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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
February 28, 2011
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We’re now close to the half way point for QE2.  The June wrap-up date should begin to move from the back of the markets’ mind to the forefront.  This week from the Financial Times’ Michael Mackenzie:  “It is no secret that China’s appetite for Treasuries has been waning. Official figures now bear out Beijing’s stated desire to diversify away from US government debt.  The market impact is likely to be muted for now, given the Federal Reserve’s bond-buying under its ‘quantitative easing’ program.  But what happens when QE2 ends in June?”

It is central to Credit Bubble analysis that policies that artificially inflate price levels are inevitably problematic.  To be sure, policy stimulus engendered specifically to create excess marketplace liquidity inflates market prices while manipulating market perceptions.  The Bernanke Fed wanted stock prices higher and they’ve succeeded.  Along the way, policymaking has fomented Bubble Dynamics - reinvigorating risk-taking and leveraged speculation.  Speculative excess and inflationary forces have been unleashed upon the world.

Global policymakers have succeeded in re-inflating global securities markets – in the process they also incited rampant food and commodities price inflation.  More broad-based inflationary pressures are mounting, although global policymakers in unison are slow to move away from extraordinarily loose policies.  There is increased talk of how the world’s central bankers – especially those in Asia – are falling further “behind the curve.”  Systemic fragilities are escalating along with the potential for belated monetary tightening and “hard landings”

The Fed clearly has no inclination to reverse course anytime soon.  Our central bank has basically signaled that its blinders have been positioned to see little else beyond our unemployment rate.  It’s also apparent that structural issues and the current strain of global inflationary dynamics ensure that U.S. employment gains lag inflationary pressures.  It’s the wrong economic indicator for which to base monetary policy.

The Fed has convinced the markets that our central bank would feel more comfortable with a higher inflation rate.  And, at some point down the road, policy could change course to manage the inflation level to some optimum point.  Our central bank – along with the markets – has grown comfortable with “quantitative easing,” over-confident in its capacity to control the unfolding financial boom, and complacent about what comes next. . . .
Our deficits are completely out of control, and the Federal Reserve has added to its list of historic blunders by accommodating Washington spending profligacy.  Quantitative easing distorted the pricing of government debt and the markets perceptions of risk, thus promoting unprecedented government borrowing and spending.  Without QE1 and QE2, higher Treasury borrowing cost would have some time ago commenced the necessary “austerity” measures.  Instead, the Fed has aggressively manipulated borrowings costs and the Treasury has accumulated debt recklessly. 

It hasn’t mattered much in the market that the Chinese and other central banks have backed away from accumulating Treasurys.  Few take notice that the dominant international buying now takes place through the financial hubs in the UK and the Caribbean (hedge funds and other leveraged players?).  Perhaps, as the FT suggested, it might matter in June when the Fed wraps up its (latest phase of) monetary experiment. 

There are reasons for the marketplace to become increasingly nervous with the confluence of massive supply, the lack of a reliable central bank (Fed, China, etc.) backstop bid, potentially “weak-handed” leveraged players becoming the marginal source of market liquidity, and a potential derivatives tinderbox.  With inflationary pressures mounting in a world dominated by derivatives and sophisticated hedging programs, one has the makings for one volatile bearish concoction.  And with the unprecedented trajectory of federal debt accumulation, we’re now at the point that market yields don’t have to surprise much on the upside for some really serious problems to unfold. 

I think the sophisticated players have believed there were still a couple of years before the U.S. debt problem turned unstable.  I think they may have to rethink.  I have in the past pointed out that in early November 2009 Greece could borrow for two years at about 2% - and markets could pretend the Greek debt situation was manageable.  The fact that markets were content to postpone the disciplining process ensured that when it did finally arrive it was serious.