Today’s ADP report (via Denninger), and mostly likely, the new claims report
coming out tomorrow will serve to further strengthen the realization that the
economy is not recovering. Europe is
going to collapse. The impending changes
in the French government will only make matters worse.
My wife stayed up a couple of nights ago and watched Charlie
Rose on PBS. She was telling me that he
had “some guy” on, who seemed to know what he was talking about, criticizing
Bernanke. Knowing of Rose’s man-crush on
Buffet and his love for all things governmental, I assumed it probably wasn’t
Paul Ryan, Karl Denninger or some other truth-teller. She would have known Buffet. “Was it Krugman?” I asked. She wasn’t sure and asked for his first
name. When I said that it was Paul and
asked if he was bearded, she said that was who she thought it was.
I think the Fed has one option open that might keep the sham
going. If they bought up a bunch of
short-term treasuries, driving the rate down a few basis points while
subsequently and suddenly jacking up the lending rate for banks, it might give
the economy enough of a boost to get through the election this fall. It is almost counterintuitive, but I think it
may be why they have the stooge Krugman out front taking shots at the Fed.
If CD rates jumped a couple of percentage points, it would
pull in deposits. I have a substantial –
for me – amount of cash sitting almost idle in money market accounts. Give me even two percent for six months and
that money will go in a CD. By squeezing
the banks on bond rates and boosting their reserves, the Fed could hope to
balance on the razor’s edge and push a few more loans out the door with an
inflationary spark that would be just enough to look like growth.
A rate boost would likely pull money out of the stock
market. It could also be the last straw
for the euro. I almost feel sorry for
Bernanke. He’s the goat no matter what,
not that he is undeserving. He helped
get us in this mess and clearly lacks the courage to get us out. A rate hike could bring down crude prices
just in time for summer and, more importantly, Obama’s election. It seems like the only solution. The problem would be if it raised the cost of
servicing the debt. I think the Fed can
keep the federal government bonds out of trouble for a brief period of time,
but I am not so sure about states like California and Illinois. States defaulting on pensions and other
obligations would be bad news. Again,
the key would be the timing, which I am not sure anyone can predict, much less
control.
Anyway, if the Fed announces a move from their Zero Interest
Rate Policy, I expect it will be merely a cover for buying bushel baskets of
3-month to 5-year treasury bonds.
There is also always the possibility that I am completely wrong and do not understand either the current situation or the intended end-game. In fact, there is a pretty good chance of that.
Heck, I'm going to give you points for understanding the system enough to at least come up with a prediction.
ReplyDeleteI appreciate it, but I don't know much.
ReplyDeleteLooking into it a little further, I see that Krugman is on a book tour calling for a $2 trillion stimulus package for New-Deal-like infrastructure projects. That's obviously untenable at this point and not going to happen. It's an extreme position, an initial offer leaving "room for compromise" -- like a used car salesman upfront asking twice what a car is worth.
Some folks are condemning Krugman for his personal attacks on Bernanke. I am suspicious enough to wonder if that isn't designed to make Bernanke look more moderate depending on the path he takes. I think more quantitative easing is almost certain -- I just don't see how they keep it from getting out of hand.