Economic Forecast and Commentary for 2012

As the election year frenzy whips up, the Federal Reserve is target numero uno for the emotional base on both sides of the political spectrum as cannon fodder to gain votes, with the global economy at stake. Adding yet one more headwind for a fragile recovery and a bug in the margarita of the mostly under rated and brilliant Central Bank Governor Ben S. Bernanke.

Monetary Policy
            The forecast for interest rates on this blog have been exactly right so far. It is now become patently clear how long the Gov will keep them low, since he now sets up a time frame for his policy instead of just language that everyone can debate to utter oblivion and confusion.           
            If one wants to have more than a drive-by understanding of how Ben Bernanke has used his arsenal of tools up to this point to re-write the text books, one need look not much further than hisspeech to the National Economists Club in Nov. 2002. A speech many would seem correct in saying is likely the reason he was appointed by a horse smart President from Texas.
            While an alphabet soup channel understanding of the maneuvers of the Federal Reserve Bank both past and in the future are far more sensational and conducive to ratings and the Cassandras` of the world; this perspective is not only physically unhealthy since it causes so much stress, it is fairly ill informed and not a very accurate take on Central Bank Policy from my position in the drive-by theatre. 
            This sort of polarization has only served to elect leaders who are willing to use emotion and omission to gain constituent favor. With the end result being bubble burst after bubble burst for decades and a declining standard of living for Americans as collateral damage.
On the bright side: globally more people have risen out of poverty in recent history than ever before.  If one happens not to believe this fact, one must use some basic reasoning and math skills and draw a simply obvious conclusion. An inability to be able to make this kind of judgment is concerning and dangerous. It not only shows a lack of critical thinking, it demonstrates in a nutshell how the dumbing down of America has been a resounding triumph for propaganda monopoly.
Now let’s look inside the mind of Gov. Ben by simply examining some parts of this speech in the autumn of 2002 that he made. A speech that outlined every step he has taken up to this point and clearly explains what he will do next.
            In this speech Bernanke said the following when describing one of the tools he would use in the various steps he would take to fight deflation that reveals with a fair degree of certainty exactly what his most recent operation has been, and at what stage we are at in his series of steps he described in this speech:
            “… For the Fed to commit to holding the overnight rate at zero for some specified period…”
            This is a very easy reference point, a sign post that one can easily recognize as one of the Gov.’s most recent actions that almost everyone knows about if they follow interest rates to some degree. These days the number of folks doing this is quite a few, since many are watching the housing market as either first time buyers looking to buy that first home, or those who are trying to refinance, and as an indicator of the economy and confidence.
            If the US economy is the Professor’s laboratory, the mad scientist must be feeling some degree of satisfaction at this point. In his speech, the Gov. explains his theory on the application of agency tools and their effects on deflation and the steps he would ideally follow to combat it. While quite difficult to grasp in my opinion, one of the things I pull away from it is the idea that his theory if executed properly will always stop deflation, but more importantly that not everyone agrees with this concept despite historic precedent that seems to support the Gov.’s hypothesis. The current empirical results of real world applications and executions of the methods modeled in his speech by him and his predecessors show the evidence is in his favor at this time.        
            If one doubts this reality, they just need to put things in perspective, use some simple reasoning and math skills, and the facts will become clear to an open mind.
 I am not going to take any time out in this forecast to defend the emotionally unstable notion that the US economy is in a depression, a double dip, or that it is ,”..Just about to go over the cliff any day now...”.
             I am certainly tired of hearing the partisan spin from both sides that everything has been done wrong and only made everything worse.  However true that may be, the fact is we are not contracting as much as one would expect by now. The fact is there is growth in the economy, and it is enough to keep us with our head above the water as the economic data flow proves.
            But, if your one who thinks everything about the data is not real, then it is not possible to believe the data. But then that only leaves you with pretty much one thing left to believe in which granted is very lucrative; but also dubiously healthy, which is fear.
So since we know that the Gov. is going to keep rates fixed for a predetermined amount of time, we can then look to his next comments for a clue as to his next actions, or even actions he has taken but may not be widely or easily known by most:
“…For the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt… “
He has done this in what is widely known as Operation Twist , whereby the FED has been buying the US debt. As one can imagine, this operation has been the subject of a great deal of propaganda for the masters of spin and the architects of the convenient truths who use emotion and omission to keep the politics distracted and in the gutter, appealing to the worst in everyone.
The fact yields are falling and not rising appears to me to be the crown jewel of evidence supporting the Professor `s deflation theories. A fact that would have the Doc getting giddy with excitement as the laboratory results continue to stack up in support of his thesis. Indeed, if the world was a fair place in my opinion, the Gov. would be awarded a Nobel Peace Prize for his contributions in economics not to mention policy. But as I will explain shortly, it has become very clear to me after reading this speech, why feelings about him are so polarized.
But lets first take a look at a couple of other steps the Gov. would take after purchasing shorter term Treasury debt:
Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years.”
This is just an extension of Operation Twist spun as many disappointed propagandist and gold bugs claiming the Gov. is out of options as “Shout”. The Gov. is far from out of options at this point, and here are some of the reasons why as the Gov. goes on to explain:
            “…the Fed has the authority to buy foreign government debt, as well as domestic government debt… the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt”
            This is the bazooka with a silencer in the FED`s arsenal, and if everyone catches on to and becomes aware of it, will cause the rabid base to cry foul and every possible conspiracy under the sun. Even more entertaining to those in the “know” like traders is the fact this is already being done.
            So what does this mean exactly? I am no expert and my analysis is certainly not the final insight, but it would appear to me that the FED has the ability to purchase several times the amount of US debt in foreign securities! This is truly a mind numbing idea in my opinion. Let’s just say for example that the US debt is only 4 trillion, this means the FED could be the purchaser of nearly 30 trillion in foreign debt! No wonder the ECB is so resistant to being the lender of last resort; there already is a global lender of last resort: the FED.
             I wonder about this and its implications. Does this mean the FED basically has an unlimited balance sheet? Not needing approval by anyone? Not even the President? Furthermore, that it is not even transparent so as not even known by anyone outside the FED? I would not even be surprised if there are built in charters amongst the various Central Banks that protect the supremacy of the FED. After all they invented this fiat system. It is also a fact that the ECB charter is very limited, I can`t help but think this is a hangover from WWII and how fearful the world has been ever since of global currency denomination domination by the German Central banks. This is not conjecture, it’s a fact all wars have been fought over the dollar and its standing vs. other banks in the world; from WWI and Iraq, to Libya. 
            So given the fact that QE3 is actually already underway in the form of stealth operations by the FED and world Central Banks, and is going to continue for quite some time it is only a wonder why many folks can`t believe the Gov. when he says the following since he is in fact already doing this by purchasing securities foreign and domestic:
…intervening to affect the exchange value of the dollar is nowhere on the horizon today”
“A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation.”
            The Gov. is devaluing the dollar, and I think he plans to continue this as long as the economy stays in deflation.  According to the quotes above, the historic precedent for devaluation was 40%. I think that the Gov. is trying to say that it will likely be the case this time as well.
            Next in the speech by the Gov. he explains what could only be described as QE4 and flies in the face of the global liberal agenda to hike tax rates across borders and shows how those waiting on QE4 might be waiting for a long time indeed. But it is beyond the horizon at some point as the global political gears continue to mesh and churn. It also explains why he is so polarizing:
 “…of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets…”
            “…policy options I have discussed so far involves the Fed's acting on its` own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices…”
            The best way to describe all this is “stealth socialism” in my opinion.  But to be perfectly honest, it’s a bit over my head at this point. I think as time goes by these statements will become easier to understand. It is safe to figure that at this point these policy maneuvers are not being exercised.  If I understand this part of the speech correctly these policies would be recognized as a tax cut by the fiscal authorities, and an increase in government spending. Neither of which has happened yet depending on whom you ask. I happen to be living in the very real world of Government cut backs and see and hear of the effects on a daily basis. A trend I expect to see for a long time to come. Not only would we need to see a very publicized increase in public spending, but this increase in demand on goods and services by the Government would also be accompanied by an equal amount of FED purchases in the private sector. But it has to be pointed out, that all of these measures were in effect taken during the Great Recession in the form of extending the Bush Tax cuts, TARP and the American Recovery Act.
            If China is to overtake the US economy, they will have some Ghost Cities to show for it. While everybody in 2011 was looking one way across the Atlantic to the Euro crisis, from behind in the other direction across the Pacific was another big story of this coming decade: the China charade. Americans know very little about this great country except that they respect and fear it in many cases. According to my own writings of the last few years by the year 2012 the economic recovery would be derailed by bad debt, energy and foreign policy. This has begun to pan out as the Arab Spring solidifies into a deep freeze against America and Israel. My take is that if the Super Majority that came in on the tide with the election of 2008 had not been paralyzed by the health care heist, we would be on our way to a very certain and prosperous future. However the US economy continues to resists another downturn according to data releases in 2011. As a result I expect to see US GDP come in between 1-2% again this year. Last years forecast was the same and it is turning out that 2011 GDP is expected to come in right at the middle of the road at 1.5% 
            The reports out of the Middle East about possible dangers to global oil supply are ongoing, developing, and gestating into a plethora of ingredients for the perfect storm. As a result Oil will be supported at 90 a barrel this year. We are very close to seeing a surge past 120 if policy continues to be so flippant. Gold is in correction until the market finishes realizing that the fight against deflation is here for a while, and the Eurozone crisis is dealt with. I think gold is well supported around the current levels and won’t be surprised to see it be very volatile with a swing lower to 1150-1350 but still make another run to 2000k this year. I personally am not as confident of the long gold trade this winter as I have been for the last few, but am pretty sure it will be a good buy again before next winter. The stock market is technically poised for gains this year, with valuation placing it around 1350. It will remain volatile and capped as long as the Eurozone crisis is not satisfactorily resolved.
            The GOP nomination process will continue to be a thorn in the incumbents` side, having the potential to derail the longer term strategy the left has to keep the current President in power. That strategy is one of apparently having a rhino nominated in the GOP Primary, continued economic improvement, and perhaps an ace in the hole is another war, then pulling yet another one of the plays from the Bush playbook: “… stay the course…”.  On the other side for the GOP, the improving economy is diminishing their chances at unseating the incumbent. It is also becoming clearer that the assumed GOP nominee will not be able to win the General Election because of a host of reasons not the least of which is simple stereo types that the majority of voters will never let go of. The opinions on this good man on the street are unfair to say the least, and are bigoted at best. The curve ball is still yet to come, if Rick Santorum gets folks attention we may avoid the fiasco of a third party candidate and give this nomination something less than a rabble rousing contest and an actual throwing down of the proverbial conservative gauntlet at the liberals.

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Comment by nutz on January 31, 2012 at 1:00am

ben is brilliant indeed he has successfully in flated equities sucked our goverment into extraordinary debt and consolidated and/or ehanced the fed power and profits at the expense of the taxpayer......and of course those who have criticised or made alternative suggestions have been largely marginalised as heretics to orthodox fed fiscal policy. Savers being punished  a public sector that really seems to be having a difficult time deleveraging from the bloated debt they themselves are responsible for............ wages and benefits when adjusted for all this devaluation of the usd creates continues to deplete their purchasing power.......what is the end game i wonder....... how many lifetimes before all this debt is reconciled?                     at any rate retracer it was a thought provoking article.    i have marked it " liked it" and wish you success in all your endeavors.....your friend ....NUTZ

Comment by fxretracer on January 31, 2012 at 4:06am

I hear you jet, but one thing you and the other FED bankers see is a economic recovery that will improve quite a bit, I dont agree with that. I think the GDP is going to stay in the 1.5% area for longer than we think. Not to mention trgt inflation is 2% and I think it will have to go to 3% before they actually start worrying a great deal about inflation. This is a big bubble, with the possibility of severe deflation in the cards. They wont let up QE very soon, and besides they have to debase dollar to deal with debt. Were talking an easy one year or two at least is my feeling. On the flip side, if GDP surges past 2% before that time, then you will be right, I wont argue that.

Comment by fxretracer on January 31, 2012 at 4:18am

Thank you for the thoughtful comment nutz. I think the question you ask about how long will it take is a great one. In the 1919 depression era the recovery was much faster than the recovery from the 30`s depression. This is why I am such a pessimist on the US economy, not only do we have the global toilet bowl of messes holding us back, following the crisis of 2008 our government did the same thing as we did in the 30`s and 70`s: massive government intervention. This was not the case after the depression before the 30`s, where the economy crashed hard,  but the government left the private sector to clean up the mess. The natural conclusion from this for me is that the massive government tinkering stabilizes the depression, but it also prolongs the recovery a great deal. To take it a step further, I think due to the very large scale of the FED and government actions this time, we will be looking at an even longer recovery process. Something I forgot to mention in this article was housing, which is still in the toilet big time. This adds merit to the idea the recovery is far from strong, and that the hype about it is very over rated as is to be expected, after all it`s great news that the economy is recovering.


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