It was time for the FED Chairman to make his legislated appearance to Congress and Mr. Bernanke rightly refrained from being dragged into the battle over the budget. I have criticized the FED Chairman more than a month ago when he offered an opinion on the budget resolution. Fiscal issues are the purview of CONGRESS and the FED risks its independent stature if it wants to opine of the CONGRESSIONAL PREROGATIVE. Congressmen and women tried to get Bernanke to wade into the muddied waters and finally he flippantly said that legislators get paid the “big bucks” to make fiscal policy.
However, at day’s end the analysts at MOODY’S decided to enter the fray and threatened CONGRESS that the U.S. debt would face a downgrade if the debt ceiling wasn’t raised. The rating agencies have already raised the IRE of EUROPE and now seem to be looking for credibility by telling the U.S. CONGRESS to get its house in order or suffer the consequences. MOODY’S is a designated Nationally Recognized Statistical Rating Organization (NRSRO)
as granted a privilege by Congress, so if the rating agencies try to exercise their financial muscle by intimidating CONGRESS they may run afoul of their regulator. Careful Moody’s, very careful. Besides, from a credibility standpoint, the ratings agencies may actually be lower on the scale than the legislators they are trying to intimidate. As usual, the threat of a downgrade roiled the markets and aborted an early risk-on rally fueled by the soothing words of the FED CHAIRMAN.
In Bernanke’s prepared text he laid out the FED‘s success in the last year as the QE2 program halted the risk of deflation and inflation was lifted to more normal levels. The U.S. was able to head off a Japanese deflation in terms of economic growth. The FED also wants to take credit for lifting exports and the increase in business investment–tough to prove and tough to argue against. When questioned about the costs, Mr. Bernanke maintains that the FED is actually making money on all the securities it purchased and is recycling the proceeds back to the TREASURY. This is a flawed argument as the FED has only been able to roll down DEBT at this point and has yet to start unwinding its portfolio as the economy is still too weak to start removing the $2 TRILLION + portfolio.
However, Mr. Bernanke conveniently fails to discuss the problems the FED is having unwinding the more suspect instruments acquired from AIG in the Maiden Lane 2 portfolio. ALSO, IF MOODY’S DOWNGRADES U.S. TREASURIES WON’T THE FED TAKE A HUGE LOSS AS THEY ARE NOW THE LARGEST HOLDER OF TREASURY AND GSE PAPER. Wow, think of the conflict of interest in this dilemma. Imagine the DAMAGE to the FED‘s BALANCE SHEET AS THE AAA rating is lowered to JUNK. Also, in Chairman Bernanke’s testimony was a paragraph that the media jumped on as proof of another QE program to counter the recent soft patch in the U.S. and global economies.
“THE FEDERAL RESERVE COULD ALSO REDUCE THE 25 BASIS POINTS RATE OF INTEREST IT PAYS TO BANKS ON THEIR RESERVES, THEREBY PUTTING DOWNWARD PRESSURE ON SHORT-TERM RATES MORE GENERALLY. OF COURSE, OUR EXPERIENCE WITH THESE POLICIES REAMAINS RELATIVELY LIMITED, AND EMPLOYING THEM WOULD ENTAIL RISKS AND COSTS. HOWEVER, PRUDENT PLANNING REQUIRE THAT WE EVALUATE THE EFFICACY OF THESE AND OTHER POTENTIAL ALTERNATIVES FOR DEPLOYING ADDITIONAL STIMULUS IF CONDITIONS WARRANT.“
This paragraph should make any investor cautious as the market and the pundits like to believe that the man behind the curtain is all knowing. Congressman Ron Paul asked Chairman Bernanke if he watched GOLD PRICES and was he concerned by the rise in GOLD since the QE programs were initiated. The chairman said he did follow the GOLD price but deemed its rise to all the anxiety about instability throughout the world. Ron Paul then followed this up with a question about whether or not the FED Chairman believed that GOLD was a currency, in which the answer was a definitive NO.
In my mind it all depends how one defines the character of a currency. If you believe it to be a STORE OF VALUE RATHER THAN SIMPLY A MEDIUM OF EXCHANGE, the answer is more difficult. The uncertainty that prevails in the Chairman’s testimony means that the world’s lack of certainty in the FED‘s credibility is making GOLD a haven store of value. Yes, I am aware that U.S. TREASURIES are yielding very low rates and that means U.S. DEBT is still considered a depository of TRUST. Maybe, but it may mean that the FED‘s intervention in the TREASURY market has caused a temporary distortion or may represent the needs of foreigners and pensions to seek some return as they await the fog of economic and political uncertainty to lift. The TREASURIES MAY BE A MEDIUM OF TRUST BUT THE GOLD IS THE ULTIMATE TOOL OF VERIFICATION.
Tags: AIG, Ben Bernanke, Congress, Europe, Fed, Gold, Maiden Lane 2, Moody's, QE, QE2, Ron Paul, Treasury, U.S. debt
July 13, 2011 at 9:20 pm |
Bravo Yra.
Economics for educated fools & poltroons in public service.
A virtuous economic cycle is based on trust.
A vicious economic cycle is based on mistrust.
No trust = bust.
In God we trust. All others pay in gold.
July 13, 2011 at 9:44 pm |
Seanm—well said .It is even more evident if one reads the FOMC minutes from Tuesday.The first issue the FOMC dealt with the weakness in the FED’s DSGE based models.This is very disconcerting as the FED is nothing but its models ,especially in the Bernanke Era.I am left wondering as towho raised the issue and had the FED staff report out on it.
July 14, 2011 at 11:27 am |
>Ron Paul then followed this up with a question about whether or not the FED Chairman believed that GOLD was a currency, in which the answer was a definitive NO.<
I want to note it was a rather pregnant pause at that.
Maybe low treasury rates reflect in part the fact that the US has the largest gold reserves in the world, of which reserves are roughly 3.5 times that of the #2 and #3 top gold reserves in the world? On top of that, the US is still the safest place to store an asset in terms of a government that likely would nationalize or confiscate assets without due process held within its jurisdiction.
July 14, 2011 at 11:38 am |
all good points but the reserves relative to debt and gdp may find you a different answer
July 15, 2011 at 11:04 am |
Yra,
I think 30 Year Bonds are yawning at the Debt Limit Date because they know Treasury would just prioritize interest payments. And a default actually makes the 30 year a better investment if it cause Democrats to cut entitlements.
Democrats have proven they will never cut entitlements even in the face of mathematical certainty (e.g. Medicare is scheduled to blow up in 10 years with growth from 200 billion to 1 trillion).
I say Republicans should let Aug 2nd pass with no debt raise. The Treasury markets will be fine. Its the only way to force democrats to cut entitlements.
What am I missing here?
July 15, 2011 at 11:56 am |
Ron–the democrats will only cut entitlements if when they have the white house a leader will lead them to see that it the cuts will either be self directed or market directed and the market is a very harsh mistress.I think the debt market stays bid as investors are very scared and uncertain and feel the need to park money safely.The question for me –is do I buy dividend stocks rather then government debt–seems like a no brainer to me –why would I want to own u.s. debt when i have not seen the type of management that I can respect.