it signi\ue000es impending in\ue001ation or recovery, both at the same time, or whether it kills off any chance of recovery via higher mortgage rates, continues to hold centre stage:
When I step back from events in the \ue000nancial markets, the whole scene looks increasingly surreal. I\u2019m reminded again of my analogy of the journey up the Nung River in the \ue000lm Apocalypse Now.
Back in 2006, when I \ue000rst grasped what was unfolding, subsequent events took on an almost slow motion nature. It feels the same again \u2013 that we are heading towards severe currency and economic crises in both the US and UK. The only question is whether the authorities can induce one last upturn before it goes very, very wrong? Last week I quoted the Cara Trading team in the Bahamas saying \u201cDo you feel like a frog dropped in the lukewarm water as the heat is slowly turned up?\u201d. This week, I\u2019m reminded of Colonel Kurtz (Marlon Brando) from the \ue000lm:
Stock market standoff
- Coppock versus Martin
\u201cthe responsibility lies more generally with a deeply \ue001awed monetary policy regime \u2013 a regime hopelessly locked in interest-rate manipulation and in\ue001ationism\u2026At some point the in\ue001ationists should accept the reality that they are a big part of the problem \u2013 and not the solution. Is that what the bond market is beginning to tell us?
\u201cWe\u2019re witnessing the same analytical errors today that were made in the post-tech bubble analysis: the willingness to in\ue001ate an even greater bubble for the cause of mitigating the pain from the so-called de\ue001ationary risks associated with a bursting of THE bubble. And with each re\ue001ation comes a heightened governmental role in both the markets and real economy \u2013 to the point where Washington is essentially backstopping the \ue000nancial and economic systems.\u201d
to go yet - into what a\ue000cionados will recognise as the heart of darkness.
\u201cI\u2019m going 70 clicks above the Do Lung bridge\u201d
\u201cThat\u2019s Cambodia Captain\u201d
Talking of surreal, I almost have to pinch myself to accept the shameful fact that two key protagonists in charge of the stewardship of the US and UK economies are still turning up for work. In the US, we have a tax evader, Tim Geithner, as Secretary of the Treasury who was voted in by the Senate Finance Committee even after his transgressions came to light. In the UK, we have a Chancellor of the Exchequer, Alastair Darling, who claimed expenses on two second homes at the same time in contravention of parliamentary rules. Gordon Brown wanted to replace Darling with his ally, Ed Balls, but conventional wisdom has it that our Prime Minister is in such a weakened position he could not even risk sacking a Chancellor who had \u201c\ue000ddled\u201d his expenses and was refusing to resign. What\u2019s happened to us?
\u201cChinese assets are very safe,\u2019 Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s. His answer drew loud laughter from his student audience, re\ue001ecting scepticism in China\u201d
\u201cThe coverage of the Geithner speech before the students was very strange. It was reported in all of the non-mainstream media that they laughed at his comments about the dollar. But I couldn\u2019t \ue000nd any reference to it in the Times, the Journal and Bloomberg, so I thought that perhaps it was made up. But I just found this from the London Times that veri\ue000es that it happened as reported. My point is that it was obviously intentional that none of the mainstream \ue000nancial media reported it.\u201d
When Geithner was wrapping up his trip to China, CNBC\u2019s Steve Liesman was granted an exclusive interview with him. Sadly, but not surprisingly, he didn\u2019t question Geithner on his very newsworthy humiliation at Peking University. Presumably Liesman had adopted the compromised role of the \u201cembedded journalist\u201d \ue000rst created with the 2003 invasion of Iraq. Wikipedia explains the concept:
\u201cWhen asked why the military decided to embed journalists with the troops, Lt. Col. Rick Long of the U.S. Marine Corps replied, \u2018Frankly, our job is to win the war. Part of that is information warfare. So we are going to attempt to dominate the information environment.\u201d
\u201cTreasury is issuing over time, and not so much time, trillions of dollars of debt. The Fed is buying US$300bn of Treasury\u2019s debt. Why is this not the dreaded concept of monetising the debt which so many economists have warned about?\u201d
There\u2019s no risk of that in the United States. We have a strong because (sic), again, we have a strong independent central bank whose obligation under the law is not just to achieve maximum sustainable growth but to keep in\ue001ation low and stable over time\u2026\u201d
\u201cAbsolutely not and again, err, the no con\ue001ict (sic) between the Fed\u2019s responsibilities for \ue000nancial stability, the measures they\u2019ve taken to help make sure there\u2019s liquidity for markets. We\u2019re easing this process of adjustment in the \ue000nancial system and their long term obligation to help keep in\ue001ation low and stable and I\u2019m completely con\ue000dent in their ability to do that.\u201d
\u201cWell, you know the \ue000rst part of that question was economists are worried about quantitative easing - are we monetizing? And his answer was no, we have a strong independent central bank. Now the latter may be true but it certainly isn\u2019t an answer to the question and I put forth, and I\u2019d like feedback everybody - that quantitative easing can\u2019t exist without the monetization process. We issue debt; we print the money to buy it. That is monetizing. I can\u2019t believe that was his answer\u2026He\u2019s not telling the truth and if he doesn\u2019t understand it, that\u2019s more scary. And if he understands it, he\u2019s lying to the American people.\u201d
The day after the Geithner interview, Ben Bernanke was on Capitol Hill in front of the House Budget Committee. The ranking Republican, Paul D. Ryan of Wisconsin, challenged Bernanke on monetisation arguing:
This is more dif\ue000cult to interpret than the blatant untruth uttered by Geithner. Is Bernanke denying that the Fed is currently monetising debt like Geithner did, or is he saying that there will be no further monetisation? If yields at the long end continue to rise, we\u2019ll see if the Fed can resist further intervention? I doubt it, even though it hasn\u2019t worked so far.
A persistently annoying aspect of Bernanke misinformation is that in\ue001ation is always the result of strong demand and the consequent tightness in utilisation rates across the economy. He never acknowledges that in\ue001ation is generally a \u201ccurrency event\u201d rather than an \u201ceconomic event\u201d caused by currency depreciation
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