Ben Bernanke Talks Himself Into A Corner

Good Day,

The phrase, “another day, another dollar” is traced back to the late 1800s where it was a saying adopted by sailors paid by the day.  But that was prior to the rise of the Federal Reserve and their ongoing destruction of the US dollar.  Now the saying would be better as, “Another day, another down day for the dollar”.

As I write gold just hit another all-time as the spot price in Hong Kong hit $1,360.00 as the US dollar continues to look like a swimmer with a rock tied to his legs.

Amazingly and bizarrely enough, this collapse in the dollar has mainly occured not from any action taken by the Federal Reserve but based solely on the words of Ben Bernanke.

We put together a chart showing the Fed's operations for the last year to make this point.  The markets are currently reacting as though the Fed has or will be making some massive changes in their operations.  But, clearly, as of today, the Fed hasn't hardly done anything out of the ordinary.

*Dollar figures in Billions

1) Reserve Bank Credit: the factors that affect reserve balances held by the banks at the Fed
2) Securities Held Outright: the main factor within reserve bank credit that comprises Treasuries, agencies, MBS’s, etc…liquid stuff
3) Total Factors Supplying Fed Funds: often confused with the “balance sheet” or should be used instead of the balance sheet
4) Reserve Balances With Fed Banks: this is the most important category that influences money supply creation by the banks

Note that the changes month to month are so small as to suggest the Fed’s balance sheet has been static all year long.  Keep this in mind when you read news that in the latest week, the Fed’s purchases of Treasuries indicate that QE II is on its way.  A few billion here or there is infinitesimal these days.  You have to see a hundred billion dollar change before it shows up as a blip on the chart.

Since August the Fed has bought $44 billion in Treasuries.  This is less than a quarter of the pace of 2009’s purchases.  Moreover, the category “securities held outright” only increased $8 billion in the last week (less since August), suggesting that the Fed sold securities to buy those Treasuries rather than expanding its “balance sheet”.

Indeed, the Fed’s balance sheet (factors supplying fed funds) increased $9 billion this week, but it is down almost $20 billion since August.  Reserves are down even more (almost $50 billion) since then because currency in circulation increased by about $10 billion, and also due to reverse repos and an increase in gov’t deposits at the Fed (probably resulting from those Treasury purchases).

In the latest week reserve balances have grown $16 billion, but that is after falling $38 billion in August and $29 billion in September.  So any talk about the Fed expanding its balance is out of context unless it refers to the future.

And that is where it gets tricky.  Ben Bernanke has talked himself into a corner.  He has talked up the market so much to prepare for Quantitative Easing II that unless he comes up with an absolutely ludicrous number, like $20 trillion, then the markets will almost certainly have to sell off on the news because they are already pricing in some monstrous number.

And, heaven forbid, if Bernanke decides not to go ahead and yet again debase the US dollar then who knows where the markets would go.  A 2,000 point drop in the Dow and a $150 drop in gold is not out of the question if he were ever to come out and say that they weren't going to go ahead with QE II.

What havoc these centrally planned financial systems wreak on the world.  We would much rather be sitting here looking at real, private, free-market statistics and following which sectors and which companies or doing what.  But, in this topsy turvy world of central banking the biggest influence on the markets are the government bureaucrats and the central bankers and so we find ourselves having to pay attention to know-nothing political hacks at the G7 and G20 meetings and awaiting every word released from the likes of Ben Bernanke, a man who has accomplished absolutely nothing in the real world his entire life.

But Ben may not be around too much longer.  We don't see how he is going to get out of the next 6 months in tact.  He now has two options.  1) Announce a Quantitative Easing II so gargantuan in size and scope that hyperinflation would almost instantly occur or 2) “Dissapoint” the markets with an undersized QE II and watch world stock, bond and commodity markets have record-making collapses.

We'll be waiting and watching Ben… and selling our dollars and buying gold & silver like more and more people are doing every day.

Jeff Berwick

Chief Editor