On a notable Tuesday, Federal Reserve Chairman Ben Bernanke achieved something quite unexpected…he opted for inaction. Following the Federal Open Market Committee meeting, Bernanke’s announcement revealed no changes to monetary policy.
This is indeed a remarkable occurrence. Recall that Bernanke has been instrumental in distributing $16 trillion in money—created out of thin air—to U.S. banks, corporations, and foreign institutions from December 2007 to June 2010. It seems like an almost daily ritual for him to dispense funds to those who haven’t earned them and don’t necessarily deserve them.
Needless to say, Wall Street reacted with disappointment to Bernanke’s lack of action. Given the declining economy and the looming crisis in Europe, many had anticipated a substantial announcement—perhaps the much-anticipated QE3—to support stock prices as the New Year approached.
Unfortunately for Wall Street, this holiday season, Bernanke was less generous than expected; he resembled Scrooge before experiencing his transformation. For the average person outside of Wall Street—who earn and save money diligently—the pause in money printing may protect our paper currency from depreciating into worthlessness, at least for a little while longer.
Price Discovery
Bernanke’s decision not to act isn’t exactly restrictive. The federal funds rate remains effectively at zero, a level more accommodating than anything seen during Alan Greenspan’s tenure. However, expectations have grown immensely; people now demand much more from Bernanke.
His familiar money-printing tactics—such as CPFF, MMIFF, TAF, QE, and QE2—have become signature moves of this central banker. Anything less evokes substantial disappointment from Wall Street.
On Wednesday, reeling from Bernanke’s surprising restraint, traders went into “risk-off” mode. Stocks, gold, oil—everything took a hit, with gold suffering a 4 percent decline and oil and copper both down by 5 percent.
Yet, not all assets fell; Treasuries soared instead. Yields, which move inversely to prices, on the 10-Year Note dropped to an impressive 1.90 percent.
Without the promise of more “funny money,” markets are now free to identify true prices. Asset valuations have undeniably been inflated due to heavy Fed intervention over the years. It is high time for the market to correct some of these price discrepancies.
In Praise of Scrooge
So, has Bernanke experienced a change of heart or a newfound clarity?
It’s unlikely. However, due to the significant attention the Federal Reserve has received since the massive bailouts of 2008, they are now compelled to step back and let the markets experience the tough realities of a less manipulated environment. Many people may struggle with this shift. We suspect that a DOW drop to 9000 will prompt the masses to implore the Fed to “do something.”
“The sky is falling!” they will cry. “You must save us from our mistakes!”
This urgency will likely enable Bernanke to regain the political momentum needed to fire up the printing presses once more, increasing the money supply. Just wait and see—by the second quarter of 2012, expect central bank money printing to be in full swing.
This time, though, the Fed might not label it quantitative easing, as such terms have garnered a negative connotation. Instead, they may rebrand it as interest rate targeting, at least initially, and many will embrace it. We will keep you updated as the Fed rolls out its plans. In the meantime, let’s take a moment to appreciate Scrooge.
Despite Dickens’ portrayal, Scrooge wasn’t wholly villainous. In fact, many of his attributes could, if adopted widely, significantly contribute to economic recovery: hard work, prudence, diligence, savings, and capital formation.
These are the virtues that foster true wealth creation. Yet, these traits come and go in popularity, much like tech stocks and turtlenecks.
One generation may amass wealth, only for the next to squander it. One group upholds their agreements with a firm handshake; another fills contracts with conditions and legal jargon. One generation supports a currency anchored by gold, while the next allows it to float atop an ever-expanding bubble of central bank inflation.
Ultimately, all accounts must be settled. Scrooge’s cold-hearted ledgers have always balanced.
Sincerely,
MN Gordon
for Economic Prism
