How Bernanke stole ChristmasDecember 19, 2012: 12:28 PM ET
The Federal Reserve's latest bond-buying plan is far from a watershed moment.
By Moshe Silver, Hedgeye
FORTUNE -- While the rest of the world prepared to shop till they drop for Christmas, Fed Chairman Bernanke was indulging in the playful Jewish tradition of the season, known as Chanukah Gelt -- "Chanukah money." Each day during the Festival of Lights, parents give small amounts of money to their children. The children take the cash and proceed to gamble it away playing Dreidel – the Yiddish word for a spinning top – a game in which a four-sided top is spun and the players either win or lose their bets, depending on which letter of the Hebrew alphabet comes up.
This is a particularly apt metaphor for the press conference Bernanke held on the fourth day of Chanukah last week. As Hedgeye's Keith McCullough put it in his Early Look note the morning after:
Educating yourself to contextualize this moment in economic history is one thing – having common sense is entirely another. Bernanke admitted yesterday that his entire policy framework is based on forecasts that you should have no confidence in. Finally, I think global markets actually took his word for it on that. To review Bernanke's 2012 experimentation (actually he called them "innovations" yesterday, and smirked):
- January 25th, 2012 – right when Global Growth was accelerating (I was as bullish as anyone in the world on the prospects for US and Global Consumption growth on JAN24), he arbitrarily decided to move his 0% interest rate Policy To Inflate out to 2014 from 2013. Stocks and Commodities ripped for the next month, then topped.
- September 13th, 2012 – after whispering sweet bailout promises to whoever got the memo (other than me) from Jackson Hole, Bernanke pushes his 0% interest rate Policy To Inflate out to 2015 and beyond. Stocks and Commodities continued to rip for another day, then topped.
- December 12th, 2012 – whoever was front-running the Fed's latest "innovation" (knowing he'd move to "targeting" an unemployment rate that you may not see until 2017-2020) didn't even stick around for the full press conference. Stocks and Commodities topped, intraday!
After perpetuating all-time highs in Housing, Education, Oil, Gold, and Food prices (2006-2012), he pushed out the 0% rates 3 times in 10 months, from 2013 to 2017 and beyond. Each time, the market rallied less (for less time) on less volume.
Bernanke is preparing two stocking stuffers to add to this Santa's Bag for his Monetary Lemmings as they rush headlong towards the Fiscal Cliff. Here are our two thoughts on what economic gurus are calling Bernanke's "watershed moment" in changing the Fed's focus from a date, to a number (6.5% unemployment).
It is much more difficult to manipulate the calendar than to diddle with economic statistics. Calendar tampering has long been a hallmark of revolutions-turned-dictatorships. Consider the French, who transitioned from Monarchy, to righteous revolutionary rage, to Terror and dictatorship – to the point where Robespierre presented himself as both Messenger and Messiah of a new religion – to the ascent of Napoleon as absolute dictator. Consider Pol Pot, who renamed 1975 "Year Zero," then proceeded to kill 2 million of his countrymen during Years One, Two, Three and Four. To this we now add the Bernanke Corollary: when you can't change the calendar, change the arithmetic.
Riding on the back of this maneuvering comes a more radical notion, one that keeps tugging at our warped imagination. It is the thought that the Fed and Treasury might enter into a deal to cancel a portion of the national debt. As has been observed by many across the political spectrum, Treasury debt held by the Fed, through its QE program purchases, is actually debt owed by the US, to the US. And there have been a few articles in recent weeks that appear to be trial balloons: what would the world do if we just canceled the Treasury's debt?
Part of the logic is that Treasury bond sales restrain spending across the economy. If the government merely printed money to pay its debts, inflation would spin out of control. By selling bonds that it will one day need to redeem, the government sucks a certain amount of private capital out of the market. This acts as a brake on private spending and thus (theoretically) controls inflation. And the knowledge that those bonds will one day come due keeps a constant tax pressure on consumers and investors alike as they recognize they will one day have to foot the bill. cancellation of Treasury debt held by the Fed would be inflationary – helicopter-style. As a policy shot in the dark, though, it might be seen as a last-ditch way to stimulate all that private spending and bank lending that is not going on. A spike in interest rates, for example, will make it more attractive to banks to make loans. The removal of a portion of future tax burden will make private investment more attractive.
The Financial Times (5 December, "How Cancelling Central Banks' Holdings Of Public Debt Could Be A Useful Thing") says such debt cancellation is essentially an accounting entry and ultimately not material to the economy "because both treasuries and central banks are part of the public sector." The article quotes research from Morgan Stanley that says increased household saving is, perhaps counter-intuitively, not reducing leverage in the economy. This is because the increase in credit was not the kind that can be paid down with savings. Households are supposed to save to pay credit card bills, to pay down current spending on things like groceries, minor household improvements and clothing. Thus savings go dollar for dollar to cover the spending that boosts consumption. That's the theory, but for decades they have borrowed to buy real estate, cars and financial assets, all of which must appreciate in value for the debt to be paid off. If you are old enough to be reading this, you know that has failed to happen. Worse, in many cases – millions, perhaps, it has led families to sell their large assets – or default on them – to continue paying for groceries.
With Christmas approaching, we wonder who will be able to afford to stuff their family's stockings. The Fed has given us holiday cheer in the form of ongoing "support" for the economy ("On the fourth day of Chanukah, my Chairman gave to me / Continued eternal QE…"). Bernanke is linking future Fed purchases to the unemployment rate, but we fail to see the mechanism whereby continued spending of money that taxpayers have not yet paid into the system will create jobs. The Fed is promising an unlimited program to buy up assets that have already been defined in the market as worthless pieces of paper.
The coin of Bernanke's Chanukah Gelt appears rubbed smooth – perhaps "sweated" or clipped of its precious metal content. The Fed's job, famously, is to take away the punchbowl when the party gets too rowdy. With everyone looking all somber, Bernanke can't exercise his role as Party-Pooper – so he is practicing the obverse of his traditional task, making sure everyone gets drunk enough to get completely out of control. But then – not to worry, he assures us – he will be quick to snatch the liquor. After all, that's his real job.