With the announcement of a much more aggressive round of quantitative easing than most expected, Ben Bernanke succeeded in continuing the inflation of financial assets, many of which reside in the shadow economy.
My first response which I have been telling people and as many pundits have exclaimed is that this is absolutely a political decision, even if the process to the decision was acutely rational and ethical. The only way to avoid a poeticized outcome would have been to pause any aggressive announcements until after the election. But as I am learning through the process of renovating a NYC co-op, if the decision making benefits the “decider”, without recourse then in hindsight the outcome should have been clear.
In this case the ensuing lift in financial asset prices, while likely to do nearly nothing for Obama’s middle class, will probably lead to strong PR and messaging trough the campaign trail from here to convince the vast majority of easily fooled Americans that they are better off today than they were when the S&P bottomed shortly after Bush left office.
The difference this time around however is that financial asset prices no longer respond primarily to the fundamentals of the economy but are now heavily linked to the actions of central banks who rightfully believe that lowering the probability of global financial collapse can be achieved by debasing currencies in the near term.
What they remain dangerously dogmatic about is their ability to remove excess liquidity in a systematic and orderly fashion. Hubris in Wall Street a decade ago led to its near demise. It is 100% probable at this point that the hubris among central bankers will lead us to another, far more gruesome edge. The question becomes who will finance the bailouts then?
Bernanke laid out a gauntlet yesterday and is now playing a massive game of chicken with the bond market that drives the global economy. He is betting that the threat of unlimited bond buying will be enough to scare the doomsayers out of the market keeping, now, all interest rates lower for longer, further punishing savers and rewarding borrowers who are generally afraid to take many risks.
If he is right, his brilliance now has a clock on it. Endless debasement of the worlds reserve currency will last only as long as it serves the needs of the largest foreign holders. This is not a sustainable move. For the moment it benefits China who remains loosely pegged to the dollar. However it puts the US in a precarious position should US-Sino relations falter.
Bernanke, sadly, is consciously or unconsciously using money printing as a substitute for good decision making in congress who remain practically useless to the democratic process. For a moment I can argue that this is somewhat thoughtful, but the outcome will be to enhance Obama’s reelection which will undoubtedly buy him at least one more appointment in 2014.
The analogy that came to mind this morning is that Bernanke is printing dollars to take the burden off of the house and senate to print meaningful tax and legislative reform. This is similar to building a house out paper. It may deflect the winds for a while, but it will not protect you from the vast majority of “elements”.
The medium term result of this decision, particularly in the US will creep into risk asset prices as the market digests the growing risks to sovereigns currently perceived as irrefutably sound financial hubs. We now know that a banking system can only remain stable with the threat of sovereign intervention. How long will the US Government remain a credible threat to interrupt another financial crisis.
No business leaders see the economy picking up more than it has from QE1 and QE2. In fact the downturn in transportation and materials probably in some part affected Bernanke’s decision. Adding even more liquidity will not have the desired effect without a major shift in lending practices by major banks.
Eventually equity risk premia will reflect the growing burden on US Taxpayers who by the vast majority remain under employed and less wealthy than they were 10 years ago. The irony is that continued debasement will ultimately lead more currency into safe low yielding investments.
If the US has not gotten its fiscal house in order before zombie investors wake up, the consequences will put us in uncharted territory.
When Obama makes his acceptance speech I wonder if he will thank Uncle Ben.