Money Sage

Having become accustomed to Bernanke's sleigh of hand over these many -- seemingly endless -- months, we had assumed that we had seen it all. This, however, turns out not to be the case at all.

One of the principal techniques of the con man is built upon the proposition that "the hand is quicker than the eye." This perception gives rise to the shell game. There is a lot of movement, a lot of action, a lot of excitement. The eye is focussed intently on the item under one of the "shell". This, of course, serves to DISTRACT ATTENTION from other, perhaps far more significant things that may be going on in the room. (For example, the accomplice of the con man may be getting a club with which to knock the patsy out as the prelude to robbing him).

The game itself is fascinating, riveting even, because it exploits the competitive instincts of human -- said instincts having served our species survival attributes.

Of course, the hand IS quicker than the eye, which means that the con man always comes out the winner.

Now, we do not mean to imply that our estimable FED chairman is a con man. Not at all. He is sincerely devoted to the well-being of the country. His actions are governed by the imperatives of Necessity. These requirements may, lamentably, force him to employ measures which are not exactly admirable, or even honorable. However, his motivation is pure, driven by the best of intentions. Of course, life being what it is, we must acknowledge that "the road to hell is paved with good intentions." To be fair, we must also recognize that Bernanke inherited a situation horrendous beyond comparison. (Without forgetting, of course, than he played a role in setting up the house of horrors he now combats so earnestly).

The essential prerequisite to rescuing our economic and financial system is to EFFECTUATE the transfer of wealth and income FROM creditors, savers, prudent investors, and retirees TO debtors, imprudent men, overspenders, over-borrowers, and over-speculators.
This company includes most prominently:

--Government, both federal and state and local;
--Banks
--Over-indebted homeowners
--Debt-bedraggled consumers

In order to effectuate this transfer it is necessary to secure, at the very least, the passive acquiescence of those from whom wealth and income are being transferred. A key component of accomplishing this is to confuse, mesmerize, and paralyze the latter. A variety of maneuvers and techniques are employed in this cause.

In all fairness we must observe that it is not only Bernanke who is heavily engaged in these maneuvers. It is also the White House, beginning with the president on down, the Congress, and, of course, the media and Wall Street. The media may be unwitting accomplices (or some may be witting but convinced that "white lies" are necessary for the country's salvation and recovery).

The central ingredient in the FED's witches brew is the debasement in the real value of debtors' obligations to creditors. Since some creditors are very sophisticated and difficult to fool -- e.g., the People's Bank of China and the Bank of Japan -- it is necessary to placate them with reassurances and it may we think, soon require a diminution in the amount of wealth transfer FROM creditors holding US sovereign debt. The key question remains: can the US government, and the FED, depend upon the self-interest of its foreign creditors given its "too big to fail" status, and given the trade and economic importance to them of supporting the dollar and, indirectly, the US economy. As we have noted before, governments and states sometimes act against their self-interest. Or they may weight a near-term economic interest against conflicting political or geopolitical aspirations. Alternatively, human emotions -- anger, frustration, mistrust, and fear of continuing or even accelerating debasement of their loans may induce them to anti-dollar action which could ramify and cascade, producing a global panic.

The latest shell game is the Federal Reserve exit plan complemented by the Fannie/Freddie gambit. The FED is making a rather transparent effort to assure bondholders, particularly foreign central banks and governments, that it is moving to the anti-inflation position. Simultaneously, the Treasury has expanded its credit line to Fannie/Freddie (which are of course government owned and controlled) to INFINITY. In other words, what the FED taketh away, Fannie/Freddie (i.e., the Treasury) giveth back. Government money is merely being injected via a NEW RIVER back into the real estate sinkhole. The end of the FED mortgage-backed purchasing program is instantaneously counter-acted by the vastly accelerat-able Fannie/Freddie mortgage-backed purchasing/retention program.

As far as the forthcoming end of the FED's purchasing of government bonds program, well, let us say, when we sees it we'll believes. No doubt an alternative river will be created to keep buying Treasuries.

Neither the FED nor the government are prepared to allow normal market pricing to resume, despite the passage of 15-months since the banking system and financial market collapse.

This, we think, speaks volumes. Not only will the liquidation not be allowed to proceed "normally," but it will be fought every step of the way, as it has been all along.

Bottom line: the due bill keeps rising ominously. How far down the road can the government kick the can? When will the day of reckoning come? Or, will the wealth transference program be sufficiently successfu so as to allow some type of recovery, and bar us from repeating Japan's experience?

Moneysage - 2009 - copyright