Thursday, July 23, 2009

Bernanke and Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Fed Chair Ben Bernanke was on Capital Hill for a second day of hearings yesterday. This time he appeared before the Senate. As he did in his testimony before the House, Bernanke spent a great deal of time assuring the Senate that the Fed could "exit" the policy moves of the Fed (including increasing its balance sheet by over a $1 trillion and massive increases in bank reserves) he has made before inflation pressures mount. This is like saying Pandora's Box can be closed again after it was opened. I do not know if our elected representatives burst into hysterical laughter or chuckled in an amused manner when Bernanke made these statements. This was not recorded in the hearing transcripts.

Once again Bernanke also emphasized that "monetary policy remains focused on fostering economic recovery". Apparently the focus isn't working. A number of senators complained that businesses in their states reported that banks were refusing to lend funds because of the crisis. Since nothing in U.S. government policy requires them to do so and the Fed and U.S. Treasury have made it possible for banks to earn riskless money, why should they lend? Bernanke at least admitted that reducing unemployment was "difficult and challenging". So his policies aren't working for anything that they are supposedly 'focused' on fixing. Maybe that's because they are focused on creating inflation instead.

In one of the great hypocritical moments in contemporary American politics, Senator Chris Dodd asked Bernanke, "When can the American people expect the recovery that they have funded?" Dodd himself publicly demanded the policies Bernanke has followed and supported the programs the Treasury has implemented. He also has a history of questionable dealings with Fannie Mae and was an enthusiastic supporter of government policies that led to the Credit Crisis. Now of course he's complaining the Fed and Treasury haven't cleaned up the mess he helped create. For his part, Bernanke said that Congress should try to reign in its spending. This of course would cause the economy to contract and make Bernanke's policies even less effective than they already are.

But the American public can rest assured that the Fed's no interest rate policy will continue no matter what. Bernanke made it clear that interest rates would not be raised any time soon. My guess is that the Fed is also pumping huge amounts of liquidity into the financial system currently (so there would be no complaints from congress about the stock market falling apart). This would explain both the stock rally and the weak dollar (trading just above its breakdown level for the third day in a row). Gold closed at $953 an ounce yesterday, a six-week high.

In presumably unrelated news, the weekly Natural Gas storage report was out this morning. Storage was up 66 bcfs versus an estimate for a rise of 67 bcfs. Stocks are 458 bcfs above the 5-year average. Natural gas futures fell 0.6% after the report was released.

NEXT: Is It 1998 All Over Again?

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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