Tuesday, July 28, 2009

Bonds, Bernanke and Immoral Hazard

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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The U.S. is auctioning off $235 billion in debt this week, which surpasses the $104 billion record set in a week in late June. There is some concern among the participants that foreign demand may be weak - and it probably will be. That doesn't mean the the paper won't be sold. The U.S. will simply print the money to buy it. But don't worry, the mainstream media will as usual assure us that this won't be inflationary even though it has been every other time throughout history.

'No inflation' has been the mantra of the U.S. monetary authories since 2007. One reason that has been cited for the last few days of the stock rally is Bernanke's testimony before Congress last week that the economic recovery is widening (where this is happening I don't know) and it won't likely include inflation. Bernanke also said that there would be no subprime crisis one month before it blew up. He then proceeded to continually misjudge the extent of the problem and mishandle it over and over again. So of course, he knows what he's doing now.

Bernanke also has a town hall meeting in Kansas City on Sunday night to get in touch with the people and to help further misinform them. He was repeatedly asked about the Fed's 'too big to fail' doctrine. His response was that he had to "hold his nose" to rescue such institutions during this crisis. Fortunately, Bernanke isn't Pinocchio or his arm would have had to reach out to the planet Neptune. The 'too big to fail' doctrine was actually established in the U.S. in the early 1980s because of the South American Debt Crisis, when the 17 biggest U.S. commercial banks got into trouble because they had lent substantial amounts of money there. Continental Illinois actually failed in 1984 and was essentially nationalized by the government. The other 16 banks were indirectly bailed out. At that point going forward the big banks knew they could do no wrong. A much bigger bailout was necessary during the Savings and Loan Crisis and a now a much, much bigger bailout has been necessary because of the Credit Crisis (something that Moral Hazard theory predicted would happen). Does the deeply concerned Bernanke have any plans to fix this problem? It doesn't appear so.

The trade-weighted dollar ETF was at 78.50 the last time I checked, just above the 78.33 breakdown point. Something is almost certainly going on behind the scenes. Gold was as high as 956 this morning, but had a sharp drop the moment U.S. trading opened - something that happens over and over and over again. An academic study analyzing the pattern concluded that this could only take place because of market manipulation. The regulatory body CFTC is not likely to hold hearings however even though they recently claimed that they were out to stop market manipulation (it's similar to Bernanke being concerned about bailing out the big banks). Apparently though, they can't find it if it is being done by the big players, just as the SEC couldn't realize that Bernie Madoff was a crook.

NEXT: Durable Damaged Goods

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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