The First Bond Wars of the 21st Century

Posted: Sep 14, 2012 12:01 AM

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases…..until such improvement is achieved.” – (Text of Federal Reserve statement on QE3)               Let the war begin. 

Ben Bernanke has thrown down the gauntlet and will, once again, attempt to de-value the U.S. currency on the premise that U.S. products will become cheaper worldwide versus their competition. 

More U.S. sales will be achieved at the expense of the other export areas, such as Europe, South America, and Asia. 

Yet, more U.S. exports means increased profits which leads to more hiring, ultimately reducing unemployment, so the thinking goes. 

Of course, the premise is that countries such as China, Brazil, Germany, and even Russia will sit idly by and say “thank you, Ben, for destroying my export base.” 

Bernanke has now taken the tact that the U.S operates in a vacuum, and that actions such as QE3, QE4, QE5, QE6, etc. will not precipitate a reaction and Mario Draghi has already stated that the ECB will do whatever it takes. 

So much for passive acceptance. 

Brazil has declared war and has instituted counter measures.  China, with new management, is treading softly and, of course, Putin is watching all with a small smirk on his face. 

Ben has also chosen to view the actual anti-U.S. physical violence developing around the world as non-related to his decision and that’s a mistake that will have dire consequences.  Another byproduct from the QE3 announcement is the complete decimation of fixed-income recipients. 

Keeping the zero-interest rate policy “through the middle of 2015 at least” will continue to drive the unwary to put at risk not only income but principal, as well. 

Using the Ben Franklin approach to decision-making regarding QE3, namely to list out the pros and cons, the substantially greater number of cons would seem to negate QE3 altogether. 

But that would mean the current regime stepping aside and Keynesianism relegated to the dust bin.  Simply put, “that ain’t gonna happen.” 

Whether it’s a dictator, an elected official, or even an appointee, no one gives up power without a fight and the Fed’s statement certainly was that fight. 

Exporters, middle class, seniors, the unemployed, and even other countries are to be damned as long as Helicopter Ben is in control. 

That was Bernanke’s pronouncement, loud and clear. 

It’s simply Ben’s world which operates under his rules and the “purchases will continue until improvement is achieved” regardless of its futility.

Or to put it another way: The floggings will continue until morale improves.