The Fed Is Bringing Things to a Head
Published in La Tribune
(France) on 17 October 2010
by Marc Fiorentino (link to original)
(France) on 17 October 2010
by Marc Fiorentino (link to original)
Translated from
by Mylène Perdreau.
Edited by Alex Brewer.
The American central bank has left no doubt as to its intentions. All kind of measures — conventional or not — will be used to revive the economy. The objective the Fed has set for itself is simple: growth and growth and nothing but growth. Let's not forget that the European Central Bank's primary objective is price stability. So the Fed is going to launch QE2 — the second phase of quantitative easing — which means in incorrect political and economic languages that the Fed will print money 24/7 and flood the world with dollar liquidity.
We know that Ben Bernanke is an expert on the crisis of 1929 and that he believes that a restrictive monetary policy would lead to a remake of the severe relapse into recession of 1932. We understand his concern. It is justified by the slow recovery of the American economy.
But Bernanke is still playing a dangerous game: He is using a strategy that was already used by his predecessor, Alan Greenspan, and which is known to be the main cause of the subprime crisis and the global economic crisis. The main loophole in the Fed's aggressively lax regulation is that, unfortunately, the dollar injection is not going into the real economy. It is going into the financial markets. American banks are absorbing the greatest part of this bailout and are stifling it, either by transforming the money — they borrow at 0 percent from the Fed and lend to the government by buying 2-year, 5-year and 10-year Treasury notes in order to pocket the spread — or by investing in financial markets.
The money that the Fed is injecting is going straight to India, Thailand, Brazil and all emerging countries whose stock exchanges and currencies are at their highest levels. And the leaders of these countries are more and more worried as they face this hot money pouring in. This money is also flooding the raw material markets. The prices of gold, silver and agricultural raw materials are soaring. The Fed is again fueling bubbles all over the world from Mumbai to gold mines to the Chicago grain markets.
Meanwhile, American households remain unaffected by the decreasing rates with good reason: People in need are not granted any credit whatsoever — except for consumer credit and credit cards with record-high interest rates. And people who do have a job, who receive a salary and who may even own property do not want to get into debt. In addition, they see the return on their capital used for short-term monetary investments not paying anymore.
The Fed wants to avoid Japan-style deflation, but it is going to fuel asset-price inflation and soaring food prices. Once again. It is a dangerous game. Very dangerous. We have to be aware that financial markets are currently in an imbalanced situation and on the verge of a disaster, mainly because of the Fed's policy. The dollar is collapsing, but everything else is increasing: stock-exchange indexes as well as raw materials, emerging countries and bond markets. This will not last long, because it does not make sense. Gold cannot remain at its record high for a long time while long-term interest rates are at their record low. "Classical" correlations must regain the upper hand. To that extent, one market has to redress the situation. Either stocks will have to dramatically fall again — but companies' profits are quite strong — or bond prices will have to crash. The latter is the most likely scenario to happen, but the Fed is keeping the stock market afloat for the moment.
By trying to maintain this unbalanced situation, the U.S. may be saved from another recession, but it may cause a new financial market crisis. Once again, the United States is making decisions on its own without any consultation and favors its interests at the expense of other countries. The United States does not do better than China.
We know that Ben Bernanke is an expert on the crisis of 1929 and that he believes that a restrictive monetary policy would lead to a remake of the severe relapse into recession of 1932. We understand his concern. It is justified by the slow recovery of the American economy.
But Bernanke is still playing a dangerous game: He is using a strategy that was already used by his predecessor, Alan Greenspan, and which is known to be the main cause of the subprime crisis and the global economic crisis. The main loophole in the Fed's aggressively lax regulation is that, unfortunately, the dollar injection is not going into the real economy. It is going into the financial markets. American banks are absorbing the greatest part of this bailout and are stifling it, either by transforming the money — they borrow at 0 percent from the Fed and lend to the government by buying 2-year, 5-year and 10-year Treasury notes in order to pocket the spread — or by investing in financial markets.
The money that the Fed is injecting is going straight to India, Thailand, Brazil and all emerging countries whose stock exchanges and currencies are at their highest levels. And the leaders of these countries are more and more worried as they face this hot money pouring in. This money is also flooding the raw material markets. The prices of gold, silver and agricultural raw materials are soaring. The Fed is again fueling bubbles all over the world from Mumbai to gold mines to the Chicago grain markets.
Meanwhile, American households remain unaffected by the decreasing rates with good reason: People in need are not granted any credit whatsoever — except for consumer credit and credit cards with record-high interest rates. And people who do have a job, who receive a salary and who may even own property do not want to get into debt. In addition, they see the return on their capital used for short-term monetary investments not paying anymore.
The Fed wants to avoid Japan-style deflation, but it is going to fuel asset-price inflation and soaring food prices. Once again. It is a dangerous game. Very dangerous. We have to be aware that financial markets are currently in an imbalanced situation and on the verge of a disaster, mainly because of the Fed's policy. The dollar is collapsing, but everything else is increasing: stock-exchange indexes as well as raw materials, emerging countries and bond markets. This will not last long, because it does not make sense. Gold cannot remain at its record high for a long time while long-term interest rates are at their record low. "Classical" correlations must regain the upper hand. To that extent, one market has to redress the situation. Either stocks will have to dramatically fall again — but companies' profits are quite strong — or bond prices will have to crash. The latter is the most likely scenario to happen, but the Fed is keeping the stock market afloat for the moment.
By trying to maintain this unbalanced situation, the U.S. may be saved from another recession, but it may cause a new financial market crisis. Once again, the United States is making decisions on its own without any consultation and favors its interests at the expense of other countries. The United States does not do better than China.