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This week, desperation became palpable at the Fed. In both the
formulaic statement that accompanied its FOMC policy decision and Chairman
Ben Bernanke's unusual (and clumsy) Washington Post op-ed follow up, the
guardians of our currency expressed grave disappointment at the slow pace of
US economic recovery and emphasized the continued threat of deflation. The Fed
is now pledging to defeat this recession using any monetary means necessary.
Unfortunately, their embrace threatens to smother our economy.
Despite its paternalistic rhetoric, the Fed really has just a
few simple goals: allow for the perpetual expansion of the federal deficit,
push up stock prices to create the illusion of wealth, and stimulate consumer
spending. To do this, the Fed will hold interest rates near zero for the
foreseeable future, and will buy some $600 billion of US Treasury debt by
April of next year. Per capita, the commitment to quantitative easing comes
to almost $2,000 per American. What's more, if this program fails to pull the
economy out of recession, the Fed stands ready to up the ante. This amounts
to little more than gambling; but instead of using their own accounts, the
central bankers are wagering the nation's savings.
Having already committed $1.7 trillion in the first round of
quantitative easing, the Fed is rolling the dice once again - despite ample
evidence that their costly remedy won't work.
According to the Fed's own analysis, the US economy continues to
disappoint, despite the massive QE-1 cash injection. Given the poor
fundamentals: rising unemployment, plummeting house prices, and falling stock
prices, it should come as no surprise that consumer confidence is low and
spending continues to lag.
Now, by monetizing almost the entire federal deficit through
QE-2, the Fed hopes to give Congress the breathing room to enact reforms
before skyrocketing interest rates bankrupt the Treasury. Meanwhile, the
central bank hopes that the expected inflationary consequences will be
nullified by a resulting broad-based recovery. But an economist as
knowledgeable and experienced as Chairman Bernanke should know by now that
any real economic revival will come from private industry, not government.
The money printed by the Fed will indeed flow into the economy, where it will
push up asset prices in many sectors. Already commodity prices are soaring.
But inflation cannot create real growth.
What the Fed is doing, essentially, is forcing consumers to
spend their cash hoardings. Until the economic and financial policies of the
government change dramatically, those who are tempted to invest their savings
within the United States risk increasing regime
uncertainty. So, much of our domestic capital is flowing into hard
assets and overseas markets.
This will do nothing to help the festering wounds underlying the
US economy.
For example, the problems within the real estate market remain
toxic. Combined with falling margins, they threaten the banks with a second
crisis. The probability of a mortgage-related crisis in the housing market
has further increased by the unresolved "robo-signing" scandal, in
which legitimate foreclosures have been blocked by sloppy paperwork. Given
the truly abysmal state of documentation for foreclosed properties that had
been bought with securitized loans, it is hard to imagine that this problem
will be resolved anytime soon.
Surveying the landscape in the mortgage market and elsewhere, it
becomes apparent that the only bankable asset America has left is a reservoir
of confidence in our country's role as the global economic leader. But
confidence can be ephemeral. Usually, even gradual erosion of credibility
reaches a latent tipping point. When change comes, it does so with alarming
speed.
When international confidence in the US evaporates, those
holding dollars will be holding worthless paper. Furthermore, if the US
dollar retains its privileged position as the international reserve currency
while it spirals downward, the entire structure of international fiat
money will be threatened.
In the turmoil that lies ahead, America's saving grace could
have been a reliable currency to brace us up. Yes, our legs are weak, but at
least we could have had firm ground on which to walk. The present Governors
of Federal Reserve, however, would prefer to prop up the bloated and hobbled
bubble-era structures in the hopes that a deus ex machina will
save the day. Unfortunately, while they're waiting for a miracle, we'll all
be left swimming against a tide of new dollars.
John
Browne
Senior Market Strategist
Euro Pacific
Capital, Inc.
20271
Acacia Street, #200 Newport Beach, CA 92660
Toll-free:
888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
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Please note:
Opinions expressed are those of the writer.
John Browne is the Senior
Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a distinguished
former member of Britain's Parliament who served on the Treasury Select
Committee, as Chairman of the Conservative Small Business Committee, and as a
close associate of then-Prime Minister Margaret Thatcher. Among his many
notable assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the first to
convince Thatcher of the growing stature of then Agriculture Minister Mikhail
Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
Royal Guard.
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the
Harvard Business School, John joined the New York firm of Morgan Stanley
& Co as an investment banker. He has also worked with such firms as
Barclays Bank and Citigroup. During his career he has served on the boards of
numerous banks and international corporations, with a special interest in
venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the
former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.
Copyright © 2008
Euro Pacific
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