Ben Bernanke a.k.a. “Helicopter Ben” Prepares to Land Circling and circling without a Volcker Moment in sight

“Helicopter Ben” Prepares to Land

Circling and circling without a Volcker Moment in sight


            When Ben Bernanke prays, he must sound like St. Augustine: “Lord, make me prudent—but not yet!” The minutes of the Federal Reserve’s most recent board meeting illustrate this indecisiveness perfectly. The Fed’s QE programs must end, but the US economy is too frail for it to end. The market reacted in its predictably unpredictable way: Bond yields shot up on Wednesday before retreating Thursday. Similar movement earlier this summer, with the Fed hinting that tapering was imminent, before rescinding their comments to soothe investor panic.

Seldom have the collective actions of investors been so far divorced from true market performance as they have these last few years. High volatility in virtually every investment vehicle, from precious metals to stocks to Treasuries to currencies, suggests investors are acting on something beyond concrete market data. In fact, they are consistently reacting to the words of economic policymakers, and attempting to decipher what future events these enigmatic words might portend. The consensus on November 20, 2013, was that the Fed would begin tapering immediately; the consensus on Thursday was that, no, perhaps not; the Fed will continue bond purchases.

It’s unlikely that systemic, pronounced, and enduring economic growth can occur with such economic uncertainty. But this uncertainty is the product of a symbiotic relationship between investors, consumers, and the government. The Fed’s only two directives are: control inflation and encourage full employment. Inflation and employment are, incidentally, the two biggest concerns of consumers, who account for two-thirds of America’s economic activity. Their buying habits directly influence the movement of capital among investors. If consumers are buying certain products, investors will follow. Often, they attempt to arrive first. But if consumers aren’t spending, and consumer products and the companies producing them aren’t growing, capital will park in safer, more-predictable investing instruments like Treasuries.

With unemployment high, incomes stagnant, and household wealth still in recovery, consumers are not as influential in directing capital movement as they have been historically. Instead, government spending is the single most influential factor. Without the government’s excessive spending, GDP would shrink. (This is, after all, tautological. Most GDP calculations factor consumption, investment, and government spending. If government spending increases, GDP must increase, ceteris paribus.)

The government has averaged +$1 trillion deficits for 5 years. It has done so to soften the impact of the Great Recession and to prevent the economy from slipping back into another recession. Normally, this would cause Treasuries—on which countless investing instruments are directly or indirectly tied—to rise; as the government accrues debt, its bonds become more risky, less attractive, and therefore demand higher yields to attract investors. But with the Fed purchasing massive amounts of U.S. debt, they can keep Treasuries artificially depressed.

This is all well and good, except that if capital is tied up in Treasuries, it is not moving through the broader economy. Investors are not investing in businesses, which in turn are not investing in factory upgrades, which in turn are not employing people, who in turn are not spending their incomes.

This is the mechanism by which the government is destroying the economy in order to save it. The QE program is meant to stimulate the economy by allowing for persistent, debt-driven government spending by keeping government debt cheap. But this same program so heavily distorts the normal flows of capital that the broader, consumer-driven economy is suffering. The Fed will not, however, risk another recession, since the temporary pain brought to families in the form of higher unemployment and reduced government spending would be politically disastrous. (The ostensible, quasi-private nature of the Fed is supposed to mitigate this effect.)

For this reason, it seems likely that any hints, whispers, or insinuations that the Fed’s QE program will begin tapering will soon be retracted in further hints, whispers, and insinuations. Ben Bernanke is now the Oracle of Wall Street—a purveyor of self-fulfilling prophecies. His words, no matter how subtle, have substantive and profound effects on the American and global economy. Because of this, he will not even speak of tapering with any authoritative force, let alone actually implement such a policy. The economy will not recover until the Fed tapers, and the Fed won’t taper until the economy recovers.

The American economy is in desperate need of a Volcker Moment. For those unfamiliar, Paul Volcker was confirmed as Federal Reserve chairman in 1979 and immediately pursued a policy that “would seek to hold increases in the monetary base and other reserve aggregates to amounts just sufficient to meet monetary targets and to help restrain growth in bank credit, recognizing that such a procedure could result in wider fluctuations in the shortest term money market rates.”

And fluctuate they did! Bond yields skyrocketing, unemployment shot up, NGDP collapsed, and the deep recession of 1982 followed. The Volcker Moment marked the end of the government and Fed’s policy of incremental, inconsistent, and unpredictable interest rate adjustments. During the 1970s, the Fed had lost all investor credibility due to its erratic behavior. This was largely responsible for that decade’s period of Stagflation.

Rather than pander to investor desires or political expediency, Volcker pursued a radical policy of predictability. Investors were convinced that the Fed would pursue a consistent, predictable course, regardless of economic data or political pressure. As soon as the Fed eased its monetary tightening in the early 1980s, the economy immediately rebounded, employment skyrocketed, and ultimately the US would experience 25 years of nearly uninterrupted growth.

As the saying goes, history may not repeat itself, but it sure as hell rhymes. The Great Recession and subsequently sluggish recovery are nothing new to history. And the government’s reluctance to pursue the right policy over the most comfortable policy is nothing new, either. It is rare that economies recover from deep recessions by waiting them out. Rather, it is typically some massive, disruptive force—whether World War II or Paul Volcker—that sparks a recovery. Unless we have our own Volcker Moment, the next disruptive force will not arrive until the maturation of the Millennial generation in 2020.

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