Yesterday, Federal Reserve Chairman Ben Bernanke announced that the government would not slow its bond purchasing (money printing) because the economy had not yet improved sufficiently. The magnitude of this decision is still being absorbed, but may have negative effects on the entire world in the coming years.
How exactly? This might be a bit wonky, but we’ll try to keep it light. Lets establish a few facts and we’ll see where it takes us.
1) Bernanke could have tapered, but decided he couldn’t afford even the modest rise in interest rates. This reveals how weak the government and the economy has become.
Consider that tapering of QE4 was priced in to the stock market, but it would have forced bond yields to rise significantly. Before Bernanke’s announcement, the 10-year was resting just below 3 percent, a unprecedented low level, but one that has been rising over the last 6-months. If the Fed slowed its money printing, the cost of government borrowing would have risen significantly and suddenly — adding perhaps as much as $170 billion a year to the debt. That the US government could not absorb this minor instability shows how week the government and its currency have become.
2) Despite propaganda to the contrary, the Fed’s manipulation of interest rates doesn’t save money, it takes it from everyone else and gives it to connected elites.
It should have been clear the day before the announcement that the Fed had no intention of tapering because the newspapers were filled with articles talking about how great QE was for American companies. Take this “news story” from Bloomberg:
“America’s companies, from Apple Inc to Verizon, are saving about $700 billion in interest payments with the Federal Reserve’s unprecedented stimulus.
Corporate bond yields over the past four years have fallen to an average of 4.6 percent from 6.14 percent in the five years before Lehman Brothers Holdings Inc.’s demise, a savings equal to $15.4 million annually per every $1 billion borrowed.”
This is a clear distortion. When interest rates are manipulated lower, the government is allowing one group to steal money from another’s pocket. In this case, banks and other large corporate entities can borrow and expand with little risk, but pension funds, savings accounts and insurance companies all have lower rates of return on their investments.
3) Forcing interest rates lower endangers pensions, insurance companies, savers and anyone else who relies on an investment for income.
Imagine a recent retiree who saved $150,000 over their entire life. They would earn about $10,000 every year with interest rates between 6 and 7 percent. Now, with interest rates at 0 percent, they need to make due with nothing. This money they would have earned is kept by their bank and is indirectly transferred to Wall Street.
Further, as we have well documented, insurance companies who are required to invest their money in ultra-safe, low yield bonds are often on the verge of bankruptcy. Michael Snyder at the sensationally titled (but accurate) Financial Collapse Blog writes:
“According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for state and local governments across the United States is $4.4 trillion. America is continually becoming a poorer nation and all of that money is simply not going to magically materialize somehow… That isn’t just a trend. That is a tidal wave. And many of the private pension plans that still exist are massively underfunded. For example, Verizon’s pension plan is underfunded by $3.4 billion.”
Cities in Rhode Island, Florida, California, Pennsylvania, Illinois and Alabama that are experiencing funding issues with their pensions. New York State is actually borrowing from it’s own pension fund to pay current beneficiaries! Even the proposed budget cuts at the Pentagon are focused less on cutting back weapons of war than cutting promised pensions because they are “overly generous compared with civilian benefits.”
4) Artificially lower interest rates sustains otherwise unsustainable debt.
When the only growth an economy can produce is based on debt, keeping that debt affordable is essential. If you were to buy a $250,000 house at a rate of 4 percent, your monthly payment would be about $1,200. Clearly doable for a couple who both have decent jobs. If rates rise to 8 percent, the rate they were in the mid to late 1990s, you would need to pay about $1850 per month. The final cost of the house would be $150,000 more than if interest rates were 4 percent. This would kill almost all market demand.
You can’t even say that QE is good for prospective home owners because if rates were allowed to rise, demand would collapse and the prices for homes would fall to their true value. Buyers would save literally hundreds of thousands of dollars in principal and interest payments. The same arguments could be made for student loans and car loans. The only people who benefit from this kind of manipulation are those in the business of selling debt.
5) Bernanke is backing the country into a corner.
If the government and the economy as a whole cannot absorb a modest increase in the interest rate, how will it handle the increase when those rates finally do increase? The nation’s debt will be greater then, and if Bernanke has his way, so too will private debt.
Market Analyst Karl Denninger concurs. He writes:
“What Bernanke did yesterday was guarantee a crash. He guaranteed it because he took what was a clear opportunity to take what had been priced into the market and execute on that and squandered it, effectively turning the crack whore into the person in charge of the crack supply. He blew his own brains out and doesn’t even realize it.”
Bernanke’s attempt to forestall a rise in interest rates wasn’t even successful. After his announcement, yields fell about 0.2 percent, and would have offset government debt by about $15 billion a year — if it had stayed there — but yields are already rising and will likely be back near 3 percent by next week.
6) Even the French Bank Societe Generale’s analyst condemned Bernanke’s failure, likening it to the Weimar Republic’s monetary policy which caused a massive hyperinflation.
He wrote:
It’s like they’re on a train which they know to be heading for a crash, but it is accelerating so rapidly they’re scared to jump off. This is exactly the train Rudolf von Havenstein found himself on as President of the Reichsbank during the German hyperinflation.
According to Liaquat Ahamed’s work on von Havenstein’s dilemma, in his majestic book ‘Lords of Finance’:
‘Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s [then] fragile state might precipitate a real political convulsion.’
If the major French bank is condemning your monetary policy, you might want to stop and take note. It would be like JP Morgan himself clawing his way out of the grave just to say you’re out of control.
7) Bernanke may have been forced into the situation by the White House.
Currency expert Jim Rickards suggested that Bernanke’s possible replacement may have been held hostage by the Obama administration who clearly wants more easing, least the economy tank on their watch. While the Fed is supposed to be independent of government interference, clearly power games such as this take place.
If true, then the Obama administration knows the ship is going down; it just doesn’t want to be left holding the bag when it does. It is possible that Yellen, Bernanke’s possible replacement, will adjust rates if she takes over in January, but few think she will act “dovish” and “taper” the bond buying.
In the interim, we suggest reading our essay on money printing in the Weimar Republic. It contains quotes and information you’re not likely to find anywhere else on the net.
