Tuesday, September 1, 2009

Bernanke Stays Put

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Gary’s Note: Bernanke is going to keep helping shove you further into the Depression. He will remain at his post as head of the bank that controls the supply of money and thus causing the sort of distortions and misallocations that are guaranteed to erase the wealth of a nation. Bill Bonner explains the inevitable below.

Whiskey & Gunpowder
By Bill Bonner

September 1, 2009
Ouzilly, France

Bernanke Stays Put

Damned if he does; damned if he doesn’t.

Last week, Ben Bernanke got the nod for another stint as head of the world’s most important central bank. Yes, he completely misunderstood the implications of the hugely negative US trade balance, believing that America did the world a favor by spending its “global saving glut.” And, yes, he missed the approach of the biggest financial disaster in three generations. Then, when it arrived, he mistook it for a routine recession, until finally, panicked by the collapse of Lehman Bros., he insisted that Congress pass a $750 billion spending bill — or “we may not have an economy on Monday.”


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But except for things that really matter, he’s been a pretty good Fed chief. Besides, he has the right credentials. He was a professor of economics at Princeton and holds a Ph.D. from MIT — just like the most recent Nobel Prize winner in economics, Paul Krugman.

The United States has just averted the Second Great Depression, say the papers. “What saved us?” asks Krugman in a recent New York Times editorial. “Big government,” is his answer. Specifically, the big government of Ben Bernanke.

But the ghost of Milton Friedman haunts the central bank. Bernanke borrowed a phrase from Friedman, saying he’d even “drop money from helicopters,’ if necessary, to prevent deflation. This led to one of the surest trades of the Bubble Era was the so-called on the ‘Bernanke Put.’ Investors thought they could count on him. Buy stocks. If they went down, Ben Bernanke would make sure you didn’t lose. He’d add liquidity until the market bounced back. But the Bernanke Put trade went bad in ‘07. The market fell. Ben Bernanke added liquidity. But so far, stocks have yet to regain 50% of what they lost. Meanwhile, consumer prices are falling. And yet, he does not drop money from helicopters. Why not?

Few people would have more authority on the subject than the group gathered at the Beverly Hilton in Los Angeles earlier this year. Michael Milken, the Junk Bond King, gathered them thither and picked up the tab for Gary Becker, Myron Scholes, and Roger Myerson...each of their names is preceded by ‘Nobel Prize winner.’ With that kind of brainpower on hand, you’d think you could come up with a good explanation. But the best they could do was a simple analogy. Gary Becker (Nobel awarded ‘92) took the Friedman line; he argued that by putting out the little forest fires, the recessions of the ‘90s and the early ‘00s, the feds inadvertently created the conditions for an even greater conflagration. Instead of burning off the underbrush, the tinder built up until a huge blaze was inevitable. And in a speech honoring Friedman, Bernanke accepted Friedman’s criticism of the Fed in the ‘30s. Yes, Bernanke admitted, the Fed made mistakes; but we won’t do it again, he said. The burden of today’s rumination is that he was wrong; he will do it again.

“Inflation is always and everywhere a monetary phenomenon,” said Friedman. But deflation doesn’t seem to be a monetary phenomenon at all. Despite huge inputs of new money from the Fed, prices are still going down. The Fed’s balance sheet more than doubled in the last 18 months. It will probably double again — to $4 trillion — before Bernanke’s next term is over.

Friedman won a Nobel Prize for his work. And he drew around him a community of scholars that won so many Nobel Prizes they ran out of room in the University of Chicago trophy cabinet. But it only makes you wonder about the Nobel committee. Friedman’s acolytes won their prizes for elaborating a series of mathematical proofs for things that were either self-evident or self-evidently absurd. Most of them were later shown to be wrong, irrelevant or misleading. Modern Portfolio Theory, Black-Scholes Option Pricing Model, Dynamic Hedging — the farther afield the scholars went, the more they lost touch with home. The more scientific their work became, the more it resembled alchemy or phrenology.

Friedman’s work itself was flawed in the same way. The general principle was correct — that the government that governs the markets least governs best. But when he got into the mechanics of ‘monetarism,’ he got lost. He believed that if the Fed kept its eye on the money supply; the free market would take care of everything else. But the free market didn’t take care of everything, at least not as people hoped. Economist Murray Rothbard explained why in 1971. You cannot expect the free market to function perfectly if you leave in the hands of the government the power to control money. Either markets are free or they aren’t, was Rothbard’s point. If they’re not free, you can’t blame freedom when they fail.

But free market economists are now blamed for everything. The free-market Chicago boys are out. The MIT crowd is in. And investors are buying the Bernanke Put again, confident that the Fed chief will keep pushing money into the system and stocks will continue rising. But Ben Bernanke, for all his bluster, is a victim of the trade. Everyone knows what he is up to. They can’t help but look ahead and see where it leads.


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As soon as Bernanke starts his helicopter engines, bond buyers get out their missiles; the Chinese — the biggest single customer for US debt — have warned that they will shoot him down. What can Bernanke do? He is damned if he doesn’t. But even more damned if he does. He can’t guarantee increases in either CPI or stocks. All he guarantees is that Big Government will play a larger role in the economy...and that Milton Friedman’s history of the Great Depression will turn out to be prophecy:

“The Fed was largely responsible for converting what might have been a garden-variety recession... into a major catastrophe...”

Ultimately, Bernanke does what his predecessors at the Fed did in the ‘30s...and what the Japanese did in the ‘90s. He hesitates. He makes mistakes.

And he wonders why he took the damned job in the first place.

Bill Bonner

A Parting Shot
First, thank you all for the well wishes on my anniversary.

Several of you caught that I’d written my starting date as September 2, 2009 instead of 2008…

If you started September 2, 2009, you are at work early because that’s next Wednesday!

The secret is out, Shooters. I’ve mastered time travel. Please don’t tell anyone.

Dear Gary,

I’m taking your suggestion and writing to you concerning your predictions about the price and quantity of oil available to us munchkins. You’re right. The calendar is wrong. I’m in the oil business and have been since 1966. You’re also an optimist. So am I. I can see what is coming right here in my own backyard.

When I started in this business, it was with a major, fully integrated oil company we all know and is still around but not now in Oklahoma. At that time I was one of 42 brand new geologists that year in that district. 95% of western Oklahoma was rank wild cat country and deep wells were 10,000 feet. The company had over 3,500,000 acres under lease or production in the Okc district alone.

Now the company is gone, no district, no geologists, and 95% of western Oklahoma is fully developed. A deep well is now below 22,000 feet and is looking for tight gas only. By the way, 95% of the oil in Oklahoma is above 10,000 feet. Only the gleaners are left and very few of them. I’d guess there are no more than 50 geologists in the whole state looking for oil now. The rest of the lower 48 onshore is the same or worse. Illinois and Kansas are history as is Arkansas and a lot of other places that were former big oil producers.

Hate to say it, but the socialists have been fiddling with the calendar numbers again. If the free market had been allowed to perform the way it should, your predictions would have been right on the money. Unfortunately, the socialists have tinkered with the money supply and driven the treatment for the cancer into the future, hoping it will cure itself. Really! Ya think! Surely not!

Keep up the good work. You are greatly appreciated by the munchkins who live in the real world and with a real calendar.

It seems that a few of you were as worried about Y2K as James Howard Kunstler and you don’t regret taking action, not one bit…

Got prepared for the worst, but did ok in the 10 years plus. Got out of the stock market in ‘99. Bought close to 40k in gold and silver Eagles.  Still have 3000 in freeze-dried food that will be good till December 21, 2012. Only 73 and living pretty good.


I too was one of those crazies who believed the info put out on Y2K and even bought the manual “The Y2K Smart Money Manual” by Paul D. Franklin.  Well today I can enjoy some of the fruits of that foolishness while others are licking their wounds of a down market in these past ten years.

See? Sometimes it pays to panic early. In fact, I generally recommend panicking at least a year or two ahead of everyone else.

But do so with a song in your heart and a smile on your lips. It’s just the end of the world. These things happen from time to time.

A former reader writes….

I called Agora Financial customer service to cancel my subscription to Outstanding Investments as soon as I began seeing negative and disrespectful comments about Ted Kennedy in various AF newsletters.  I want to grow my portfolio but I don’t want to have to listen to attacks on those whose vision is more inclusive and thirst for justice more acute than many drawn to the financial world.

Ted Kennedy’s story was one of redemption.  If you watched his funeral, you saw that throughout his life he embraced the social values of the Gospel - feed the hungry, clothe the poor, take care of the sick, etc. - as spoken by none other than Jesus himself and as taught to him by his mother.  Unfortunately, he and his siblings were also subjected to the “values” of his conservative father - who was by all accounts a philanderer, a bootlegger, and a “crook” in the words of FDR. (Note:  ”crook” is synonymous with “big businessman” in today’s parlance).  It took Senator Kennedy most of his life to overcome the influence of his father, but in the last two decades he was finally free.  There is no need to “spin” such a triumphant journey - it speaks for itself.

I don’t happen to support health care reform at this time or the way that it is being done.  However, I have the greatest respect for the values of those like Kennedy and Obama who strive for a fairer, more just world. 

My point is that it is possible to disagree without being disagreeable.  The bottom line for me is that in the couple of days that I received email from Agora Financial, it was clear that AF writers have not mastered that skill and matured to that level.

Oh my. Good thing she didn’t stick around long enough to read Linda Brady Traynham’s latest article in Morning Whiskey!

A useless, vicious, amoral man is dead at seventy-seven after a lifetime of excesses—and I don’t see how it can be described as “a heroic fifteen month struggle;” What’s heroic about having cancer, other than that he didn’t die of cirrhosis of the liver as many of us supposed he would eventually?


I feel like Ted Kennedy myself this morning. It’s like I’ve been run over by a bus or two. And I swear it’s not from drinking!

Your jack-of-all-trades editor is seeking mastery in at least one thing, Shooters. I’m training for my second U.S.A. Powerlifting meet, which will once again be held at the Naval Academy in Annapolis.

I managed to set a couple state records in my weight class (75 kg) in the unequipped or “raw” category back in February and I seek to break those records on September 19. And sometimes the training gets a little out of hand. This morning my central nervous system is still letting me know just how angry it is at me for having pushed so hard last week.

So I’m going to go lie down and read some more pro-market propaganda. And I’ll be back tomorrow, rested and ready to pick up the conversation where we left off.

Till then.

Gary Gibson
Managing Editor,
Whiskey & Gunpowder

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