August 5, 2011
What Now Ben?
Following yesterday’s market plunge a re-read of Bernanke’s memorable QE2 commentary seemed in order:
“This approach [QE and the speculation leading up to it] eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
A day before Mr. Bernanke penned the above the S&P 500 was at 1997. 96. Yesterday the benchmark came less than 2-points of breaking below this level. Taking into consideration inflation (manipulated statistics or not), and paying little attention to the run-up in the markets prior to the official launch of QE2, it is safe to say that QE2 now symbolizes the flushing of $600 billion down the proverbial toilet. Furthermore, and as if this colossal waste of paper money were not enough, the ridiculous justification for QE2 all but ensures that another round of printing is forthcoming. To be sure, Mr. Bernanke is not ready to admit that monetary sorcery has reached its limits. Rather, so long as already low – or negative for that matter – interest rates can be pummeled lower and the already bludgeoned U.S. dollar can be weakened further, Bernanke still has options. Another day or two like yesterday and we may find out exactly what these options are…
As for yesterday’s market plunge, the primary culprits sparking the drop appear to be the shockingly bad U.S. economic statistics (i.e. the GDP revisions, ISM, consumer spending, etc) and the shocking speed at which the Euro crisis has returned to front page news. Amplifying these events was/is the following:
- At the same time weak U.S. statistics were rolling in U.S. policy makers were trying to raise the debt ceiling and debating tax increases/spending cuts. Many have argued, correctly so, that the debt ceiling debacle hurt the U.S. economy and investor confidence (see TIME’s new cover). What hurts even more is the signal from Washington that they are out of ideas when it comes to trying to kickstart the U.S. economy.
- The return of the Euro crisis – this time with Italy and Spain taking the spotlight – arrived less a month after Greece’s second bailout. Those that remember how tension filled the lead-up to the Greece bailout was are obviously fearful that a repeat on a larger scale is in the works. Question is, will/can Italy and Spain get bailed out?
How, exactly, this trend of negativity gets reversed cannot easily be predicted. Rather, the tale of bailouts and money printing combining to boost asset prices is, albeit slowly, continuing to lead to the reality that there needs to be more busts and monetary stability.
This as Japan tries to weaken the Yen, Switzerland cuts to try and weaken the Franc, and Bernanke prepares to print…