Quantitative Pleading

Good Evening: Stocks in the U.S. took a breather and finished mixed on Monday after an event-filled previous week. Behind us now are a reddish-hued mid term election, the official launch of the $600 billion QE II, and a modestly encouraging jobs report. Prognosticators have turned into Monday morning quarterbacks in the wake of these events, and words — both written and spoken — are now the order of the day. From the Chairman on down, various members of the Fed are taking pains to let us to know what they did and why. It almost looks as if the Fed is now engaged in what might be called “quantitative pleading”.

The debate over the size and necessity of further money-printing will rage here in the U.S. for quite some time, but the more interesting reactions are coming from overseas. Our trading partners claim QE II is actually a warship in disguise and that this latest policy move represents a fresh salvo in what Brazil’s Finance Minister calls a “currency war”. Other than in tears, no one can say how this latest attempt by the Fed to revive the U.S. economy will end, but the head of the World Bank just today offered up what can only be called a golden solution ahead of this week’s G-20 meeting.

The promise of dollar bills being issued at warp speed in Washington didn’t do much to help equities as Monday dawned. Investors in Europe, for example, turned their attention back to the worsening credit situation for peripheral nations in the E.U. Irish and Greek CDS have scaled new heights of late, and it didn’t help today when Fitch issued a negative opinion about some Portuguese banks. After opening under a bit of pressure, the major U.S. averages hit their trough (down 0.5%) in the late morning before stabilizing. The indexes then wandered sideways during the rest of what looked to be a pretty dull session. The Dow’s 0.3% loss trailed the other averages, while the NASDAQ and Russell 2000 managed fractional gains. Treasurys, which had been on the heavy side after last week’s FOMC announcement, also finished mixed on Monday. The dollar benefited from the fresh angst in Europe, but the 0.65% rally in the U.S. dollar index did little to stem rising commodity prices. With gold (+1.1%) and silver (+3.5%) leading the way, the CRB index posted a gain of 0.5% today.

What the Fed did and why: supporting the recovery and sustaining price stability, by Ben S. Bernanke

With all the views about the Fed’s latest round of money-printing fighting to be heard, it is as if QE II is the ship that launched a thousand Op-Eds. Chairman Bernanke went first with his personal appeal in the Washington Post last Thursday. That our Chairman felt the need to defend the FOMC’s actions in an OpEd is bad enough (what’s next — an appearance on Jon Stewart’s “Daily Show”?), but I found his rationale suspect as well. Mr. Bernanke wants to help our economy, he says, and he further wants to protect us all from the dangers of too little inflation. Considering Mr. Bernanke is supposed to be the Defender-in-Chief of our nation’s currency, his stated pursuit of more inflation sounds less like a central banker than it does a boy playing with matches. Is it of any wonder why precious metals and other commodities are on fire these days?

Bullard Says Stimulus May Have “Maximum Impact” in Six Months
The New Malaise and How to End It, by Kevin Warsh

The other members of the FOMC have felt the need to opine about QE II, too. Just today we heard from James Bullard, Kevin Warsh, and Richard Fisher. Surprisingly, none of these men came out in strident support of Mr. Bernanke and his OpEd reasoning. Mr. Bullard’s main point seemed to be that the benefits of QE outweigh the costs, while Mr. Warsh hopes Congress will suddenly become fiscally responsible. Just how Mr. Warsh expects others to act with restraint while the Fed is printing hundreds of billions of fresh dollars out of thin air is a question he doesn’t address.

Fed’s Fisher Says Purchases May Be “Wrong Medicine” for the U.S. Economy

If Mr. Bullard and Mr. Warsh sound like apologists for voting for QE II, then Dallas Fed president, Richard Fisher, sounds like a man who would place icebergs in its path. Among other assaults on the dangers of money-printing, Mr. Fisher had the following to say today:

““I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed,” he said.

I happen to agree with Mr. Fisher’s assessment, but when the time came last Wednesday for a show of hands in the Eccles building, this would-be hawk raised a dovish wing of support for QE II. His explanation that “I respect the will of the committee” represents a head-scratching surrender.

China Says Fed Easing May Flood the World Economy With “Hot Money”

We can expect the Fed’s latest experiment in inflation-seeking currency debasement to stiffen spines overseas, however. In the Bloomberg article above, policy makers from China and a host of other nations are labeling the Fed’s Treasury purchases as a “protectionist”. Many Asian nations see the policy as monetary hypocrisy, since they have been told they are keeping their currencies too low relative to Western currencies. Watching the Fed try to shred the dollar simply galls them. And with many of Europe’s PIIGS hoping to export their way back to growth, a weaker greenback will make for an unwelcome holiday gift.

The G-20 Must Look Beyond Bretton Woods II, by Robert Zoellick

Many observers, this one included, are unhappy with this new round of money-printing, and they look forward to a day when fiscal and monetary sanity will prevail. Argentina and Zimbabwe are just the two most recent examples of why it is ill-considered to think a nation can print its way to prosperity. Whether the World Bank’s Robert Zoellick is taken seriously with his notiion in the FT to consider returning to a gold standard is doubtful, but I have a feeling his suggestion will look better with time.

Alan Greenspan: Monetary Myopia, The Economist, January 12, 2006

The need for an impartial global standard for sound money is growing because human beings in leadership positions at central banks tend to like delivering pleasure more than pain. Alan Greenspan, the champion among easy money advocates, used to say monetary policy was a “blunt tool” that was an inappropriate way to thwart the bubbles expanding before his very eyes. The Maestro is apparently a good mentor, since Ben Bernanke has also called rate hikes a “blunt tool”. To both gentlemen I ask a simple question: Isn’t Quantitative Easing the ultimate blunt tool?

Jack McHugh

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