A "Vigilance" We Could Live Without

By: Christopher Galakoutis | Wed, Mar 1, 2006
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Now that the US central bank handover celebrations have drawn to a close, and all the serenading, partying and booze cruises have returned to shore, I thought we might look at the cold, hard economic realities in store for the new Federal Reserve Chairman, Ben S Bernanke.

The man Bernanke replaced, Alan Greenspan, arrived at the Federal Reserve in early 1987, taking over from Paul Volcker, the inflation fighting Fed chairman who, with the support of Presidents Jimmy Carter and Ronald Reagan, had the unenviable task of confronting the stagflation of the late 1970's and early 1980's with the toughest of loves. Volcker tightened money supply and brought double digit inflation rates under control, down to the low single digits by 1983. That set the stage for the strong recovery that followed the 1981-82 recession.

From 1987 on under the "Maestro", we could not have witnessed a more diametrically opposite response to the various financial crises during his tenure, whether it be the savings and loan crisis, the Asian crisis, LTCM or the 9/11 terrorist attacks, to name a few. Greenspan's continual flooding of the markets with liquidity following each and every crisis might have avoided, or shall we say postponed, any significant pain for the US consumer; but this was little solace to those who saw their $US savings lose half their value under his watch.

Greenspan was therefore no "Maestro" at all for American retirement savings, but rather, a hero to those who profited most from what came to be known as the "Greenspan Put". Just like the bandits in the film "The Italian Job", Greenspan's friends could always rely on him to ensure nothing but green lights along their getaway routes as well. Now comfortably in retirement patting himself on the back while giving six-figure speeches, perhaps Greenspan should take a moment and re-acquaint himself with the story of Robin Hood. Not that any wrongs might be righted at this point, but rather, reminisce into his golden years about what might have been.

Enter Ben S Bernanke. Although infamous for his helicopter money-drop speech from 2002, and arguably a strongly qualified academic, we really don't know much about him as a policy maker at all. What we have been able to surmise after his first month however is that much like his predecessor, he is no Paul Volcker either. Bernanke went to Capitol Hill last month and continued with Greenspan's policy themes, if not his delivery style, about a continued "vigilance" on inflation.

Politicians applauded the clearer message emanating from Bernanke, an apparent knock on Greenspan's approach of confusing the heck out of them for almost two decades. When it comes to our policy makers in Washington, with the exception of Ron Paul, it is always reassuring to know that they are hard at work defending our interests; at least when not in a state of perpetual bewilderment.

But what is this "vigilance" that Bernanke refers to? How does the loss of one half of the dollar's purchasing power during the Greenspan reign translate to vigilance? In all likelihood this was code directed at the Bureau of Labor Statistics (BLS). What Bernanke was signaling was not a continued vigilance on inflation itself, which in reality is on course to spiral out of control, but a continued vigilance on the reporting of inflation, as well as the unemployment statistic, to name another. For, as long as terms like "core rate" and "full employment" paint the illusion that all is well and the economy effectively "managed", the wolves at the door can be held in check.

Outsourcing has played a critical role in keeping salaries contained, and by extension, the consumer price inflation that runaway salary increases might spur. Despite vocal senators and members of congress from States hardest hit by job losses, the truth of the matter is that it might be necessary to outsource even more jobs in our quest for "vigilance" on inflation. If and when wage earners finally rise up and protest is anyone's guess, but I would think it may nicely coincide with the bursting of the housing bubble, as it would necessitate Jim and Betty Paper-rich-no-more actually getting up off their couch and looking for jobs now filled by grateful workers overseas.

The successful "managing" of these statistics is obviously of utmost importance for the housing market. Having inflated a housing bubble following the demise of the stock market in 2000-2001, the Fed ensured that cash-out refinancing and short term variable rate loans would free up cash flow for continued consumption. That plan however sent the dollar lower and policy was reversed in 2004 in support of the currency. This led to what Greenspan coined as the "conundrum" of long rates refusing to rise during the period of tightening. The truth however may be that there is no conundrum at all, but rather the use of the printing press to "manage" the long end of the yield curve, so as to allow borrowers the opportunity to shift their loans over to low long-term fixed rates.

One must never underestimate the American consumer, however. Living in a society where reality-TV million dollar jackpots have turned naïve consumers into get rich quick wannabees, Americans took to the initial low rates in style and with reckless abandon, getting into the biggest house their monthly paychecks could afford. Early on, these moves paid off in spades as homes kept appreciating, and homeowners felt richer by the month. That is no longer the case in 2006 however, as the rise in short term rates has put a rather large red dent into homeowner budgets, effectively short-circuiting the Fed's carefully laid plans.

Conspiracy theories might be one thing, but where you have smoke there is usually fire. If the government can "manage" the inflation and employment data coming out of the BLS, why would they stop there? They in all likelihood would not, but instead seek to conceal the fact that our economy today is like a car engine burning and leaking oil. Sure, it might get you to where you need to be today, tomorrow and perhaps the day after that, appearing to be doing just fine to the average person. But all the blue smoke and leakage stains say otherwise to the trained and watchful eye, including the price of gold.

Gold understands all too well that sooner or later the engine will cease, or in the worst case scenario, be completely obliterated in a raging inferno. Its continued march higher has been signaling that something is just not right. Of course if we left it up to the deep thinkers at the BLS they would disagree, having you believe the blue smoke is actually a lovely aroma rising to the heavens, and the oil leakage a soil fertilizer doing us all a favor. If the extent of this idiocy wasn't outrageous enough, you can always count on the mainstream media to do one better, actually reporting the laughable as credible.

Thus, today's corporate greed, and what passes for mainstream economic analysis, makes Gordon Gekko look like a choir boy, and analysts of his day Rhodes Scholars. If that doesn't paint a scary picture for all including our new central banker, it should. And while Alan Greenspan has been called "the greatest banker who ever lived", the reality is that his handprints are all over this ugly scene. By the time the curtain comes down on this disturbing tale, the world should see once and for all the damage this man will have inflicted, and a more fitting tribute might be a quote by Mark Twain, who said that "it is better to deserve honors and not have them, than to have them and not deserve them."

The other reality is that we are stuck with Ben S Bernanke, the "vigilant" helicopter money man himself. Of course, since most central bankers live in a land of make believe anyway, I am sure he feels he can successfully handle any crisis that may arise. No doubt his middle initial can easily be pasted to his chest, enabling him to dazzle the markets with his abilities to leap tall buildings in a single bound.

Fortunately for some they can always fork over a nominal $40, as opposed to a $20 core rate, for 2 movie tickets, drinks, candy and popcorn to escape the painful reality these clowns have wrought. Unfortunately for others a cost of $40 might limit it to one or two outings a month. As costs continue to rise for these types of therapeutic excursions, perhaps that alone may prove to be the tipping point in this never-ending charade. After all, forced to sit at home with a bag of microwave popcorn just may be that final elusive straw for many cash-strapped Americans.


Author: Christopher Galakoutis

Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA
Website: www.murkymarkets.com
Email: info@murkymarkets.com

Christopher G Galakoutis is an independent investor and commentator, who in 2002 re-directed his attention to studying the macroeconomic issues that he believed would impact the United States, and the world, for many years to come. He works diligently to seek out investments for his own portfolio that align with his views, and writes about them on his website. With a background in international tax, he also works with clients holding foreign investments (ExpatTaxPros.com), ensuring their global income tax costs are being minimized.

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