Peter Schiff - Ben's Balance Sheet Blues
During his testimony before Congress this week, Federal Reserve
Chairman Bernanke made it a priority to dampen the growing concern that
the unprecedented growth of the Fed's balance sheet presents great
risks to the economy. There has been a heightened sense even among
normally complacent members of Congress that the Fed could spark a
precipitous decline in the economy and the financial markets if and when
it seeks to "withdraw liquidity" by selling even a minor portion of its
bond portfolio (which is projected to swell to $4 trillion by year
end). This is a valid concern that I have been discussing for years.
Gentle
Ben soothed these fears by his novel assertion that the Fed doesn't
actually need to sell bonds to neutralize previously injected stimulus.
Instead, the Fed could simply allow its bonds to mature, thereby
achieving a more natural, and potentially less disruptive unwinding of
its gargantuan portfolio. Although his explanation seemed to satisfy
many of the Congressman (and the vast majority of the journalists who
slavishly dote on Bernanke's assurances), the idea is completely absurd.As a result of its previous efforts during "Operation Twist" (which was conducted in order to push down long-term interest rates), the Fed has already swapped hundreds of billions of dollars of short-term securities for Treasury bonds with maturities of ten years or longer. Only a small portion of the Fed's portfolio, then, becomes due at any given time. The average maturity of the entire portfolio is now over 10 years. There may well come a time when inflation or asset bubbles become so pronounced that aggressive withdrawal of stimulus is needed. Forceful action will only be possible through active selling, not simply by passive maturation.
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Peter Schiff is a well-known commentator appearing regularly on CNBC, TechTicker and FoxNews. He is often referred to as "Doctor Doom" because of his bearish outlook on the economy and the U.S. Dollar in particular. Peter was one of the first from within the professional investment field to call the housing market a bubble. Peter has written a book called "Crash Proof" and a follow-on called "The Little Book of Bull Moves in Bear Markets". He is the President of EuroPacific Capital, which is a brokerage specializing in finding dividend-yielding, value-based foreign stocks.
