the 10 year at 1.66% and holding it to maturity.  Very few people with even a reasonably firm hold on their senses would advise such a strategy; if earning 1.66% for 10 years turns out to be a good, or even a not all that disastrous, exercise in positioning, we have a lot more to worry about than the conditions of our treasury portfolios.  

But by buying even for a trade, one is making the implicit assumption either that one is buying value for the long run or that a greater fool will come around quickly enough to relieve one of what appears to be a very malodorous long run investment.   In other words, if we buy the ten year (or any instrument, for that matter) despite not liking it for the long run, we are betting that someone, the greater fool, must believe that the 10 year is a good buy at a yield presumably even lower than 1.66%...or that the fool in turn can find an even greater fool to take him out of his position at an even more absurdly low yield.

This is a dangerous game of musical chairs.   I will let others who are confident of their ability to move quickly when the music stops play this game.   As a long term investor, I want no part of either aspiring to a miserably low yield for 10 years or betting that I can find someone with even more misplaced trading hubris to take me out of what I know, and presumably everybody knows, is a rotten long term position.   I’ll leave that to the clever people.

“TO WAR! TO WAR! THE (CENTRAL BANKS ARE) GOING TO WAR!...YOU THINK THIS (CURRENCY’S) IN BAD SHAPE, JUST WAIT ‘TIL I GET THROUGH WITH IT!”

2/19/13

European Central Bank (“ECB”) President Mario Draghi was an active participant in last week’s G-20 meeting in Moscow, the conclave at which financial officials from throughout the world fell all over themselves denying that they were engaging in manipulation of the value of the currencies under their tutelage.   Yesterday, Mr. Draghi again insisted that the ECB has no target for the euro’s value.

So why did Mr. Draghi, as this morning’s (i.e., Monday, 2/19/13’s, page A8) Wall Street Journal reported, suggest

significant further gains in the euro zone’s currency may prompt stimulus measures from the ECB.

If the ECB’s stimulus measures are designed only to juice the euro zone economy and any consequences for the euro are purely ancillary, why would further gains in the euro prompt further stimulus measures?   One could argue, with only a slightly out of kilter face, that a strong euro might hurt euro zone exports, slow its economy, and thus prompt stimulative action, but that would appear to an objective observer to be only a rationalization.

Mr. Draghi’s engaging in at best only slightly clothed currency manipulation is also indicated by his also saying yesterday

“The exchange rate is important for growth and stability.”

On the other side of the world, new Japanese Prime Minister Shinzo Abe is threatening to attempt to legislate a less independent Bank of Japan (“BOJ”) if the bank doesn’t reach the 2% inflation target the BOJ set under pressure from Mr. Abe.  At least Mr. Abe is threatening to eliminate the BOJ’s independence legislatively; in this country, the Bush/Obama Administration stole the Fed’s virtue (to little protest from, indeed the willing submission of, Obsequious Ben and His Merry Men) without bothering to deal with the niceties of the law.

It’s bad enough that the world’s central banks are obviously engaging in a currency war.   That they are out and out lying about it, and assuming that we are too stupid to see through their diaphanous ruse, is perhaps even worse.

BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY

1/29/13

Yours truly has been alarmed for years now about the aggressiveness of the Fed’s monetary easing; in fact, I feel so strongly about it that I made it the subject of my final post at Rant Finance, P/E RATIOS, EASY MONEY, AND OTHER FINAL THOUGHTS FOR MIGHTY INSIGHTS AT RANT FINANCE

which I have reproduced below.  

The Fed’s easy money policy of zero short term interest rates and at least three rounds (but who’s counting?) of quantitative easings (“QE”s) was ostensibly designed to somehow remedy a problem born of too much spending and borrowing by encouraging more spending and borrowing.  In the process, the policy has financially decimated much of our nation’s elderly population who had the temerity to actually save and invest rather than, as the Fed would advise, follow the advice of my warped generation and spend every last penny and then some out of a perverse notion that spending like a fool will somehow make on happy, fulfilled, and intelligent looking.  Not only have the elderly been tossed over the cliff, but easy money also has the potential to do for our currency what the Fed has already done to the elderly. 

The stated primary goal of Ben Bernanke’s war on the elderly and the greenback is to stimulate the economy by making borrowing and spending cheaper.  A secondary, not often stated, but never denied goal of the Fed’s easy money policy is to force up the price of stocks and other risk assets.  The Fed has so far failed to have much luck stimulating the real economy; we are still growing at a mediocre, at best, pace.  But the Fed has done a remarkable job of stimulating the stock market; note the doubling of the market since Obsequious Ben and His Merry Men embarked on their not all that brave crusade against saving.  The relative success of the efforts to stimulate the economy and goose the stock market have led both the cynical (I prefer realistic.) and the not so cynical to suggest that indeed the primary motive behind the Fed’s rapid easing strategy was to save the stock market and Wall Street rather than the economy.

So how has the Fed managed to succeed in propelling the stock market to levels that seem, to some of us, out of line with paltry progress of the real economy?   The most stated, and obvious, means of sparking the market is pushing the elderly (There Ben goes again!) and other risk averse investors out of safe investments like CDs and money market funds and into the stock market.   The guy who is getting zero on his savings, and thus rapidly eating into his nest egg, looks to earn something somewhere, so he goes into dividend paying stocks or longer and/or less creditworthy bonds.   He is more exposed than he would like to, or should, be and will get cold-cocked if (when?) the stock and other riskier markets head back down, but Ben Bernanke and his pals (and future employers) on Wall Street are happy, so who cares?

There is a less obvious way, however, that the Fed’s easy money policy has goosed the stock market.   The policy has directly driven down treasury and mortgage backed securities rates but has also brought down interest rates along the maturity and credit spectrum.   Even high yield, or junk, bond rates have been brought down dramatically since just about all rates key off treasuries and one of the receptacles of yield seeking money is the high yield bond market.   Spreads in the high yield market are tight, though not alarmingly so.   But given the low level of treasury yields, absolute yields on junk bonds are at or near historic lows; the ETF HYG is yielding around 5.3%, while another popular high yield index, the FINRA-BLP Active High Yield U.S. Corporate Bond Index, yields around 5.9%.   These yields stagger yours truly, who made his bones in the high yield market back in the ‘80s when junk yields were routinely twice as high, but I digress.

With the thirst for yield driving down the price of junk financing, it becomes very cheap for private equity firms to finance leveraged buyouts (“LBO”s).   Indeed, as the Wall Street Journal reported last week, LBO activity is picking up and is expected to ramp up further given the seemingly improving economy and the easy and cheap availability of junk financing.  This not only puts a big quantitative, and larger qualitative, bid under the stock market, but it makes a lot of people richer:  private equity guys, investment bankers, bond salesmen, Wall Street lawyers, to name a few.   So, in the eyes of Obsequious Ben and His Merry Men, the mission has been accomplished.   After all, it is not the elderly middle class saver who will be writing the checks when these monetary estimables at the Fed decide it is time to cash in on their years of “public service,” so who cares that this policy of enriching Wall Street has impoverished our senior citizens?

PROMISED EARLIER POST:

P/E RATIOS, EASY MONEY, AND OTHER FINAL THOUGHTS FOR MIGHTY INSIGHTS AT RANT FINANCE

1/28/13

Stock prices, interest rates, and one of my recurring topics at Rant Finance, worldwide monetary laxity, occupy my thoughts as Rant Finance winds down and yours truly moves on to a new blog, Mighty Quinn on Politics and Money.

--Some argue that stock, even after the breathtaking rally of the last several weeks, are cheap, citing the S&P’s price/earnings (“P/E”) ratio of about 14.   Bulls further elaborate on this argument by stating that, while 14 is not a rich multiple even under “normal” circumstances (debatable, according to yours truly),with interest rates still not all that far from historic lows, the market’s multiple should be much higher.

Whether stocks are cheap or rich is beyond me; back when I was young and knew everything, I was in the habit of telling anyone who showed even the list bit of curiosity or interest what I thought about the level and direction of the stock market.   Now that I have been around for a few trips around the block and have seemingly lost a great deal of my former smarts in the process, I am nearly always agnostic on the direction of markets.  (I elaborated on the futility of trying to call markets in one of my first posts on Rant Finance, NOSTRADAMUSES ON PARADE, 5/7/12.)  But even if one thinks stocks are cheap at these levels, the “multiples should be much higher at these levels of interest rates” argument is a poor reason for such bullishness.  

Interest rates are not low due to natural market forces such as the sluggishness of the economy or a consensus regarding the quiescence of inflation; rates are low because the Fed has done everything it can to keep them low and has stated that it will continue to do so for the foreseeable future.   People know that rates are artificially low and that this Potemkin low rate environment cannot last forever.   Thus, the multiple expansion pressure that low interest rates normally exert is, in all likelihood, not a factor in the present rabbit hole monetary environment we are experiencing.

--Speaking of the present rabbit hole monetary environment, one of my recurring themes in my musings on this site has been that world monetary authorities have completely abrogated their responsibilities to maintain the values of the currencies over which they have been given tutelage.  See, for example, my 10/23/12 piece,  ARTIFICIALLY LOW RATES:  FROM MR. BIBLE’S LIPS TO GOD’S EARS and my 9/11/12 piece, A LOOK AT MARIO DRAGHI FROM THE FAR SIDE and the posts to which they will refer you.

The latest incidence of the monetary authorities tossing their inflation responsibilities over the side in order to provide some temporary juice to their domestic economies is the wholesale printing of yen by Bank of Japan (“BOJ”) President Masaaki Shirakawa has been undertaking at the behest of new Prime Minister Shinzo Abe.   (See my 12/19/12 piece, SHINZO ABE TO THE BANK OF JAPAN:  BE MORE AMERICAN!)  Yes, Japan has plenty of problems, only one of which is the constant fear of tipping into full scale deflation.  And, yes, some monetary loosening is needed as part of a comprehensive cure for Japan’s problems, if indeed such a cure is possible.   But German Chancellor Angela Merkel and Bundesbank President Jens Weidmann were right last week when they accused Messrs. Shirakawa and Abe, and Mr. Shirakawa’s colleagues among world monetary authorities, of engaging in a wholesale currency war, heartily joining in a competition to see who could debase his or her currency the most quickly and decisively.   The credibility of Ms. Merkel and Mr. Weidmann would be stronger if they did not allow themselves to be rolled by their colleagues in the eurozone, but that is grist for another mill that has been visited on numerous occasions on Mighty Insights at Rant Finance.  See my 6/29/12 post “PICTURE SHOW, SECOND BALCONY, WAS THE PLACE WE’D MEET, GO DUTCH TREAT, YOU WERE SWEET...” and my 5/3/12 post, DANKE SCHOEN, CHANCELLOR MERKEL. 

If the rest of the world doesn’t become more German on monetary matters, indeed, if the Germans don’t become more German on monetary matters, there is little hope for the future of fiat currencies.   Since most central bankers, and most saliently our own Ben Bernanke, have chosen to abrogate their responsibilities and show no signs of becoming more Teutonic in their approach to their jobs, it is hard not to hold gold, silver, and other alternative stores of value, even at these seemingly inflated prices.

FEDERAL SPENDING: MAKE THEM PAY!

1/26/13

In her weekly column in this weekend’s (i.e., Saturday/Sunday, 1/26-1/27/13) Wall Street Journal, Peggy Noonan makes the following statement in arguing against the fiscal policy of Barack Obama and for fiscal prudence:

“Some, especially those who are younger, do not fully understand that what is supporting them is actually coming from other people.   To them, it seems to come from ‘the government,’ the big marble machine far away that prints money.”

Under normal circumstances, Ms. Noonan would be right, as she usually is.   But these aren’t normal circumstances; in the Bush/Obama years, we have fallen down the fiscal policy rabbit hole.

The hole in Ms. Noonan’s argument is, ironically, highlighted in her description of the government’s being, in some people’s perceptions, a machine that “prints money.”   In the modern Bush/Obama approach to fiscal policy, 30 cents of every dollar spent is borrowed.   So nobody is paying for roughly one third of the government services that people are demanding or are otherwise being handed.   One could argue that we are paying the interest on the money borrowed, but, at today’s near historically low interest rates, the interest on the debt is negligible.   Wait until interest rates return to “normal” levels if you want to see truly brobdingnagian deficits, but I digress.

Speaking of low interest rates, they are low because the Fed has aggressively expanded the money supply and targeted interest rates in its never ending crusade against elderly savers in order to reward the spenders and borrowers who got us into the economic miasma from which the experts tell us we are emerging.  The major component of this effort is purchasing treasury and mortgage backed securities with money that the Fed creates almost literally out of thin air.  In fact, the Fed buys roughly ¾ of net treasury borrowing in such a manner.  

So…

We are borrowing about 30 cents of every dollar we spend.   The Fed, in turn, is providing, by money creation, 75 cents of every dollar we borrow.   So what we have is a monetary policy problem perhaps as large as our fiscal problem.  Indeed, the monetary problem is probably larger because without such vigorous and energetic cooperation from the Fed, the government could not borrow, and spend, so much money.

So…

Ms. Noonan, who would be right under normal circumstances, is only partially right in the brave new world of BushObamanomics.  No one is paying for a large measure of the government “services” that are being provided.   We are effectively getting government at a 30% discount.   Nothing drives up demand like discounted prices; no wonder the demand, from all points along the political spectrum, for government continues to grow!

If indeed we want to throttle the growth of government (and yours truly and Peggy Noonan surely do), we should make someone pay for the government we demand.   Then those who have to foot the entire bill might be inspired to offer some spirited resistance to those who demand more and more from government.   No one likes higher taxes, especially yours truly.  But perhaps a balanced budget amendment that would wind up requiring higher taxes when people demand more government might be the most effective means of checking the seemingly never ending expansion of the federal leviathan.  Nothing else has worked.