A Spoonful of Sugar
By Peter Schiff
The
press has framed Ben Bernanke's valedictory press conference last week
in heroic terms. It's as if a veteran quarterback engineered a stunning
come-from-behind drive in his final game, and graciously bowed out of
the game with the ball sitting on the opponent's one-yard line. In
reality, Bernanke has merely completed a five-yard pass from his own end
zone, and has left Janet Yellen to come off the bench down by three
touchdowns, with no credible deep threats, and very little time left on
the clock.
The
praise heaped on Bernanke's swan song stems from the Fed's success in
initiating the long-anticipated (and highly feared) tapering campaign
without sparking widespread anxiety. So deftly did the outgoing chairman
thread the needle that the market actually powered to fresh all-time
highs on the news.
Peter Schiff |
There
can be little doubt that the Fed's announcement was an achievement in
rhetorical audacity. In essence, they told us that they would be
tightening monetary policy by loosening monetary policy. Surprisingly,
the markets swallowed it. I believe the Fed was forced into this
exercise in rabbit-pulling because it understood far better than Wall
Street cheerleaders that the economy, despite the soaring gains in
stocks and real estate, remains dependent on continued stimulus. In my
opinion, the seemingly positive economic signs of the past few months
are simply the statistical signature of QE itself. Even Friday's upward
revision to third-quarter GDP resulted largely from gains in consumer
spending on gasoline and medical bills. Another major driver was
increased business inventories fueled perhaps by expectations that QE
supplied cheap credit (and the wealth effect of rising asset prices)
will continue to encourage consumer spending.
But
to many observers, the increasingly optimistic economic headlines we
have seen over recent months have not squared with the highly
accommodative monetary policy, making the arguments in favor of
continued QE untenable. Even taking the taper into account, the Fed is
still pursuing a more stimulative policy than it had at the depths of
any prior recession. As a result, as far as the headline-grabbing taper
decision, the Fed's hands were essentially tied. But they decided to
coat this seemingly bitter pill in an extremely large dollop of honey.
More
important than the taper "surprise" was the unusually dovish language
that accompanied it. More than it has in any other prior communications,
the Fed is now telling the markets that interest rates - its main
monetary tool - will remain far more accommodative, for far longer, than
anyone previously believed. Abandoning prior commitments to raise rates
once unemployment had fallen below 6.5%, the new statement reads that
the Fed will keep rates at zero until "well after" the unemployment rate
has fallen below that level. No
one really knows what the new target unemployment level is, and that is
just the way the Fed wants it. On this score, the Fed has not simply
moving the goalposts, but has completely dismantled them. With such
amorphous language in place, they appear to be hoping that they will
never have to face a day of reckoning. This is a similar strategy to
that of the legislators on Capitol Hill who want to pretend that America
will never have to pay down its debt.
At
his press conference Bernanke went beyond the language in the statement
by hinting that we should expect consistently paced, similarly sized
reductions through much of the year, and that he expects that QE will be
fully wound down by the end of 2014. The outgoing Chairman may be
writing a check that his successor can't cash. He also made statements
about how monetary policy needs to compensate for "too tight" fiscal
policy that is being delivered by the Administration and Capitol Hill.
Does the chairman believe that $600 billion annual deficits are simply
not enough... even with our supposedly robust recovery? By the time
President Obama leaves office, the national debt may well have doubled
in size, and he will have added more to the total of all of his
predecessors from George Washington through the first five months of
George W. Bush's administration combined! How can Bernanke possibly say
that our economic problems result from deficits being too small?
It's
easy to forget in the current euphoria that a majority of market
watchers had predicted that the first taper announcement would be made
by Janet Yellen in March of 2014. But perhaps with a nod toward his own
posterity, Ben Bernanke may have been spurred to do something to
restrain his Frankenstein creation before he finally left the lab. But
no matter who pulled the trigger first, this initial $10 billion
reduction in monthly purchases has convinced many that the QE program
will soon become a thing of the past.
But
without QE to support the markets, in my opinion, the US economy will
likely slow significantly, and the stock and real estate markets will
most likely turn sharply downward. [To understand why, pick up a copy of the just-released Collector's Edition of my illustrated intro to economics, How An Economy Grows And Why It Crashes.] If
the economic data begins to disappoint, I believe that Janet Yellen,
who is much more likely to be concerned with full employment than with
price stability, will quickly reverse course and increase the size of
the Fed's monthly purchases. In fact, last week's Fed statement was
careful to avoid any commitments to additional tapering in the future,
merely saying that further changes will be data dependent. This means
that tapering could stall at $75 billion per month, or it could get
smaller, or larger. In other words, Yellen's hands could not be any
freer. If the additional cuts never materialize as expected, look for
the Fed to keep the markets convinced that the QE program is in its
final chapters. These "Open Mouth Operations" will likely represent the
primary tool in the Fed's arsenal.
Despite
the slight decrease in the pace of asset accumulation, I believe that
the Fed's balance sheet will continue to swell alarmingly. As the amount
of bonds on their books surpasses the $4 trillion threshold, market
watchers need to dispel illusions that the Fed will actually shrink its
balance sheet, or even halt its growth. Already fears of such moves have
pushed up yields on 10-year Treasuries to multi-year highs. Any actual
tightening could push them significantly higher.
We
have much higher leverage than what would be expected in a healthy
economy, and as a result, the gains in stocks, bonds, and real estate
are highly susceptible to rate spikes. If yields move much higher, I
feel that the Fed will have to intervene to bring them back down. In
other words, the Fed will find it much harder to exit QE than it was to
enter.
In
the meantime, the Fed's open-ended commitment to keep rates at zero,
despite the apparent recovery, should provide an important clue as to
what is really happening. We simply have so much debt that zero is the
most we can afford to pay. The problem, of course, is that the longer
the Fed waits to raise rates, the more deeply indebted we become. As
this mountain of debt grows larger, so too does our need for rates to
remain at zero. So if our overly indebted economy cannot afford higher
rates now, or in the next year or two, how could we possibly afford them
in the future when our total debt-to-GDP may be much larger?
As
he left the stage from his final press conference, Ben Bernanke should
have left a giant bottle of aspirin on the podium for his successor
Janet Yellen. She's going to need it.
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.
via : http://www.economicpolicyjournal.com/2013/12/peter-schiff-what-bernanke-should-have.html
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.
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