The essence of Federal Reserve Policy,over the last 23 years:
"I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. ..." Alan Greenspan
Pure Lunacy, The Essence of Fed Policy
If your like most Americans, the arguments flying around for the confirmation of Federal Reserve chairman Ben Bernanke can be hard to understand.
Most would say Mr. Bernanke has pulled America back from the edge of economic catastrophe. He even was named this week as Time magazines "Man of the Year"
But I am going to show you a simple chart and graph on why I think Ben Bernanke should not be confirmed.
I will explain how to interpret these items.
My first example is this Federal Reserve graph of the M 1 money supply monetary base multiplier.
This chart is amazing as it shows how Federal Reserve policy of the last 25 years has effected every life in America, good and bad. Of course for the majority of these past 25 years Allan Greenspan was chairman. When Mr. Greenspan retired, Mr. Bernanke was confirmed by the U.S. Senate as the new chairman in October 2005, he was appointed by President George W. Bush.
Now in a normal economic system where transactions and loans are taking place everyday between people and banks a healthy level would be between 4.50 and 3.00. As you can see the indicator stood in 1987 at about 3.00, the same year as Mr Greenspan was appointed as Federal Reserve chairman.
You remember in 1987 the stock market crashed and the Federal Reserve lowered rates to spur economic growth. During Mr. Greenspan's tenure there where several financial panics. The year 1990 and 2000 come to mind.
The bubbles are legendary, the dot com in 1999-2000 and the housing bubble between 2000 to 2005. As result of these easy money policies,with the Fed not using the tools they have at their disposal. A cycle of boom and bust have plagued America for almost a quarter of a century.
But let's get back to the issue at hand, Mr Bernanke.
Notice the graphline has descended gradually and when the sub prime market imploded and the financial system almost collapsed from the housing bubble, the graphline collapsed.
I'll let Mr. Bernanke explain in his own words what this signifies.
"The "money multiplier," M1/BASE. In fractional-reserve banking systems, the total money supply (including bank deposits) is larger than the monetary base. As is familiar from textbook treatments, the so-called money multiplier, M1/BASE, is a decreasing function of the currency-deposit ratio chosen by the public and the reserve-deposit ratio chosen by commercial banks. At the beginning of the 1930s, M1/BASE was relatively low (not much above one) in countries in which banking was less developed, or in which people retained a preference for currency in transactions. In contrast, in the financially well-developed United States this ratio was close to four in 1929"
Bernanke on the Great Depression
Yes, that is correct in the Great depression this ratio stood at 4.00
What does the Fed report this ratio now? The graph reads a level of .811
A historic low. Remember Mr Bernanke says a ratio below 1.00 typifies....
"M1/BASE was relatively low (not much above one) in countries in which banking was less developed, or in which people retained a preference for currency in transactions."
In Fed speak that translates to people are unable to obtain loans or people are tapped out or paying off debt. Probably a combination of this and banks hoarding
cash to reliquify their balance sheets.
This can get involved but let me show you what is part of the problem and it lays squarely at the foot of Fed policy over the last 20 years.
[Upload your own video]
Mr. Dylan Ratigan so aptly describes what financial schicanery has been allowed to go on, and is still going on under Mr. Bernanke's tenure.
Back to the M 1 Multiplier graph. again the level that stood at 4.00 and now stands at .811 (below 1.00) is a historic level in the history of this country.
The question begs to be asked why?
The simple answer is in 1932 President Roosevelt closed the insolvent banks and allowed banks with good capital ratios on their balance sheets to operate.
Mr. Bernanke has done no such thing. In fact he has gone down the same path of Japan and taken the interest of the stakeholders in these banks and created a dangerous "U.S. Dollar carry trade" to develop with the insane hope of reliquifying these zombie banks with trading profits,creating another stock market bubble.
Stock market bubble you ask??
Let me show you something...
Now the first chart is IBM. Notice the triangular pattern between the upper boundry and the lower boundry. Marked "A" at the top in 1999, "B" at the bottom in 2002, "C" at the top in 2007, "D" at the bottom in 2008, and finally "E" at the top in 2009 presently.
The Dow componet IBM is probably the greatest tech company in the world, but in the last ten (10) years it has treaded water.
The stock has whipsawed back in forth in a frenzy of price,driven by a boom and bust economy, and rampid speculation fed by easy money provided by a reckless policy practiced by the Federal Reserve.
Notice how the last 2 legs in the triangle have moved so sharply?
Do you think IBM is overvalued here? The Dow is currently 10,340 and IBM is 129, but it was 130 at the high when the Dow was 14,000. Is there a bubble here or a parabolic rise, the answer, I think so. Another important point is in a triangle there are five points,A,B,C,D and E. If point E has a 5 wave thrust into the top or bottom the price will move sharply in the opposite direction in a new trend and will likely break the other boundry.
Also here is a chart of Apple, everybody buys their I-pod.
This chart is real simple. 3 facts stand out. One, it took Apple 7 years to rise to a all time high. 1 and 1/2 years to decline to less then half of it's previous value and then about 1 year to retrace back up to the previous high. There was a bubble in the market in 2007, do you think AAPL is overvalued here or has had a parabolic rise?
Study these charts and graphs please, as a roadmap of a reckless monetary policy, with a signature of boom and bust cycles, and poor policy decisions by the FED chairman Ben Bernanke.
Will he be the right man to lead this country out of the next bust? Will his policies that created this present bubble change?
I think a picture is worth every dollar you and I make in this whole vast economy and I say, it has been managed with malfeasence.
Parisgnome
Edit:
You may ask why my highly provacative outlook?
Here's why......
What would a 7.00 to 7.50 pct yield for the 30 year Treasury Bond do to the economy, in real terms?
Your right.....
and good ole Ben Bernanke will be forced to drain liquidity again to finance his pile of huge debt. Crashing the stock market, and creating a huge financial crisis world wide.
You have been warned!!
Edit:
I wrote this comment explaining the long cycle this country is in.
It starts out innocently where people are centererd correctly in the American way. The government does indeed the work of the people.
Then greed rares it's ugly head, wars are started,the military and industrial complex gains speed.
In order to finance this thirst for profit, the government debases the currency. then a long spiral of corruption and survival begins, that continues for years.
Wall street is always in the latter stages, the heart of the ponzi scheme of finance. Everybody joins the party of sqeezing every last drop of money that is actually produced by real work and the common man who creates real wealth.
The finacial parasidic complex is the final vampire to join the party. Made of banks,insurance companies and the bottom rung, the credit card companies, and two bit lenders.
The only problem is at some point in a credit based system the debt pyramid collapses, and nothing and I mean nothing can stop it.
So everybody loses, and....
The whole thing starts over.
The big question is, will we lose our society?
Will we have leaders with courage and insight of what has actually happened and
better yet will the grassroots understand and be able to demand honesty,truth and justice.
Shall America have a rebirth again as it has in the past.
Dear President Obama
You have been misled, but we cannot dispair.
Mr. Bernanke must be replaced. I believe Paul Volcker would be a good choice.
We must create a shadow banking system now. A system of regional Federal redevolpment banks,with fresh balance sheets,well capitalised to meet the needs of people and industry. This will be a important 2nd step.
There will be many steps involved to rebuild. The goal should be a stable long term monetary policy based on a new monetary system. The world will demand it.
Parisgnome
Update: 12/31/09
Right on schedule with the Lunar cycle(full blue moon), a Primary top in the markets with the resumption of the Supercycle Bear Market.
This next decline will portend the next phase of deleverging in the economy as "C" waves down,like the 3rd wave is charachterised as "no place but in cash to hide". This wave down should be spectacular in power and breath of it's decline.
This chart of FRT a very large REIT displays perfectly the real estate bubble in America. Now it has embarked on the next phase in the deleverging. I expect all real estate bubbles will come down in 2010 including the Chinese bubble as well as Hong Kong,Canada,Australia, and Singapore. The British and Spain will also feel the wrath.