Friday, August 13, 2010

Bernanke to Start Buying U.S. Government Debt with Mortgage Principal Repayments: The Japanese Deflationary Death Spiral Has Begun

Helicopter Ben Bernanke, was all giddy and smiles this spring like a teenage girl headed to her first prom.  This was Recovery Summer and all his brilliant work at the Fed had saved the world economy just like Superman rescues Lois Lane and he was destined for sainthood alongside Gandhi and the Apostle Paul.

Well, it's the middle of Recovery Summer and the economic numbers are getting worse by the day.

So Bernanke, pulling the last arrow from his monetary quiver, has announced that the Fed will start buying government debt with mortgage principal repayments.  With interest rates stuck at zero percent and the Fed's windows open wide for borrowers like a New Orleans bordello during Mardi Gras, Bernanke is betting that even more stimulus will finally get the economy moving forward---even when trillions of dollars has not budged the U.S. economy one inch.  Check out the chart above for the U.S. unemployment rate since the real estate bubble burst.   Doesn't look like much progress to me.

Of course, the problem with the U.S. economy is not a shortage of capital.  It is uncertainty.  And even Kansas City Fed President Thomas Hoenig is making the point that Bernanke's zero interest rate and loose money policies are feeding the perception that the economy is weak and headed towards collapse.

St. Louis Fed President James Bullard is arguing that the U.S. is risking a Japanese style deflationary spiral.  He's right and I have been saying this in this blog for nearly a year.

But Helicopter Ben is not listening to them.  Nor is he listening to investors like Greenlight Capital founder David Einhorn who is betting on the "death spiral" effect of a currency when the central bank foolishly buys debt with its own principal.  This is not just throwing good money after bad, this is selling your home to buy scratch off lottery tickets.  If you think the Fed's balance sheet is a mess now, and it is, just wait a few months and see what a train wreck really looks like.

Robert J. Abalos, Esq.