Please feel free to use the following mood music as a soundtrack while reading:
June 07, 2012
Posted by Harry Willis at 1:01:00 PM
June 06, 2012
"All through the day, they looked at the bomb line on the big, wobbling easel map of Italy that blew over in the wind and was dragged in under the awning of the intelligence tent every time the rain began. The bomb line was a scarlet band of narrow satin ribbon that delineated the forward most position of the Allied ground forces in every sector of the Italian mainland.
"For hours they stared relentlessly at the scarlet ribbon on the map and hated it because it would not move up high enough to encompass the city.
"When night fell, they congregated in the darkness with flashlights, continuing their macabre vigil at the bomb line in brooding entreaty as though hoping to move the ribbon up by the collective weight of their sullen prayers. "I really can't believe it," Clevinger exclaimed to Yossarian in a voice rising and falling in protest and wonder. "It's a complete reversion to primitive superstition. They're confusing cause and effect. It makes as much sense as knocking on wood or crossing your fingers. They really believe that we wouldn't have to fly that mission tomorrow if someone would only tiptoe up to the map in the middle of the night and move the bomb line over Bologna. Can you imagine? You and I must be the only rational ones left."
"In the middle of the night Yossarian knocked on wood, crossed his fingers, and tiptoed out of his tent to move the bomb line up over Bologna.”
― Joseph Heller, Catch-22
The financial Big Cheese are awaiting word from Federal Reserve Chairman Ben Bernanke on whether he will announce another round of Quantitative Easing or Large Scale Asset Purchases or Pulling Cash Out of His Asshole and Calling It Money. If he makes such an announcement, or hints that he will, then the stock market will probably head northward again. It's really that easy. The economic indicators in the United States are beginning to soften and ooze again, and the temptation to give the economy a jolt must be overpowering, given how simple the process is. The Fed merely has to use its "transmission mechanism" for introducing electronically generated money into the economy. It does this by buying up preexisting assets which are in the hands of big financial players, mainly the Primary Dealers holding large stakes of Treasury bonds or mortgage-backed securities which are guaranteed by one of the federal agencies (Fannie Mae, Freddie Mac, the FHA).
Since 2009 when the Fed began this process of hitting "Ctrl-P" on the computer in Ben Bernanke's office, the Fed has generated about $2.2 trillion in new money, swelling its balance sheet from about $800 billion pre-crisis to its current size, just under $3 trillion. The Federal Reserve has become the largest Treasury holder in the world through this process, larger than China, Japan or the United Kingdom. When you eliminate the intervening step of Primary Dealer purchase of Treasuries at auction (which precedes the Fed's action in taking the Treasuries off the PD's hands), the entire caper looks suspiciously like a way for the United States to buy its own debt.
All of this has leaked into the general consciousness of anyone with an IQ, say, one standard deviation above baseline normal who pays any attention to any of this. This general awareness is itself something of a problem. John Kenneth Galbraith described the dilemma perfectly in 1975:
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”
Bernanke chose the stock market because it gives him leverage in a way that interest rates alone do not. He knows the housing market is a lost cause. It isn't coming back to 2006 levels unless we move into hyperinflation. But the stock market is the bubble tenuously keeping aloft the public and private pension funds in America, the insurance investments which allow the payment of annuities and claims to policyholders, and all the other funds, foundations and endowments which rely completely on high rates of return (in the vicinity of 7-8%) for their very viability. There is no way to get such returns on conservative investments in a worldwide moribund economy. Only the casino players can generate such out-of-this-world income, and they need juice, Bernanke's Juice, to do so.
If the stock market goes, the game is up. All of the pensions, public and private, will head toward complete insolvency as they use up the corpus (the capital invested, not the return) to pay current beneficiaries the money promised. Insurance companies, even the casualty companies writing auto liability, will have to jack their premiums to the moon in order to remain in business. They will face the same problem which the health insurers already face. Homeowner's insurance, long term care, disability policies - all will face the same fate: a pool of money with no place to invest the funds to earn a decent return, essential to their actuarial reality.
So the Wall Street Players stare at the Bomb Map of Finance. And one night soon, in the wee hours, Bernanke will knock on wood, cross his fingers and tiptoe out of his office to move the Bomb Line up over Bologna.
Posted by Harry Willis at 11:41:00 AM