Word on the street is that the Fed
is now "out of bullets." Many economists fear that in its efforts
to spur recovery, the Fed may have already exhausted its array of monetary
ammunition and that it has nothing left of significance to fire at the
steadily advancing recession. They believe that since interest rates are
already near zero and Fed policies have failed to inspire banks to expand
commercial and consumer lending (despite ample bank reserves), the tools
traditionally employed by the Fed have been rendered impotent.
To their credit, these
commentators are 100% correct in asserting that the Fed can't help the
economy by printing more money. But it's not because the Fed policy is
without consequence, but because the Fed has always been incapable of creating
real growth. All it can do is manipulate the purchasing power of money. By
keeping prices from falling more that they would have naturally, Fed
intervention has created a burden. Lower prices would have cushioned the
effects of the recession for many people.
However, because it failed to
spark faster GDP growth, most people now agree that Fed's traditional
ordnance, namely purchases of short-duration Treasuries from primary dealers
in order to depress the yield curve, has lost effectiveness. But the Fed is
never... ever... ever... out of ammo. In fact, according to Mr. Bernanke
himself, the central bank may be about to unleash the heavy artillery.
Our central bank controls the
printing press, so it has the ability to create money at will and use it to purchase
anything it desires. It can and does purchase longer-dated Treasuries and
other bank assets like home loans. If these funds are falling into the black
hole of the banking system, there are ways for the Fed to cut out the middle
man.
For instance, the Fed could buy
stocks and real estate directly from the public. The Fed could buy a
trillion-plus dollars worth of S&P 500 stocks. Consumers that sold stock
to the Fed would receive funds that didn't previously exist. M1 money supply
would boom as demand deposits surged. But if the Fed continued to hold
interest rates to zero, banks would continue to pay near-zero interest on
their deposits. So, American consumers would then be faced with a choice:
earn pennies on their savings accounts or take the cash out and jump onboard
the soaring stock market.
The Fed could also, if it thought
necessary, create another bull market in real estate. It could guarantee 'no
down payment' loans of any amount to any borrower, with a promise never to
foreclose or seek compensation in the result of default. By making home
purchases risk-free, such a policy would surely re-energize the housing
sector.
By spurring price increases for
stocks and real estate, the elusive "recovery" could be conjured in
an instant. The only flaw would be that nothing would actually improve. By
telegraphing unlimited monetary debasement, such policies would cause a run
on the dollar. Although the "dreaded risk of deflation" would no
longer be discussed, investors would be forced to once again abandon savings
and chase runaway prices. In other words, we would find ourselves in the
exact same predicament that led to the crash of 2008.
Speculation on non-traditional Fed
activity is not a vain exercise. Bernanke's speech last week gave warning of
major initiatives to come. First, there's this gem: "The FOMC will strongly
resist deviations from price stability in the downward direction [i.e.,
deflation]." He also showed just how strongly he desires a return to
rampant money supply growth and asset inflation when he said, "The
Committee is prepared to provide additional monetary accommodation through unconventional
measures if it proves necessary, especially if the outlook were to
deteriorate significantly." What Bernanke means by such rhetoric is that
the Fed will not only monetize assets held by banks, but will purchase assets
directly from consumers - thereby placing money directly into their hands.
We must immediately understand
that the Fed can shower liquidity directly on the consumer in any amount it wants.
The political pressure to do so will only increase as unemployment rises and
economic growth falters. Therefore, rather than fearing phantom deflation,
investors should prepare their portfolios for the real upcoming battle with
intractable inflation.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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