Reactions to Bernanke

I'm a little late in blogging my reactions to Bernanke's press conference, or rather, my reactions to the reactions to Bernanke's press conference. It struck during the press conference that most people don't realize that tapering is not equivalent to tightening. The question from the reporter from Marketwatch.com was a particularly stark reminder of that. Tapering from $85 billion/month to $50 billion/month is not a tightening of monetary policy; the balance sheet continues to expand. It's expansionary monetary policy, just not as expansionary as markets are expecting. But from the reaction of the stock and bond markets, you'd have thought that Bernanke was going to slash his balance sheet 50% overnight. This is the same type of thinking that causes people to claim that government spending growing 1% instead of 4% is a "spending cut" and to wail and gnash their teeth over the "cuts" brought about by sequestration. Cuts are cuts; cuts in the rate of growth are not cuts.

But what really struck me in reading press accounts of the press conference was how strongly most writers misinterpreted Bernanke's comments and answers. A few samples below: From Reuters:

"Asian shares tumbled to nine-month lows on Thursday as slowing Chinese manufacturing activity exacerbated sentiment already unnerved by the U.S. Federal Reserve Chairman Ben Bernanke confirming the Fed would begin reducing its stimulus spending later this year."

From the Financial Times:

"European stocks join sell-off seen across Asia and the US after Federal Reserve signals it will begin tapering asset purchases later this year."

From the Frankfurter Allgemeine:

"America's central bank has bought much government debt. That will end next year. That has enormous consequences for the whole world."

From the Washington Post (via AP):

"Stocks extended their slide after the Federal Reserve said it could start scaling back its economic stimulus program later this year and end it by the middle of next year."

It's as though all of these writers are writing from the same script. Bernanke didn't confirm anything about any tapering or end to quantitative easing. He merely laid out a hypothetical scenario under which the Fed might begin to slow down the expansion of its balance sheet. And look at the market reaction! Gold and silver down, stocks down, bond yields spiking, just all around chaos and panic all over. Not as bad as '08, thankfully, but look at what just the possibility of slowing down QE3 will do.

It wouldn't surprise me if this were all a movement on the part of markets to force the Fed's hand and force them to continue or even ramp up quantitative easing. After all, Bernanke promised that the Fed would continue to try to keep long-term interest rates low, so if tapering QE3 means that yields will spike, then he really has no choice but to continue or even increase the amount of money he is pumping into the system. The markets lust after the Fed's easy money, and the banks would hate to see that gravy train of large scale asset purchases come to an end.

What the recent market activity has shown is that Bernanke really can't control interest rates to the extent that he thought he could, no matter how much money he pumped into the system. He hasn't begun to taper QE (we think) and yet interest rates are rising. I always knew that markets would eventually reassert themselves and overcome the Fed's attempts to push interest rates downwards. Fundamentals will always trump fiat. Could this be the beginning of the end of low interest rates? Looking back over the past two months, rates on 30-year mortgages have risen nearly 150 basis points, this during a period of continued monetary easing. Eventually Bernanke and the Fed will hit a wall. They'll keep pumping and pumping and it will have no effect, or at least not the effect they want it to have. I can only hope that the Fed will draw the obvious lesson from that and stop the printing presses, but we'll see. That time may be rapidly approaching.

First Thoughts on L'Affaire Snowden

I sincerely hope that one of the lasting consequences of Edward Snowden's decision to blow the whistle is to lay bare the reality of how deeply American society is held captive by the intelligence state. During the Cold War Americans were told that the only way to defeat the Soviets was to become like them, and so the US government underwent a radical transformation. The excuse was that it would only be temporary, until the Soviet threat was vanquished, and then things would return to normal. But after 45 years of existence, the massive security apparatus built to counter the Soviets was not about to let go. In fact, the US had become just like the Soviet Union, where the key to wealth was to latch onto the intelligence apparatus and its accomplices.

How many rich Russians have pasts with the KGB? And how many of Russia's largest firms are full of executives with KGB backgrounds? Of course we can't forget the once and current Russian President, Vladimir Putin, who himself was a KGB agent. Yet for all the wailing and gnashing of teeth in the US over these facts, Americans seem to forget that the former head of the US intelligence services was himself president from 1989-1993, and that his son served as president from 2001-2009. I don't know whether American arguments against Putin's KGB past are merely from ignorance or from hypocrisy, but they hold no water with me. Because the fact is that the US is likely infiltrated by elements of the intelligence-industrial complex to the same extent that Russia is.

Some articles in the early days of the Snowden controversy highlighted the deep ties between Booz Allen and the intelligence agencies. The fact that Booz Allen is owned by the Carlyle Group, whose current and former board members and employees read like a Who's Who of the Washington foreign policy, defense-industrial, and intelligence-industrial complexes, and that Booz Allen, one of the DC area's largest and best-known names, is so heavily involved in intelligence contracting for the US government, is an indicator of where much of the money is to be made in government. I have yet to read Confessions of an Economic Hitman, but I have no reason to believe that it's not factual. That the CIA and its cronies attempt to place talented people in Fortune 500 companies, use them as sources of information, and attempt to profit or enable others to profit from the information they acquire from their espionage is a fact that I don't believe can be denied any longer.

The US economy is the goose that lays the golden egg, and the Stasi types who have infiltrated corporate America realize the extent to which they can take advantage of that goose. But I fear that we may be past the point of no return and not even know it. The intelligence-industrial complex is so embedded into so many areas of American society today that it risks strangling the lifeblood of the economy. At some point, some higher ups will demand total control, and the turn-key authoritarian state that Snowden warned about will spring to life. Spies won't be running things behind the scenes anymore; now their control will be out in the open.

I fear that Snowden's revelations have only scratched the surface of what the NSA, CIA, and their ilk are up to. I can only hope that the full extent of their shenanigans is ultimately revealed as a result of this affair and that it can be combated and overcome. If the fact that intelligence bigwigs are using their knowledge and connections to enrich themselves and their cronies at the expense of the American people isn't enough to get people off the couch and motivated to change the direction the US is headed in, then there's probably not much hope left for this country.