TCS Daily

Another Fed Meeting, More Helicopter Ben

By Larry Kudlow - September 23, 2009 12:00 AM

Today's FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn't care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month's reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation.

A Bloomberg story last night said the Fed has been talking to government bond dealers about something called "reverse repos," which simply means the Fed would sell Treasury bills to Wall Street and withdraw cash liquidity from the financial system. But there's no mention of this exit strategy in today's policy memo.

Essentially, the whole reverse-repo business has to do with the Treasury's debt-ceiling limitations and the fact that the U.S. government is taking back $200 billion of cash sitting at the central bank. So the Fed could absorb some of that $200 billion through the reverse RPs, or simply let excess reserves held on deposit at the Fed go up another $200 billion. Whatever, it's a technical matter.

The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today's incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben.

Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That's gonna wait well into next year.

It's ironic that today's policy announcement sounded much more optimistic in terms of the economy. And in view of this great monetarist experiment — which really is Friedmanism run amok — the Fed and everyone else may be surprised by a barnburner of an economic recovery over the next four to six quarters. Anticipating this, the stock market has had a tremendous run, and will probably continue on its upward path.

Trading has been lackluster following the Feds' statement, with the Dow up only 20 points as of this writing, somewhat lower than the pre-Fed level. Reflation investments in industrials and commodities are clearly the place to be with the Fed strategy.

But heading into the G20 meeting, the U.S. has no exit strategy for fiscal or monetary policy. That could well create more problems, including more chatter from China and others about the dollar's status as the world's reserve currency.

The Obama-Geithner-Bernanke dollar-depreciation strategy is fraught with risk.

This article first appeared on Kudlow's Money Politic$.


Doomed to repeat the mistakes of the past
"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%."

That was written by Art Laffer, too

This is WHY Bernanke was not replaced by Lawrence Summers
He whored out the Fed's 'independence' to keep his job.

This is exactly the relationship Robert Mugbabe had with is central bankers in Zimbabwe...the ones that wanted to keep their jobs or even their lives, anyway.

Off topic: If Roy is still paying attention...
"Three spacecraft have indications of widespread water on the moon. Media coverage focused on the surprise of scientists regarding this result and how it has potential implications for future human exploration. ABC World News (9/23, story 10, 1:45, Gibson) reported, "It appears there is much more water on the surface of the moon than anyone ever knew." ABC (Ned Potter) added, "Today's discovery is something that NASA has been hoping for, for years." Carl Pilcher, NASA: "Water that might be used someday by...human lunar explorers, who return to the moon to do science on the moon and perhaps it is a steppingstone out into the rest of the solar system." Potter: "Several satellites orbiting the moon have found tell tale readings of ice in the lunar soil, billions of gallons of it. There had been hints of this in the 1990s, but now, three papers in the journal 'Science' say there is good proof. ... In just a few weeks, there may be even better proof. NASA plans to crash a rocket called LCROSS into the moon, and a satellite will measure precisely what it kicks up."

The AP (9/24, Borenstein) reports the water "was spotted by spacecraft that either circled the moon or flew by. All three ships used the same type of instrument that looked at the absorption of a specific wavelength of light that is the chemical signature of only two molecules: water and hydroxyl," but scientists "doubted the unexpected measurement until it was confirmed independently and repeatedly." Measurements first seen aboard India's Chandrayaan-1 sent scientists looking at the data from NASA's Deep Impact and Cassini spacecraft for confirmation because they thought the measurements were wrong. "The chance that three different instruments malfunctioned in the same way on three different spaceships is almost zilch, so this confirms that it's water and hydroxyl," Brown University's Carle "Pieters said." However, "if you want a drink of water, it would take a baseball diamond's worth of dirt, said...Pieters." The AP notes that other scientists not involved with the work also called the findings "unequivocal."

Lawrence Taylor of the University of Tennessee, Knoxville, speaking in the New York Times (9/24, A29, Chang), said, "It's so startling because it's so pervasive." Widespread water "could make future settlement of the Moon easier, especially if significant water could be extracted just by heating the soil." Samples from the Apollo mission "did show signs of water, but most scientists working with the samples, including Dr. Taylor, dismissed the readings," but now he is "convinced he was wrong." The data "suggests the water is being created when protons from the solar wind slam into the lunar surface. The collisions may free oxygen atoms in the minerals and allow them to recombine with protons and electrons to form water."


Ben Fed a lotta Bull
Dearest Larry: You are absolutely right that the Fed is monetarizing the debt which will have broad repurcussions in the future. Bernanke is trading a short-term bubble in stocks for a long-term financial disjunction.
But, first a little bit of editing, if you don't mind. It is true, I don't think BenBer has the "wit," but I know absolutely that he doesn't have a "whit" of understanding about the real financial markets.
I would like to refer you to an excellent article in the Washington Times by Fergus Hodgson, fellow at the American Institute for Economic Research entitled "The New Zealand Way." He says, "The US Fed is in a precarious position, facing both current deflation and the prospect of severe inflation...."
This mixed mandate, unemployment, dollar stability, inflation, is combined with the new "reserve currency" burden. You are--so right!--that the Chinese, Europeans, as well as the Russians, are very uneasy about the policies of the Fed.
On another note, about healthcare (your last great article) the public has little or no confidence in the Congress or in the President to construct a fiscally responsible plan. In fact, these people are bozos.
Rockefeller, in an interview with CR, says "why do an MRI for a million bucks when you can do the same thing with a PET scan." Huh? And this is the guy who likes an exhilirating intellectual process? Then he says, "usually when you have gallstones, you know about it." You DO? With what, your X-rated vision? Then today, old Cotton-Mouth, slurred speech, carotid clog, starts rambling on about prescription plans. This, with Marfan's Obama, a still sick Summer, and a ready-to-blow-a gasket Rhambo--this is a ship of fools--or gang of ghouls.
THEN, if that wasn't enough, old ChuckieChuck Schumer says, well, I take Lipitor, but when my doctor changed me to the "generic Zocor" it didn't have the same effect. HOOOKKKAY! And these guys, who don't know a CAT from a PET or a generic from a brand or their A...from a...(but I digress...) are supposed to be managing a trillion dollar government program?
At that I will humbly address your attention to yet another excellent article, "Health Tourism Plan Put Forward," in the FT by Andrew Bounds, 7-3-08. You can look for huge Mexican/Cancun/Bermuda cruises, tours. Americans simply will not put up with this!
I love you very dearly! J

A little note on corrections
While I agree completely with the overall point of this post, there are a couple of clarifications/corrections I felt were needed.

A. An MRI and a CAT are not the same thing and are not interchangable.

B. Trust me on this, YOU WILL KNOW IF YOU HAVE GALL STONES, and you don't generally need any test to diagnose it (however, a relatively inexpensive ultrasound will confirm - as will X-rays).

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