Sunday, August 14, 2011

Bernanke the Wizard

Bernanke in remarks to Congress said that he would keep interest rates real low for the next two years. OK, tell me how? The only way to accomplish that is to buy every bond presented for sale on the resale market at full price. I wouldn’t pay full price for anything in this economy, it is counter intuitive. Every banker in town will queue up to the Federal Reserve to unload their dog eared bonds at full price.

People point to Japan over the last 20 years with super low interest rates, but the real game was obfuscated by international trading. The Japanese people were getting zero interest for their deposits but the country’s bankers were buying US Treasuries. These bonds were paying 7 to 8 percent so in actuality, we were subsidizing the banks in Japan. And by God they were patient, we made them whole over a period of two decades. The interest paid help bail out their failing institutions. They loaned us all of their savings for 20 years and we spent every dime. Of course, that’s another story.

Where do people want to put their money now? If you are super rich, it's in T bills. The money is insured by the full faith and credit of the US government. They are not worried about the return on their money, but the return of their money.

Bernanke has taken risk out of the market, all loans are guaranteed. The one market not under his control is stock market. It's looking a little sick lately. The real world is around here somewhere. Let's click some gold coins together and try to wake up--hopefully not in Kansas.


Anonymous said...

Around 1980, someone asked me how much money it would take to retire.
Interest rates on CD's back then were around 8%, so I replied that
"$1,000,000. would provide a VERY comfortable retirement."
Today, my answer would be somewhat different.

On a different note, the Home Depot in Oakland no longer allows "undocumented" workers to hang out in the parking lot, looking for day work.(Not a problem, since they now they just hang out at the fast food place next door.)
Is this a trend, or just an isolated incident? Anybody out there noticed this in your area?

frakrak said...

That is interesting Jim, I am fairly sure this is what the U.S. banks are doing, getting the 0% interest rate and investing elsewhere (as Japan did). Unfortunately I don't think the U.S. banks have the same quality investment opps that Japan did.

dearieme said...

"..we were subsidizing the banks in Japan": I'm not sure that "subsidizing" is quite a fair description, but anyway your remarks here are real food for thought. Thank you.

P.S. How are the Japanese banks to get reutrn of capital? Has the US dollar sunk vs the yen over this 20 year period?

Anonymous said...

I just hope that the politicos, bankers and Fed Reserve keep up the facade and legerdermain and keep things "floating" for a few more years so that I can make a lot of money and then turn it into tangible assets in order to save my ass before the USD becomes worthless or close to worthless. We'll be in and out of recessions and deflations and stagflations for awhile until the weight of all our excess and fiscal and monetary violations pushes us down and The Great Contraction has its way with us.

We have violated the fundamental law of economics for too long and the reckoning will come. I just hope that they hold it off a bit longer so that I can get my ducks in a row.

The fundamental law that has been violated is:


Anonymous said...


I like your post, but not sure I agree in your hint that the FED is not controlling the stock market. I see the market as being highly manipulated.

Wasn't it Ben that gave the financial giants all the cash, which in turn they dumped into the market with great success during the market low in the middle of the last crisis? Meanwhile, all the little guys got screwed as the corporate media pounded on us that it was the end of the world. Nice con. They announced huge bonuses for the financial industry in that year.

Anonymous said...

The Fed is indirectly controlling the stk mkt by keeping int rates low. That forces savers and CD people out into the stk mkt. All the liquidity Bernanke has created has gone into commodities and the stk mkt. If the Fed and Congress weren't doing what they are doing the stk mkt would be at 6000.

Tyrone said...

Surreptitious stimulus???
Perhaps they have made it easy to obtain food stamps to goose the economy. Forget about the $300 per household for a year. Give 1 in 7 money EVERY month.
$6.1B a month.

Food Stamps as an Economic Stimulus?

Jim in San Marcos said...

Hi Anon 9:47

At 2% interest, you need a couple of million more to retire comfortably.

I haven't noticed any illegals looking for work, but I have been hit on, by middle age white women, twice in the last month for hand outs, usually in the parking lot of a super market. The thing that bothers me, is that I feel bad for saying no. I think there are a lot of people out there saying yes for the same reason.

Jim in San Marcos said...

Hi Frakrak

We don't need a Sugar Daddy to bail out the banks like Japan did, we have the Federal Reserve and Ben Bernanke printing money.

I agree we just don't have "the same quality investment opps that Japan did." Ours is some sort of "Fly by Night" musical chairs game.

Jim in San Marcos said...

Hi Dearieme

I don't have any real documentation on how Japanese Carry trade played out. But it seems to have worked quite well for Japan till around 2005. At that point currency valuations got into the flux and pretty much eliminated the "sure thing" part of the investment.

I would expect that a lot of Japanese investment of any sort has probably brought their money home by now, the investment in Treasuries makes no sense at our low interest rates.

Jim in San Marcos said...

Hi Anon 7:33

I view it a bit different. The Fed has pumped money into the banks who had problems and paid off the failed loans. Interest rates dropped to zero since there is no risk.

If you have cash in the bank why keep it there at zero interest rate? Put it in the market in stocks or commodities and make a decent return.

The government changed the way it was doing business and people with money in the bank changed where they wanted to keep it.

Jim in San Marcos said...

Hi Anon 7:45

I tend to agree with you. The Feds actions have guaranteed a very good rate of return on commodities. The interest carry charges (interest charged over the life of the contract) are very low--borrow dollars and invest in gold and silver. Everything has been on the upside.

There are three games still playing in town; the stock market, commodities and bonds. You need cash to play, so watch out; these guys were all selling houses 5 years ago.

Jim in San Marcos said...

Hi Tyrone

I know what you mean.

Thank you for the link

Tyrone said...

but I have been hit on, by middle age white women, twice in the last month for hand outs, usually in the parking lot of a super market.

Wow! I have not experienced that... yet.

Anonymous said...

No question about it, we are in another recession now. Double dip or whatever you want to call it, it's a recession. We've got stagflation happening right now. I believe there will be cycles of recession, stagflation, deflation, inflation, etc. etc. but they will all be within the overall major cycle of a DEPRESSION.

Not sure how long it will take before the majority of Americans acutally understand that the USA is in a DEPRESSION.

Jim, you were a little early calling it 2006. Only missed by a few years. I believe once the historians look back on this period in time they will say the second great depression started to manifest in 2007 and that the causes go back 40 years when the poor fiscal and monetary policies and regulatory actions were implemented. We are now paying for having created the biggest credit bubble in history. Debt driven spending for consumption and as a solution to economic problems will be the straw that broke the camel's back.

Jim in San Marcos said...

Hi Anon 11:38

It's hard to say where history will cite a date on this depression.

The Depression of 1929 actually started in 1926. Historians gave it the date of 1929 only because of the stock market crash, but times were still very good then. It was only in 1933 that everyone knew they were in a depression.

When I started writing this blog in 2006, I mentioned that we would only see this depression in the rear view mirror. As long as we believe that the recovery is just around the corner, there is no depression. It's when we stop believing the optimism put forth by government, that despair has a chance to set in.

This time it could be very different, the 15 trillion in government debt is money already spent and we can't pay it back. We can still pay the interest, which is a good thing, but that may not last long.

frakrak said...

Jim, what can one say about all this? Warren Buffett pleading to be taxed? Now what prompted that I wonder? If that doesn't say the game is up what does?

Deck chairs, Titanic, string quartet, icy waters beckoning! I am thinking that as the ship sinks expect some fellow passenger to hold you up for your designer diamond encrusted Tag Heuer (instead of your life boat pass), under 15 and with a British accent no doubt:)

In fact what happened in Britain these past few weeks could happen anywhere, and at anytime now .....

Anonymous said...

when the government/media prop up and public relations finally wears off and the lumpen public finally realize there will be no "recovery" and that their "leaders" are not capable of solving these problems that they and their predecessors created, the collective sentiment will turn down and the depression will be "official".
this could happen sooner than we think or maybe we'll coast for a bit longer. super low interest rates seem to allow you to skate over thin ice for quite a while.

Jim in San Marcos said...

Hi Frakrak

I don't understand it either. Most rich people are cash poor, everything is sunk into the business. If they had to come up with taxes, they would be bankrupt.

If things are getting better, why do I have the feeling that Europe is falling apart?

Your references to the Titanic make me chuckle. We can rearrange the chairs, but we can't change the outcome. I guess that is the real message we need to comprehend. It's going to happen whether we like it or not.