The US Fed is doing nothing
15 DECEMBER 2010
"Shoot me, if you must, this old gray head,
But spare my country's flag," she said.
A shade of sadness, a blush of shame,
Over the face of the leader came;
The nobler nature within him stirred
To life at that woman's deed and word;
"Who touches a hair of yon gray head
Dies like a dog! March on!" he said.
- John Greenleaf Whittier
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It's the Ides of December, if December has ides. Some months do. Some don't.
Yesterday, we drove up to Frederick, Maryland. It is the site of the encounter - fictional - between Stonewall Jackson and an old woman. More on that, below...
But you're probably wondering what the Fed's FOMC did yesterday, aren't you? You're not? Well, good for you. You must have a life. Or a brain.
Those of us who are condemned to follow such things found out that the Fed is standing pat. You can imagine how that stirred our blood. We had barely slept wondering what the Fed would do. We had worn out the carpet, pacing back and forth. And now we discover that the Fed will do nothing!
The 'recovery' is too weak to raise rates, said the Fed. And the economy may need more stimulus, it added; so it will stick with its plan to buy $600 billion worth of US government debt.
You'll remember that the Fed purchases were supposed to drive down long-term interest rates so that mortgage borrowing and capital investment increased. But instead of falling, long term rates went up.
On the surface of it, you might think the Fed chief would lower his head....and admit that his QE plan is a colossal failure. Since March '09, he has committed an amount equal to more than an entire year's output of the US economy to his QE initiatives. With so much of the nation's treasure lost, you'd think he'd offer to slit his wrists...or at least resign. But that would just go to show that you've never studied modern macro economics. If you spent a few more years in school, maybe you too could begin to see that up is really down and black is actually white. The Fed's actions will multiply the US monetary base by 4. Is it any wonder investors are getting suspicious of US dollar-denominated paper?
In theory, the Fed's purchases of Treasury debt are absurd. In practice, they have backfired. So, the Fed will do more of them. Makes sense, right?
The US bond market could be signaling that it is headed the way of Greece, Ireland, and Lehman Bros. Who wants an IOU from someone who can't pay it back? Once the selling begins, it is hard to stop. Interest rates go up, increasing the cost of financing for the debtor. Pretty soon, he can no longer fund his on-going expenses or make the payments on his debt. He is forced into bankruptcy.
Meanwhile, the latest numbers from Robert Shiller tell us that the US stock market is 33% overvalued. Our guess is that stocks will go down much more than that number implies. Markets tend to overshoot in both directions.
And the latest news from China tells us the Middle Kingdom could blow up at any time. Nearly half the GDP is spent on capital improvements (usually things that involve concrete and steel). It's breathtaking to see it. But there's no way you can make that many capital investment decisions without making some colossal blunders.
And from Europe comes a bleak and foreboding assessment: European banks have five times as much government debt as they did 3 years ago...and even US banks have nearly $350 billion worth of debt from Europe's wave-washed periphery. Investors are selling off Spanish bonds; another chapter in the debt crisis could be at hand.
Dear reader, you are faced with a grave and dangerous situation. In front of you is the Valley of Death for investors.
America's stock market could crash at any moment. Its bonds are slipping. Its homes are sinking. China could collapse into a heap. Europe could come unglued. Trade could fall off a cliff. Interest rates could rise everywhere. Another great depression could be coming soon.
And yet, CEOs are optimistic, says one report. Investors are overwhelmingly bullish, says another. And your captains are telling you to 'charge ahead!'
Our advice: Take cover!
*** It snowed last night. Not much, just enough to make it pretty. This is supposed to be the 'bleak midwinter.' But it's not very bleak. Holiday lights are up on many houses in the neighborhood. Shops are hung with festive lights. Occasionally, we hear Bing Crosby singing White Christmas.
We drove up to Frederick, MD, for lunch. What a charming little town. Colonial era brick houses. Coffee shops. Restaurants.
This was the town that Whittier made famous. He recalled something that never happened. An old woman, Barbara Frietchie, was said to have stood in the middle of the street waving a Union flag, stopping the advance of the Southern troops. Stonewall Jackson halted his troops and gave his order.
The story was a lie. It never happened.
But lies carry more weight than the truth, especially in wartime. People prefer lies. They're simpler. And more flattering. Sure, the US is fighting terrorism in Iraq and Afghanistan. Sure, the Fed is stimulating a recovery. Sure, the banks had to be bailed out, or something awful would have happened. Sure, if the federal government doesn't spend $1.3 trillion it doesn't have our quality of life will decline. Sure, the schools make us educated. The hospitals and doctors make us healthy. The army, courts and police make us free and safe.
This is the first time in 15 years that we've been back in the US at Christmastime. All that time, our farm house was rented out. It's a pleasure to have it back. On weekends, your editor happily cuts down trees and fixes fences. Or he paints bedrooms and repairs roofs.
He was painting a metal barn roof a couple of weeks ago. The roof had a decent slant to it, but the rusty metal gave him something to grip onto. So he felt reasonably safe, even though he was three stories in the air. All was well until he foolishly stepped onto the part he had just painted.
His foot slipped. He fell down...and slid down the roof...catching himself on a nailhead just before going off the edge.
"Are you all right," asked Edward, who was working on the ground.
All week long, we work in front of a computer screen. It is largely an imaginary, abstract world - of GDP growth and stimulus theories - a world of lies and legerdemain. On the weekends, it is a pleasure to be back in the real world of hammers and shovels...chainsaws and backhoes.
And now the cold air bites hard when we go outside. Thirty-five degrees is probably almost tropical to Dear Readers who live in Minnesota or Alberta. But it is Antartica to us. After so much claptrap, humbug and balderdash...we - a poor scribbler, a 'literary' economist, a moralist and finger wagger - how we like the cold air upon our skin, the rumble of the chainsaw...its hot smoke in our face...the chips spraying out...snow on the ground...
...anything real! Anything that isn't vain and hollow...empty words...or busybodies' delusions...!
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