While most are focused on the elections next Tuesday, there is an even more important event on Wednesday.  This is when the Fed will announce its policy in regard to further Quantitative Easing.  It would be nice if the elections were the more important event -- they certainly should be -- but as almost nobody in the political space is even talking about Fed policies, it gives Bernanke free rein to continue down the ruinous path on which he has set the country.

What will the Fed do?  To try to figure that out, one has to ask what Bernanke's goals are.  His primary goals seem to be:  (1) Save the current banking system, (2) Promote general inflation without causing a dollar crisis, and (3) Keep the stock market levitating.  Now, I completely disagree that these should be his goals, but Bernanke is a fucking criminal and I'm not (at least as far as I'm willing to admit).  A discussion of what his goals should be is a different topic -- this post is examining what he might do.

The problem Bernanke has is that he's largely cornered.  If QE is too small, the banking system will collapse.  They've already pulled every trick in the book to try to save the system.  Interest rates are already at zero, the banks are already allowed to lie about their balance sheets, and the QE done to date is being overwhelmed by mortgage fraud.  Bernanke has to print a good bit of money just to keep the banks swimming in place.

If QE is too large, the US Dollar will collapse.  This will cause the continuation of the current commodity explosion (in dollars), along with all sorts of terrible international consequences (trade wars, etc.).  These effects will put the last spike into the heart of the average American, as prices will explode while wages largely remain stagnant.  In the worst case, we get hyperinflation (which is really a currency crisis) and society starts to unravel.

So, Bernanke's challenge is to find just the right amount of QE to keep things slowly chugging along without blowing it all up.  The problem is, he can't really have any fucking idea whatsoever what that amount might be.  Estimates by 'experts' range from $200 billion to $4 trillion -- a spread wide enough through which to sail the Death Star with room left over for a few dozen Borg Cubes.  And, in the miraculous event that he gets it right?  The reward is the Japanese experience -- years and years of economic malaise while the zombie banks and the public sector suck up every last available dollar from producers and savers.

Clearly, Bernanke needs to go, but that would require an electorate that is focused on what really ails us as a nation, rather than gay marriage and whether or not Christine O'Donnell is a witch.  In the absence of the political will to tackle the truly serious issues, the Fed's announcement on Wednesday is a good bit more important than the election on Tuesday.  Which brings us back to the question:  What will Bernanke do?

Fuck if I know, but I'm stocking up on lube.

Posted by: Hermit Dave at 01:16 PM | No Comments | Add Comment
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