The King is Surrounded: Bernanke’s No Exit Dilemma

To print or note to print that is the question;-Whether tis nobler in the mind to suffer the slings and arrows of economic misfortune, or to print volumes against a sea of troubles, and by opposing end them?” Imaginary ruminations of Ben Bernanke

Last week was a bad week for Fed Chairman Ben Bernanke. The Federal Reserve announced that they would continue their massive money printing/bond buying quantitative easing (QE) program. In the press conference Ben Bernanke mentioned that the Fed may, however, reduce their purchases later this year if the economy continues to improve.

This sent gold and silver down, drove bond yields higher and put a nice dent in the stock market. A disaster day for the Fed. Mr.Bernanke seemed confused as to why interest rates are rising. The Fed purchases nearly 90% of the new issuances of US Treasuries, owns more than 30% of the total amount outstanding, foreigners are “tapering” their purchases and bond funds are dumping them. Do you think investors are asking (as they sell) that if the Fed isn’t going to buy Treasuries, who will?

Rates aren’t rising because the economy is improving. They are rising because the buyer of last (and often only) resort is talking about slowing down their purchases.

We are coming to the Fed’s end game -check mate. When QE was first launched many observers call it kicking the can down the road. I was fond of saying that road is a dead end. Others predicted we would run out of road.

Five years of QE has not produced a robust recovery. Recently we finally had a roaring stock market and a budding real estate recovery. Both, however can be attributable largely, if not solely to the multi trillion dollar QE programs.

We just saw what happens when the Fed even talks about tapering.

For a while it appeared that the Fed was in control and it would navigate the economy through the crisis and “exit” at the right moment when the economy was able to thrive on its own steam.

But now Ben Bernanke at the Fed is like a lone king on the chess board having sacrificed all its own pieces. The Fed has been very clever in moving about the chess board to avoid check mate. By staggering their QE programs and talking about curtailing or tapering them they have helped in part tame surging gold and silver markets that had the potential to undermine the dollar’s credibility. The Fed has managed to keep interest rates low and in the process engineer raging stock and real estate markets.

The Fed has straddled a fine balance so far, but is now in a corner. The Fed knows that if they print too much they risk loss of confidence in the dollar and hyperinflation, and if they print too little, rates will rise and the economy will crash taking down the stock and real estate markets with it.

The king is cornered, alas poor Ben, whither now?
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For More on The Fed’s No Exit dilemma click here , here ,here and here

P.S. What will the Fed do if interest rates continue to climb and the markets tank? Will they taper the taper talk? carry on with $85 billion a month QE? boost QE? taper? shut down the program?

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