first majestic silver

The Green Ben Bernanke

November 11, 2005

The named appointment of Ben Bernanke (green from inexperience) represents a promise for continued dependence upon inflation for economic growth. He might possibly be the critical agent for unbridled acceleration in money supply growth which rivals the Weimar Republic. A green light for massive monetary inflation can be obtained by an incompetent targeting of inflation using fallacious statistics. His printing press will surely be dripping green ink, once it revs up in the Fed basement. One should note that before 2003 Bernanke had no banking experience, no business experience, and no financial market experience. His apprentice post for several months and Fed Governor experience counts for something, as do his clear speaking style, friendly manner, and less craggy visage. His academic roots are a huge negative, where theory is preached and arguments offered as justification for a system gone badly awry, horribly dependent upon debt and a fiat currency. The academic arena is not the place to test reality, take my word, from a guy with a doctoral degree who has seen many a doctor totally clueless about the real world.

Is the US Federal Reserve becoming an irrelevant body? Of course not, but it might fast be lowing its power. The role of the US Federal Reserve has become overshadowed by international markets. The USFed has only a few, although powerful, weapons or devices to use. They direct interest rates, control money flow, and dictate bank reserve ratios. Increasingly in today's global economy and global financial markets, these devices are outmoded. Trade-offs must be made on inflation versus employment, on continued consumption versus debt burdens, on growth versus foreign trade gaps. A sick byproduct of outsourcing is the accumulation of trade gaps and foreign ownership of US Treasury securities. These onerous symptoms are direct byproducts of the Greenspan legacy and his inflationary dependent policies. When a nation cannot obtain wealth through legitimate means, it must resort to inflation as a tool. Then it must justify the usage of inflation and lie through its teeth in bold statistical falsehoods and murky platforms of rationalization. The distortion of the Gross Domestic Product, lifted by under-stated price inflation, is fully analyzed in the November Hat Trick Letter issue, out early next week. Conundrum? What conundrum? The flat Treasury yield curve comes from flat economic growth. At least 3% of the GDP growth is pure fiction, nonsense, distortion, and lies.

Increasingly, the USFed is bewildered by the changes in progress, yet it still clings to broken theories such as the Phillips Curve. That theory links in two dimensions employment with price inflation in a pathetic narrow-minded fashion, in a childlike attempt to hold fixed all other factors. Try not to laugh too hard about fixing items in a fast changing world, with numerous changing external relevant factors. The USFed controls less of lending operations. Increasingly, big banks are not the principal intermediaries who lend from savers to borrowers. Refer to Fanny Mae, for instance, which has spewed over a $trillion into the mortgage finance system, separate from the banks, or rather as an adjunct (counterfeiter) to banks and mortgage agencies. Refer to convertible bonds from home builders, to mortgage backed bonds, to collateralized debt obligations, which all swirl around the financial markets in the derivative casinos like pinballs on a roulette wheel, bypassing banks. Banks do not contain savings ready to loan to borrowers anyway!!! We have no savings. We do have inflation engines which provide money to borrowers. Refer to venture capitalists, hedge fund lenders, and mezzanine investors, which tend to provide seed capital for new corporations, not banks. Many credit paths trace back to Asia, and more often from China.

The USFed consequently is catching up to the realities of fast evolution in financial markets, rather than leading them. No sooner did Chairman Greenspan order the mortgage rates lower from his bully pulpit, but Fanny Mae grew out of control. Unfortunately, the USFed does not pump much anymore. They influence by altering inflation expectations, and by altering perceptions of economic growth. They also regulate, which is a nice word for directing traffic. The new Chairman Bernanke will find himself caught in a nasty web of Greenspan's making. Bernanke has experience in academia, with next to no experience with financial markets, and next to no experience with big business. Bernanke could easily become the worst central banker ever as steward for the economy, but the best monetary drug dealer ever as provider of easy money. Just think how Greenspan has presided over a big economic collapse of the manufacturing sector, huge debts, housing bubble, and bubblicious false income. Bernanke will surely be forced to learn on the job, and react to conditions beyond his control.

Two open USFed Governor posts should be filled soon, and the best choices might be experts with strong experience in both financial markets and big business, the weaknesses of the former Chairman of the Princeton Economics Dept, with a mere half year logged as head of the Council of Economic Advisors. We might soon learn that being popular and residing in the mainstream does not mean qualified. Safe looking does not translate into competent.

Some have charged the medical profession as elevating physicians to a deity, the givers and takers of life. In psychological parlance, the term "Messiah Complex" is used to describe the condition. Thanks to The Economist for their excellent graphic of the monetary messiah below. Given the financial market dominance in the last 15 years, and the heavy reliance upon inflation and cheap money to satisfy the needs for growth, it is clear that the USFed Chairman has unduly been elevated to a position of a financial messiah. Bernanke has been clear to espouse monetary inflation as a route to salvation. My accusation for the last three years has been that the USFed Chairman has operated more like a monetary drug dealer, with unmistakable parallels. See the June2004 article "US Financials as an Addiction System" for a cold splash of water on the face on how the addiction parallels are engrained. My expectation is that Bernanke, as the new chairman, will continue to operate like a monetary drug dealer, perhaps even more vigorously and enthusiastically. Weimar, here we come! At risk is the confidence in the US financial system. If creditors sense that a flood of new money supply puts their reserve holdings at risk, placing a threat to their wealth, a mass exodus might occur out of the US$-denominated securities. After all, a fiat currency has as its basis foreign confidence in its value from prudent management.

One of my favorite economic analysts is Stephen Roach of Morgan Stanley. The rub against him is that he has expected a severe recession for the past three years, one which has not arrived. He is a traditional economist of solid background and integrity, who might have been silenced somewhat for his regular warnings (bad for brokerage business). In a recent piece, Roach makes some excellent points.

"Every Fed chairman I have ever worked with or observed over the last 33 years has had to face circumstances that he was unprepared for. Arthur Burns was a business cycle expert ill-equipped to cope with inflation. G. William Miller was a businessman untrained for the vicissitudes of financial markets. Paul Volcker was a financial expert who struggled with a wrenching recession. Alan Greenspan was a business consultant who was quickly thrust into the thicket of financial crisis management. Ultimately, Volcker and Greenspan learned to adapt and cope, but not without initially going through wrenching financial market corrections. Volcker quickly faced a wrenching selloff in the bond market, and Greenspan had to cope with the stock market crash of 1987… Why should we presume that Bernanke would be spared the same test that his predecessors faced? Financial markets have had an uncanny knack of finding the weak link in the new guy's chain.The history of modern day macro, to say nothing of the experience of the Fed and its various chairmen over the last several decades, warns of extrapolation [and similar test]."

So Roach is warning that Bernanke will be challenged right out of the gate next winter after being sworn into office. Look for the USDollar to go into decline at that time, and for gold to rise then also. A discontinuation in interest rate hikes by the young Bernanke Fed might be the unfortunate invitation of such a market challenge. Look for Bernanke, despite talent and Princeton pedigree, to be challenged outside his field of expertise, namely price inflation. Bernanke will take over the USFed helm when it faces a "unique confluence of domestic and international imbalances, the asset bubble, and current account nexus." In other words, he instantly must face a housing bubble and monster trade gap. By condoning and creating one bubble after another, in true inflation engineer fashion, Greenspan has led the United States into negative savings territory. A case in point is 401k pension accounts. The average 401k account is a paltry $57k. For workers over 55 yrs of age, only 26% have over $100k saved in a pension, and fully 34% have under $50k saved in a pension. That condition induces households to rely upon home equity for spending. The 1990 decade piggy bank was the stock account. The 2000 decade piggy bank is the homestead. These are nauseous Greenspan symptoms. That condition includes the federal budget also, since foreigners provide over 40% of capital funding to the USGovt for its operations. Such is the foundation and framework of the Greenspan legacy.

Expect price inflation targeting to fail, and to become a futile exercise, as seen in Canada, Australia, and certain European nations. Such targeting is essentially a quasi price control. Like other controls, such practices lead to shortages. If the measure of price inflation is fallacious and a poor reflection of reality, then targeting against it will surely lead to inadequate credit supply. For a nation whose economy depends critically upon lax credit, such targeting would choke the economy. Which particular market will his policy focus on for assessing the price target, as so many exist, most in confusing cross currents? More likely is a grand challenge of his willingness to debauch, undermine, and dilute the USDollar monetary base with a flood of monetary inflation. His cavalier words on fighting secular deflation by printing press activity, devoted to a slew of markets, these might quickly be the bluff called by financial markets.

THE BERNANKE STRATEGY
Rest assured that for price inflation guidance, the Bernanke Fed will focus as usual on the narrowly defined urban consumer prices for products, dominated by imports. This will likely remain to be the lowest among the many price components which truly matter. The other ignored areas are tangible assets like housing, financial assets like stocks & bonds, labor as in wages, material supplies like commodities, and energy as in gasoline, diesel, heating oil, and natural gas. Each group has had its own unique market, sure to continue to feel the swirling vortex of monetary inflation mixed with the capital flows in and out of the United States, versus Asia as well as Europe and the Middle East. The only way the Bernanke Fed can realistically target price inflation levels is to keep raising interest rates, with no end in sight. That is because the US Economy depends on unlimited credit growth, in place of legitimate income.

Bear in mind that even the moronic incompetent Treasury Secy John Snow believes the USDollar must go into decline next year. Last summer, he urged the Chinese to raise their currency, and thus our import prices. Late in October, at a joint economic meeting between Japan and the United States, Snow announced the need for the USDollar to fall. When wondering why any finance minister would make such a comment, note that the US debt must eventually be monetized from the printing press. Asia has essentially halted USTBond support, which is not reported in the press & media. That is the only way our debt can be serviceable in future years, given the deficit in reality has approached $1 trillion. Snow periodically utters some of the grandest stupidity in my memory. He once called a currency strong "if it is difficult to counterfeit" curiously. He recently said "There is little wonder why the American economy is the envy of the world. There can be no doubt that the American economy is an adaptive and resilient marvel." This man is a fool and an idiot, and can be called incompetent at best.

Bernanke is known to have said "managing the economy is like trying to repair a car while the engine is still running." In November 2002, Bernanke made his position on accommodation very clear. He said "When inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more pre-emptively and more aggressively than usual in cutting rates." He refers to urban consumer prices (CPI), not credit supply growth and not money supply growth, we he talks about inflation. He is very aware that downward momentum on a sagging economy can gain speed and mushroom into a highly damaging situation. His well-known statement about the effective alternative plan to drop money onto household lawns by means of helicopters points out how contradictory his methods are with both the claim of being an inflation fighter, and the goal of targeting price inflation. In order to alleviate economic slowdown and market weakness, he is on record as being extremely willing (and soon able) to employ the printing press. His methods are highly likely to produce higher price inflation systemically, even with some stagnant conditions within the US Economy.

The risk to the system is for the Bernanke Fed tightening, if it continues, to bring down housing prices. That would in all likelihood force a painful recession. The slowdown might gather speed quickly, and have difficulty in achieving stability. The risk is for the new Fed to tighten to bring down energy prices, which would in all likelihood not only harm housing again, but also discourage the necessary incentives for energy deposit exploration and development. The risk is for the new Fed to tighten in such a manner that costs continue to head higher, from the borrowing cost side. This would force a monumental squeeze on businesses, since material costs are likely to remain high. Any housing stall or decline would force a monumental squeeze on households, since home equity extractions might end soon. They have granted numerous reprieves on credit card abuse and frivolous spending patterns.

My alternative view of the US Economy is that it is a multi-headed hydra. If officials attempt to target one market to achieve stable prices, they must ignore other markets. Case in point, the stock market was restored in 2001, but in order to achieve that feat, it was necessary to create the housing bubble. To keep commerce going, we installed zero percent finance terms. The engine is always running. In fact, multiple engines are always running. The Asian outsourcing phenomenon has changed the labor market, in a manner which directs control outside our nation where foreign engines are at work. Those external engines are operated by foreign governments, sometimes in conflict with our objectives, sometimes in conflict with our geopolitical directives. China wants a more influential seat on the geopolitical stage. So they will be at odds with our objectives for managing our economic engines.

The US Economy is a many-faceted beast, whose financial sector tail has been wagging the real economy dog for many years. A brief walk through history is called for. When Alan Greenspan took the USFed helm in August 1987, he immediately faced a challenge in the USDollar leading up to Black Monday for the great stock bust. The clownbuck had sold off for several consecutive months. Interest rates rose steadily to 10% leading into the autumn. The stock market acted in oblivious fashion in full denial of the impact of both a worsening US$ currency and worsening US Treasury market. Finally we saw Black Monday in October 1987. Could such a sequence of events unfold for the year 2006? You bet, heck yes.

GREENSPAN EULOGY & CRISES
A visceral level of personal disgust is felt when eulogies are recited for Chairman Greenspan. An endless parade of boot licking can be recited from business leaders and elsewhere. Jack Welch, formerly of General Electric, gives high grades. Most business school leaders and financial sector titans give him high grades. An interesting assessment was given by former Labor Secretary Robert Reich. His high grade for the 1990 decade overlooks the condoned stock market bubble from easy money and faulty analysis of technology & productivity. His low grade for the 2000 decade to date acknowledges that same easy money policy, but directed to save the system from the damage from the previous decade errors.

In fact, hedonic nonsense lifts that productivity figure by 2% to 3% via hidden games. Business investment occurs in Asia. Greenspan justified high stock valuation in the late 1990 decade, from high information processing speed and high productivity. This is childlike. Lastly, his reliance upon "flexibility" in international financial markets (really foreign central banks) to relieve the pressures of extreme trade imbalances is moronic, motivated to give himself a passing grade on yet another failure. All we have is a temporary reprieve from foreign wrath, revenge, and corrections. Greenspan would lead you to believe the US Economy is strong, vibrant, and healthy as he exits his long reckless tenure. The truth is that he presided over a massive Middle Class squeeze and vanishing act. Consumer spending is up 3.5% versus wage gains of only 1.4% in the last 12 months. Prior years tell the same story. In fact, Q3 wage gains of 2.3% makes for the smallest annual change since 1981. The households of America extracted $600 billion in home equity in 2004. This is the Greenspan Legacy - spiraling debt and Middle Class hardship.

Former Chairman Paul Volcker issued a clear warning. He starts by conceding that the US Economy is doing well "as a result of our proclivity to consume." He points out that the necessary capital comes from outside our shores. "It is all bridged by money flowing to the United States from Japan, from China, and so forth. I do not know how long that can go on because we are spending, consuming, and investing 6% to 7% more than we are producing. And I think in the long run that is unsustainable… The key part is will people maintain confidence in the dollar." Finally comes his urgent warning, which should be heeded by all and paid close attention. Volcker is the last USFed Chairman to deal with rampant inflation. He did so before the China era, a critically different landscape indeed. The US Economy must deal with inflation mainly evident on the cost side, when Asia has put a ceiling on prices. The result is a grand profit squeeze on businesses and households alike. Here is his warning, which few heard. "One thing you can say very clearly is that there is some sense inflation is getting out of hand, and the United States better watch out. He urges Congress first, but also the White House, must make a higher priority to reduce the federal budget, in order to prepare for the "inevitable time" when the economy falters. He is on record as giving us a 75% chance of an eventual monetary crisis.

My personal assessment is that Greenspan is the most incompetent central banker who ever reigned in the modern era, if your criterion is for responsible monetary policy to prevent rampant inflation and its downstream ravages. However, if your criterion is for feeding the system from a high octane inflation diet and geared inflation regimen, he has been without question the in a class by himself at the pinnacle. He has managed to direct monetary traffic in a difficult environment without experiencing a clear fiasco. However, he has done so by permitting one bubble after another to appear on the horizon, and has earned the label of "serial bubble engineer." Unfortunately, the current system might have exhausted all remaining potential bubbles. Gold might be the final bubble, but these guys will force a recession rather than permit a gold bull to run rampant. We are left with cost inflation and commodity inflation as the last vessels to christen and send into the inflationary sea lanes. He has led people to ignore the historical truth that the roaring inflation beast bites or eats all in its path. My other assessment is that Greenspan has cleverly set expectations on monetary policy and economic reporting to become as muddy as possible. That might actually be a desirable goal, since the USS America is a bankrupt ship listing badly. We should not want the world, our creditors, to comprehend this fact in full light. He has managed to confuse the entire nation on what inflation is, how it should be measured, and what its consequences are. In this sense he has done the nation a tremendous disservice. My old CEO at Staples, Thomas Stemberg, put it well when he said "[Greenspan's successor] needs to be more of an educator than Greenspan was on the economic realities of current fiscal measures and the ramifications to our children." Without saying so, he accuses Greenspan of grand confusion and outright mis-education, both of inflation generally and deficits specifically.

In my opinion, Greenspan is desperate to cling to both his legacy and sterling reputation. The effort has the appearance more of a salvage operation. His true legacy is a series of crises bearing his signature, while his reputation is an undeserved master. He has carefully attempted to put distance between himself and an irresponsible Congress on spending matters. He has attempted recently to put distance between himself and the Fanny Mae collapse, which subjects the housing industry to great peril. Without the housing bubble, an ironic badge of honor to him, the US Economy would have plunged into a recession in 2002.

The Greenspan legacy is a twisted trail of crises and a series of bubbles, each applauded by a misguided crowd which cheers him on, eager for the next round of easy money. Instead of crediting him for successfully managing crises, would it not be better for our nation and society if he were credited for avoiding crises? By the way, his signature is on each crisis. No, he is the chief architect of crises, some of which are in progress right now. Some sick people want the next crisis to arrive quickly, so that easy money can once more by provided. After his "irrational exuberance" declaration in 1996, he caved in to pressure for easy money, permitted a stock market bubble, set the stage for the Asian Meltdown in 1997, and ensured a US stock market crash in 2000. He sanctioned a strong dollar which exported our manufacturing base to Asia, and along with it our legitimate wealth making apparatus. In fact, the Greenspan legacy is one of inflation and debt. Our nation has been coerced to rely upon inflation for wealth, as Asia relies on work. The United States, under the aegis of Chairman Greenspan, has badly degenerated into a dangerous debtor nation, whose tactics might now be to annex what we need, regardless of foreign nation sovereignty. By annex, one can read "wage war" and rely upon seizure. Greenspan might have actually led our nation toward war footing for survival. Our nation has been coerced to lean on debt to bridge the difference between a standard of living desired and afforded. Under his aegis as chairman, the money supply has grown 3-fold in 18 years, while the US Economy has grown much less than 100% in that same time.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

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