Global Economic Crisis

In a step that will be one of the markers on the road to economic and financial catastrophe, the Federal Open Market Committee (otherwise known as the FOMC) of the Federal Reserve, made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy. In a policy being dubbed QE2, the Federal Reserve’s FOMC conceded that the so-called U.S. economic recovery has “slowed,” and required more stimulus from the Fed. However, with federal funds interest rates now effectively at zero, the only aspect of monetary policy left is money printing. Thus, the Federal Reserve, in effect, will use its printing press to buy long-term U.S. government debt.

Of course, that is not how the FOMC is positioning this major escalation in quantitative easing by the Federal Reserve. In the dry, obtuse language that the obscurantists of the Federal Reserve love to engage in, the committee’s official statement said:

“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.”

In  its first bout of heavy quantitative easing, in the wake of the implosion of the major Wall Street investment  banks in the fall of 2008, Ben Bernanke, utilizing his printing press, purchased $1.25 trillion in mortgage-backed securities, and an additional $200 billion in debts owed by so-called government-sponsored enterprises, primarily Freddie Mac and Fannie Mae. This massive explosion in the Fed’s balance sheet has thus far failed to stimulate economic activity and retard a persistent deflationary recession. All that Bernanke has accomplished has been to create a new asset bubble, this time on Wall Street, with equities exploding in price far beyond their post-crisis lows. Beyond the Dow Jones index, however, the impact of Bernanke’s balance sheet expansion has been impotent in the face of economic realities, particularly a collapsing labor market and the contraction in consumer demand. The erosion in the M3 money supply, a statistic the Federal Reserve no longer publicly discloses, attests to the failure of its policies.

Now that the Federal Reserve admits, though in its typically obscure linguistic constructs, that a double-dip recession is becoming increasingly likely, Bernanke is going to enter a buying binge of long-term U.S. Treasuries. The hope is that this will stabilize financial markets, and somehow force liquidity into the economy. That, at least is the hope. Given Ben Bernanke’s track record, I would not bank on hope in the infallible judgement of the Federal Reserve and its FOMC.

What is likely to result from the QE2 phase of the Federal Reserve’s disastrous policymaking? In time, sovereign wealth funds will recognize Bernanke’s manoeuvre for what it is: monetization of the U.S. national debt. When that happens, Treasury auctions will begin to fail, and yields will advance. This will all put added pressure on the Fed to print even more dollars, and monetize an increasing proportion of the federal government’s debt. This will unquestionably inject liquidity into the U.S. economy. But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early1920s, or Zimbabwe more recently.

In deciding on a process that will lead to an ever-growing proportion of the U.S. national debt and yearly budget deficits being monetized by its printing press, the Federal Reserve, under the leadership of its chairman, Ben Bernanke, has taken a fateful step towards irredeemable economic and financial ruin, ultimately convulsing America with a savage, hyperinflationary depression. And, as history teaches us, severe economic depressions bring along other unanticipated consequences, often leading to political and social turmoil and even global war.

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Twice yearly the chairman of the U.S. Federal Reserve, Ben Bernanke, must testify before Congress on monetary policy and the Fed’s economic outlook. Bernanke has achieved during his time as a principal policymaker on the U.S. economy an enviable reputation for poor forecasting and a unique ability to put a happy, optimistic face on the global economic crisis. However, is his most recent testimony before Congress, Bernanke gave hints that he is losing his laudable ability at spinning bad economic realities into “green shoots” of an imminent recovery.

Amid all the worthless Bernanke verbosity that the world has become accustomed to (e.g. “although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth” ), there was a single sentence that betrays how even Bernanke is running scared that his policies of unprecedented public debt and quantitative easing are leading to disaster. The once pompously arrogant but now uncertain Fed chairman told Congress, “even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain.”

After adding trillions of dollars to the national debt, more than a trillion dollars in worthless assets to the Fed’s balance sheet and opening up its subsidized discount window to the likes of Goldman Sachs, the best Bernanke can mutter to the politicians in Washington is, “the economic outlook remains unusually uncertain.”

If Bernanke is publicly admitting that the economic outlook for the United States is unusually uncertain, I think we can cross off his previous forecast about green shoots.

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In his historic contribution to America’s fiscal imbalance, current Federal Reserve chairman Ben Bernanke has even surpassed the corrosive reputation of his predecessor, Alan Greenspan. It has been on Bernanke’s watch that the previous structural deficits of the U.S. federal government have been transformed into even more alarming structural mega-deficits. Bernanke knows that a fiscal firestorm is brewing. So how do you continue with policies that encourage annual deficits measured in trillions of dollars while looking responsible on the deficit issue? Why, just testify before Congress and speak eloquently of your serious concern about the deficit.

This is what the most powerful man in America, an individual who can make fiscal and monetary decisions that will bankrupt your children and grandchildren without interference from legislative or executive or judicial branches of government, had to say to the august members of Congress:

“Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance.”

Trajectory toward sustainable fiscal balance? The only clear trajectory I see is an irreversible rendezvous with national insolvency, sparking a catastrophic global economic depression.

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Ben Bernanke, Larry Summers and Timothy Geithner, the Obama administration’s economic triad, are predicting a steady recovery from the Great Recession. The March employment numbers, suitably manipulated by PR spin masters, are being heralded as proof that the recession is over. Should we believe them? Well, let’s look back at recent history.

Just a few weeks ago, Bernanke’s predecessor as chairman of the Federal Reserve, Alan Greenspan, stated that “nobody” predicted that the subprime housing situation in the United States would lead to a financial and economic implosion. Greenspan said, “Everybody missed it, academia, the Federal Reserve, all regulators.”

Not everybody. Actually, a number of observers predicted what would ensue, well in advance of the financial disasters of 2008, which culminated in the downfall of Lehman Brothers. I include myself in that list which the former Fed chairman wished everyone would ignore. In a book published in 2006, two years before all hell broke loose on Wall Street, I wrote the following:

“The American economy will almost certainly, in the next presidential administration, come to a very hard landing. The decline in housing prices, which while ascendant created the illusion of national prosperity, is a clear and foreboding marker to a dark and austere future for the American people.”

Now that Bernanke, Geithner and Summers are preaching the gospel of economic green shoots, I published my own prediction in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.”  The essence of my prediction is that massive U.S. government deficits, replicated in other major economies, will precipitate a devastating sovereign debt crisis by 2012, plunging the world into a synchronized global depression. If I am proven right, however, don’t expect the potentates of the Federal Reserve and U.S. Treasury to utter any mea culpa. If an economic depression does afflict us,  Ben Bernanke will likely mimic Alan Greenspan’s lame protestation that ”nobody” could have seen such a disaster coming.

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Despite all the rhetorical flourishes and grandstanding engaged in by that once august body, the U.S. Senate, when it came time for the rubber to meet the road, they voted overwhelmingly to reappoint Ben Bernanke to a second term as chairman of the Federal Reserve. Let us be clear as to what those 70 senators voted for, in deciding to support President Obama’s preference that Bernanke remain at the helm of the Fed. Failure on a monumental scale has been conspicuously rewarded.

While Bernanke’s predecessor has been rightly condemned for his loose monetary polices and dogmatic conviction that unregulated market fundamentalism is always correct, the current Fed chairman has demonstrated continuity with those now discredited policies, along with a numbing myopia in failing to see a train wreck coming, despite ample warning.

In October 2005 Ben Bernanke appeared before Congress, only days before being nominated to succeed  Alan Greenspan.  Growing concern had already emerged regarding the unsustainability of what was obviously a massive housing asset bubble,  in large part facilitated by  the Fed’s easy monetary policies, fully supported by Bernanke. When questioned on the perception that the residential housing market was a growing danger to the nation’s economic health, the supposedly brilliant and perceptive Ben Bernanke stated that the escalation in U.S. housing  prices did not constitute an asset bubble, and was in fact based on sound economic fundamentals.

Sound economic fundamentals?

In an earlier post, I described Bernanke’s statement to Congress in 2005 as the worst economic prediction in recorded history. Yet this same flawed individual has now been  anointed by the U.S. Senate to have another go at deconstructing the U.S. economy.  A proven failure  now has another four years as head of the world’s most powerful central bank, with executive powers that in may respects exceed those of the president’s, with virtually no meaningful legislative oversight.

The justification for reappointing Ben Bernanke rests on a flimsy pretext. He supposedly saved the world from a global financial meltdown after the collapse of Lehman Brothers in the fall of 2008. This ignores his conspicuous role as a principle architect of the global financial and economic crisis. In effect, he is glorified for indebting  generations of Americans yet unborn for covering the costs of his colossal errors in judgement. Furthermore, the Senate has failed to take cognizance that the very debt load they salute Bernanke for creating  as part of his “heroic” rescue mission has laid the seeds for a far more dangerous  phase of the global economic crisis. The risk of a paralyzing sovereign debt crisis is growing, raising the threat of national insolvency. The current fiscal crisis in Greece, and the economic purgatory being experienced by the people of Iceland, are clear warning signs on the economic horizon of what lies in wait for the American people. Maintaining Bernanke as Fed chairman magnifies the risk that a sovereign debt explosion will occur, creating a whole new level of economic devastation across the United States.

The lopsided vote by the U.S. Senate in favour of reappointing Ben Bernanke was  a clear triumph for the disaster-prone Ben Bernanke. As for the American people, this result is nothing less than a total, unmitigated defeat.

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The American weekly news magazine, Time, has an annual ritual of naming the man, woman, or people of the year. Its selection for 2009 is now official, and it is none other than  the Chairman of the U.S. Federal Reserve, Ben Bernanke. Here is Time magazine’s rationale for picking Bernanke:

“The main reason Ben Shalom Bernanke is Time’s Person of the Year for 2009 is that he is the most important player guiding the world’s most important economy. His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivalled power over our money, our jobs, our savings and our national future. The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.”

I think the praise being heaped on Bernanke by Time is premature, to say the least. No doubt, the massive borrowing and money printing facilitated by the Fed did prevent a total financial collapse in 2008, after the collapse of Lehman Brothers-a disaster that Time conveniently forgets Bernanke’s monetary policies helped to facilitate. The consequences of Bernanke’s policies, all born of extreme desperation, are totally off the radar screen as far as Time Magazine is concerned. In my view, Bernanke has sown the seeds of a far worse economic catastrophe than that which he is praised for preventing. Bernanke has begun a process that will destroy the U.S. dollar, and bring about the sovereign fiscal collapse of the United States. In effect, Ben Bernanke has not saved the economy; he has postponed one disaster in order to enable a catastrophe that will be far worse.

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In the Financial Times Professor Roubini wrote a thoughtful and frightening piece on the implications of the U.S. dollar’s sinking value and its increasing role in the global carry trade. Given Nouriel Roubini’s track record  in offering a timely warning on the collapse of the subprime mortgage  bubble, his latest red flag should be looked at very closely.

In essence, the loose monetary policies of the Fed have  poured a tidal wave of liquidity into the world, in the form of U.S. dollars being offered at effectively zero interest rates while simultaneously being devalued. This explains the explosive role the American dollar is exercising on the carry trade. As Roubini points out, speculators can borrow cheap dollars at effectively negative interest rates, and plough this cheap currency into higher yielding assets available in foreign exchange. What Professor Roubini describes as the “mother of all carry trades” is building a global speculative bubble of vast proportions, and in a manner that is utterly unsustainable.

Roubini closes his sober article in the Financial Times with the following chilling warning:

“This unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.”

* Global Economic Forecast 2010-2015: Recession Into Depression, now available. More information at:

http://www.createspace.com/3403422

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It is said that those whom the Gods intend to destroy they first drive mad. Is it not madness to reappoint to a second term leading the most important financial and economic institution on the planet, the Federal Reserve, a man with a forecasting record as disastrous as that of Ben Bernanke?

As a follow-up to my recent post on economic forecasting, below is the original Washington Post article by staff writer Nell Henderson, describing the intellect of Ben Bernanke in action during his presentation before Congress just prior to his nomination by President George W. Bush to succeed Alan Greenspan as Fed Chairman.
Read this article in wonderment, and try to comprehend how the author of such a catastrophic forecast on the implications of the housing price boom in the U.S. could be chosen by President Barack Obama to serve another term.

 
Bernanke: There’s No Housing Bubble to Go Bust
Fed Nominee Has Said ‘Cooling’ Won’t Hurt
By Nell Henderson
Washington Post Staff Writer
Thursday, October 27, 2005; Page D01
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Bernanke’s thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

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First there was the dotcom bubble. When it deflated, the U.S. Federal Reserve set interest rates at historic lows for far too long, in turn giving birth to a new asset bubble; residential real estate in America. We all know what happened to that asset bubble, and our world is still gripped with the consequences of its implosion.

How has the Fed responded? By establishing a near zero interest rate policy (ZIRP), which in turn has created a new asset bubble; equities. With the Dow Jones surging past 10,000 for the first time in a year, and Wall Street handing out executive bonuses at a rate that exceeds the  previous best year for their self-congratulatory excess, 2007, by 10%, one would think that the global economic crisis is over.

Perhaps we are just witnessing a new and potentially more dangerous asset bubble being inflated by government bailouts and monetary policy courtesy of the Federal Reserve that has gone berserk. With the U.S. dollar plummeting like a lead weight falling off a cliff, and banks providing depositors with virtually no interest, it seems that it is a matter of policy to encourage stock market trading and speculation.

The question that must be asked is this; when accelerating levels of unemployment, contracting consumer spending and elevated levels of loan foreclosures make it clear that the real economy is still in deep crisis, how sustainable will this latest asset bubble prove? I think recent history has already provided an answer.

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History is littered with flawed forecasts on economic trends. And where some have proven to have been surprisingly accurate in their glimpse into the financial and economic future, these projections have usually been scorned, until too late. Our current global economic crisis is a case in point.

In  my view, the most accurate long-term economic forecast of all time was provided by the legendary Renaissance French seer, Nostradamus, usually more renowned for his prophecies on the end of the world. In 1548, Nostradamus predicted, “From Albion’s shore shall come a marvellous contrivance: a carriage of silence bearing the arms of Rolles de Roi.”  Apparently, Nostradamus saw the creation of the Rolls Royce motor car in England, and its reputation for silent and prestigious personal transportation, more than three centuries before the invention of the internal combustion engine.

In contrast, one of the most inaccurate and inept economic forecasts of all time was delivered relatively recently, by the Chairman of the U.S. Federal Reserve, Ben Bernanke. In October 2005 Bernanke, who had recently succeeded Alan Greenspan as chairman of the Fed, issued a confident prediction that the unprecedented rise in U.S. home prices did not constitute an asset bubble, and was based on sound economic fundamentals. Oh well.

Forecasting economic trends is both highly difficult yet absolutely essential. Operating complex economies and businesses without accurate trend analyses is like flying blind without instruments. A major difficulty with many recent economic forecasts is that they are mired in ideology.

In the near future, I will be offering my own long-term economic forecast. It should be finalized within a few weeks. Readers of my blog should stay tuned for further information.

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