Questions for Ben Bernanke

Why can’t my Portrait of Grant fill the gas tank anymore?

Seth Lipsky, online.wsj.com, 04/27/2011

Federal Reserve Chairman Ben Bernanke, in a break with tradition, will now hold quarterly press conferences. The first begins today at 2:15 p.m. Here are four questions:

1) Mr. Chairman, I have here what my college poker buddies used to call a “Portrait of Grant”—that is, a $50 Federal Reserve Note. It is my understanding that the United States code says that this is redeemable at the Federal Reserve in “lawful money.” Does that mean that it is not in and of itself lawful money?

And might I impose on you here and now to redeem this bill for me in lawful money? The reason I ask is that my Portrait of Grant used to buy enough gas for me to fill the tank on my jalopy, but now I’m paying darned near $5 a gallon. I am hoping that “lawful money” might get me more gas. Read more»

S&P Commences the Process

Doug Noland, www.prudentbear.com, 04/22/2011

I’ll put the probability of a downgrade in the next few years at close to 100%.

The good news from Standard and Poor’s was that the company reaffirmed the United States’ “AAA” sovereign debt rating.  The bad news was that its outlook was revised to “negative.”

From Standard and Poor’s:  “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”??U.S. bond prices actually moved up on the news (in the face of Monday’s weak stock market), and yields ended lower for the week.

It’s true that the markets were not caught unaware of our nation’s fiscal woes.  And similar to other potentially negative fundamental developments, markets participants are these days content to play the here and now – and leave structural issues for some later date.??From my perspective, S&P’s summary point for why the U.S. retains its top rating provided the most contestable aspect of their report:  “The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.” Read more»

Geithner Downgrades His Own Credibility to Junk: Jonathan Weil

Fox Business reporter Peter Barnes began his televised interview with Treasury Secretary Tim Geithner two days ago with this question: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.” Read more»

Making Room for China:

Doug Noland, www.prudentbear.com, 04/15/2011

China is in the midst of the “terminal phase” of Credit Bubble excess…[W]e have likely passed a tipping point where China and the “emerging” economies now exert increasingly strong inflationary pressures upon the global economy.

Foreign exchange reserves held by the People’s Bank of China surpassed $3.0 TN in March – not shabby for holdings that began year-2000 at $155 million.  China’s international reserves surpassed $1.0 TN for the first time in October 2006 and jumped past $2.0 TN during April 2009.  Reserves expanded $590bn over the past nine months, a 28% annualized pace.  This unprecedented growth is even more noteworthy considering the rapid shrinking of China’s trade surpluses.  Indeed, Q1’s near record $197bn increase in reserves compares to a trade surplus for the period of $13bn (smallest surplus in seven years). Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 04/15/2011

Selected Notes:

April 12 – Bloomberg (Sandrine Rastello):  “The U.S. is set to have the largest budget deficit of major developed economies this year and should narrow it now rather than face tough adjustments in the next two years, the International Monetary Fund said.  The U.S. shortfall will reach 10.8% of its gross domestic product this year, ahead of Japan and the U.K. …

April 11 – Dow Jones:  “A prominent Chinese economist and former adviser to the country’s central bank Monday likened the market for U.S. Treasury bonds to a giant ponzi scheme, and argued China should float the yuan in part so it doesn’t have to acquire so many Treasury assets. ‘China should have retreated from the U.S. government bond market a long time ago,’ Yu Yongding, currently an economist at a state think tank and formerly a member of the People’s Bank of China monetary policy committee, wrote… ‘The (U.S government) bond market was essentially bolstered by a ponzi scheme. Read more»

Big banks are government-backed: Fed’s Hoenig

Joe Rauch, ca.news.yahoo.com, 04/12/2011

Big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday.

The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig.

Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 04/08/2011

A Few Selected Highlights:

Federal Reserve Credit jumped $22.2bn to a record $2.620 TN (22-wk gain of $339bn).  Fed Credit was up 2121bn y-t-d and $339bn from a year ago, or 14.4%…Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $1.592 TN y-o-y, or 20.3%, to a record $9.447 TN.

The U.S. dollar index dropped 1.3% to 74.86 (down 5.3% y-t-d).  On the upside for the week, the Brazilian real increased 2.4%, the New Zealand dollar 2.0%, the Norwegian krone 1.9%, the Swiss franc 1.9%, the euro 1.7%, the Australian dollar 1.7%, the British pound 1.7%, the Taiwanese dollar 1.1%, the Mexican peso 0.9%, the Canadian dollar 0.8%, the South Korean won 0.8%…On the downside, the Japanese yen declined 0.8%.

Read more»

Diverging Monetary Policies, Again

Doug Noland, www.prudentbear.com, 04/08/2011

In a lesson regrettably left unlearned, policymaking that spurs a cycle of speculative leveraging [as per U.S. Fed policy beginning in August 2007] lays the foundation for eventual de-risking, de-leveraging and liquidity crisis.

This is a dangerous period.  Global liquidity is way too plentiful, while speculation has become too all-embracing and rewarding.  Indications of monetary excess are everywhere.  Indeed, we’re in the midst of the biggest financial Bubble in history (the “Global Government Finance Bubble”) – yet everyone seems comfortably oblivious.

…I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles…It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.

Read more»

Inflation Solution?

Austerity and inflation will go together.

Holman W. Jenkins, online.wsj.com, 04/06/2011

You can hardly turn over an investing advice newsletter without finding a recommendation to buy TIPS, or Treasury inflation-protected securities, to preserve the purchasing power of your dollar-denominated savings.

Economists and investment pros look out three years and can’t believe we aren’t due for a powerful flush of inflation. The usefulness of their favorite hedging advice, however, depends on the U.S. government actually carrying out the promise embodied in TIPS, honestly to apply an inflation adjustment to protect holders from loss of purchasing power due to the government’s own mismanagement of the currency.

Will the spirit and letter of this guarantee be observed? The question has to be asked because Washington has shown no hesitancy to delegitimize legitimate claims by vilifying those asserting them—GM and Chrysler debt holders being the most recent examples. By the time the TIPS question comes up, moreover, the slope will likely have been greased by states and municipalities reneging on promises made to government retirees and bond investors. It will have been greased by governments around the world setting example after example of the many flavors of default. The justice or lack thereof in each such case is not the question. What matters is to recognize that government promises are not written in stone. Read more»

March Madness: U.S. Gov’t Spent More Than Eight Times Its Monthly Revenue

Terence P. Jeffrey, cnsnews.com, 04/04/2011

The U.S. Treasury has released a final statement [2] for the month of March that demonstrates that financial madness has gripped the federal government.

During the month, according to the Treasury, the federal government grossed $194 billion in tax revenue and paid out $65.898 billion in tax refunds (including $62.011 to individuals and $3.887 to businesses) thus netting $128.179 billion in tax revenue for March.

At the same time, the Treasury paid out a total of $1.1187 trillion. When the $65.898 billion in tax refunds is deducted from that, the Treasury paid a net of $1.0528 trillion in federal expenses for March.
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