The Fed is the very antithesis of capitalism...
IT'S LITTLE wonder the world's so screwed up, writes Greg Canavan for the Daily Reckoning Australia.
How many millions of hours were wasted this week by people trying to work out what Ben Bernanke was going to do or say?
The world has turned socialist and we don't even know it. The finance industry employs millions of bureaucrats to engage in completely unproductive work. They predict and then dissect the actions of the chief bureaucrat – the head of the Federal Reserve – and get paid handsomely to do it.
And for what? The global economy has been deteriorating for years under the distortions brought about by cheap money. Yet the mainstream can't for the life of them work out what the problem is. So they turn to their benefactor, the Fed, for the answers.
The Fed is the antithesis of capitalism. It picks winners and losers through its policies and rewards speculation over innovation, connivance over hard work and profligacy over thrift.
The West has become a socialist state. Yet the change from capitalism has been so long in the making and so subtle that almost no one realizes.
The essence of capitalism is about individual freedom. Yet the world is weighed down by debt. For centuries, humans have viewed excessive debt as an inhibitor of personal freedom. And the Fed actively encourages debt accumulation!
And it appears it only has one playbook. Overnight, Bernanke satisfied the definition of insanity once again by announcing a policy of more cheap money. Does he really expect it will work this time? No one else does. We won't bore you with the details and we certainly won't mention the banality of its name, 'Operation Twist' – except for just there.
All it will do is rearrange the composition of the Fed's balance sheet, with the aim of pushing long-term yields even lower. Because the Fed's balance sheet remains static, there's no new money for the speculators to play with.
Someone benefits though. Our guess is the beneficiary will be whoever sells the Treasury securities (around US$400 billion worth) to the Fed. It's a bull market in US government bonds at the moment and the Fed is buying at the top. The cost will eventually fall on America's middle class.
That realization will come later. In the meantime the speculators have been denied additional money. That's partly the reason why the S&P500 tanked by nearly three per cent. More importantly though, we think the market is (finally) beginning to realize the Fed does not have the answers...and it might actually be the problem.
In the scheme of things, the Fed's policy is pretty benign. Bernanke is not dropping notes from a helicopter nor is he buying European sovereign debt – not directly anyway.
But even this 'benign' policy had its dissenters. Three regional governors (out of 10) voted against the action. They were Richard Fisher, Narayana Kocherlakota and Charles Plosser. It appears that extreme Fed idiocy might be hard to accomplish with so many dissenters on the board.
So the three per cent decline in the market reflects an acknowledgement of a deteriorating economy and a Fed that can't do anything about it – and is actually making it worse.
We think that is actually a good thing. When the market starts to point the finger at these clowns as the perpetrators of the world's financial ills, the system might finally begin to self-correct.
But that's probably a case of wishful thinking. Another way of looking at this is that the Fed can't risk another bout of destabilizing commodity inflation by doing a full-blown QE.
The chart below shows the CRB commodities index. QE2 was formulated and leaked back in August 2010 and officially announced in November 2010. As you can see the Fed lit a fire under commodity prices at the time, which had all sorts of unintended consequences. Colonel Gaddafi would attest to that.
Current prices are still way above QE2 trigger levels. So, on this reasoning, commodity prices will need to fall by at least 20 per cent before the Fed can play the deflation card and begin expanding its balance sheet again.
The Aussie Dollar was a big casualty of the Fed's announcement. It lost around 2 cents overnight and is now trading just under parity. You can talk all you want about the fundamentals of the Aussie being strong. But the bottom line is it's at the whim of international capital, which moves to the beat of the Fed's drum.
And the Fed is signaling to reverse the 'carry trade'. So they sell the Aussie and buy back US Dollars. Call it reverse speculation.
With Greece preparing for default, we could be in for few rough weeks on global markets. Right on time for September/October, the bear could be about to step it up a notch.
Get the safest gold at the lowest prices with BullionVault...