The Great Depression Online

Great Depression Online Archive Issue:

Egging Bernanke On

Great Depression Online
Long Beach, CA
October 12, 2010

Inside This Issue You Will Discover…

*** Bad News Is Good News
*** Sitting On the Assets Side of the Balance Sheet
*** Egging Bernanke On
*** And More

Bad News Is Good News

The stock market’s a barometer of social moods.  It measures bull and bear markets…and the highs and lows of exuberance, excess, panics, and crashes.  But what drives the market’s movement has less to do with the fundamentals of the economy and more to do with swings in mass psychology from pessimism to optimism and back.

So while the high hopes of a robust economic recovery are waning with each Labor Department Report – 95,000 jobs vanished in September – the stock market waxes like the bloom of a spring flower.  In fact, last Friday, for the first time in five months, the DOW closed above 11,000.

What to make of it?

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The boost to stocks comes from a series of lackluster economic reports in recent weeks.  You see, bad news for the economy means good news for stocks.  Because, as Jason Pride, director of investment strategy at wealth management firm Glenmede, said, the weak [labor department] report gives the Fed “the window of opportunity to take action.”

Taking action, of course, means printing money…

Sitting On the Assets Side of the Balance Sheet

Not long ago printing money was considered a grave deceit reserved for halfwit nations of the southern hemisphere.  These days it’s considered a viable and advisable monetary policy.  In fact, economists all across the land are encouraging it.  But they don’t call it money printing…they call it ‘quantitative easing.’

To be fair, quantitative easing involves much more deception and trickery than traditional money printing.  Where traditional money printing involves flooding the economy with paper money, quantitative easing involves creating electronic money – reserves – from nothing and supplying them to commercial banks.

The commercial banks are then supposed to take all this fresh money that now sits on the assets side of their balance sheets and lend it out to businesses and individuals.  Nonetheless, what’s supposed to happen doesn’t always happen.  A central banker can create as much money as he wants, but he can’t control what happens to the money once he’s delivered it into existence.

In late 2008, Federal Reserve Chairman Ben Bernanke created $1 trillion dollars and ‘injected’ it into the banking system.  Perhaps this helped calm financial markets and restored the free flow of funds between the big banks.  But the money never made it into the real economy. 

It still sits there on the commercial banks’ balance sheets…they have not relent it.  The commercial banks are scared – and rightly so – they will not receive repayment on their loans…they do not view the economic prospects as supporting profitable ventures.

Egging Bernanke On

Everyone who knows something about anything now thinks the Federal Reserve will conduct more quantitative easing.  Some are even calling it QE2.

“Leading Wall Street economists overwhelmingly expect the Federal Reserve to embark on another round of quantitative easing this year in an effort to prop up a struggling economy plagued by high unemployment, a Reuters poll found on Friday.

“All 16 primary dealers who responded to the poll said the U.S. central bank will ease, with 14 of 15 respondents calling for an announcement at the end of the Federal Open Market Committee's next policy meeting on November 3.  The remaining one of the 15 respondents said the program would be announced in November or December.”

Here at the GDO we are a little soft in the brain.  We don’t seem to readily grasp things that are quickly accepted by our peers.  We hear the Federal Reserve will likely ‘embark on another round of quantitative easing’ and we ask…why?

Are not $1 trillion dollars of funny money already sitting on the balance sheets of commercial banks?  What good would another trillion do?  Quite frankly the $1 trillion is already pure lunacy.  Yet everyone wants more.  Policy makers are practically egging Bernanke on… “We want QE2!,” they shout.

For now, be grateful the $1 trillion hasn’t flooded into the economy yet…if it had, you’d be paying $10 for a cup of coffee.  But eventually that can change…and, perhaps, it already has…

If you hadn’t noticed, over the last three months, stocks are up, bonds are up, gold is up, copper is up, oil is up, wheat is up, coffee is up…and the dollar is not up; it’s down.


M.N Gordon
Great Depression Online

P.S.  If you are a trader or are the least bit interested in trading, you’re most likely “chart-centric.”  A good chart is priceless if it helps to identify a great opportunity.  But without the right education, you could be missing high-probability trade setups that should be staring you right in the face.

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