Dark Clouds on the Horizon

Wow!  Just when we thought we’d seen it all, something fantastic happened.  What a delightful treat…

The tiny island nation of Cyprus has the whole European continent welcoming spring with the frosted hearts of a December blizzard.  For a brief moment, when the Cyprus legislature simultaneously told the EU, ECB, and IMF – and their “stability levy” – to go fly a kite, we were overcome with anticipation.  We thought we were going to bear witness to mass bank implosions.

Certainly the loss of deposits would be worth the price of relegating an entire nation’s banking class to the ranks of the unemployed.  Moreover, the private uproar, and lessons learned, would demand sound banking for three generations or more.  Future Cypriots would be bequeathed a financial system built on a foundation of granite rather than a sea of paper.

But, alas, it was not to be.  The politicians, we soon discovered, had other, less upright, ideas for fixing things.  From what we gather, one option involves going into deep hock to the Russians.  Another, something called “Plan B,” involves nationalizing pension funds, issuing emergency bonds tied to future natural gas revenues, and revising the stability levy to only rob the rich.

In other words, the solution’s a combination of debt, theft, and eat the rich.  No doubt, an honest banking collapse would be far better for the typical depositor.  While their life savings would be vaporized, the bankers and politicians that created the mess would be kicked to the curb where they belong.

Feeding the Financial Monster

Meanwhile, here in the United States, Federal Reserve Chairman Ben Bernanke renewed his vow to continue feeding the financial monster until the unemployment rate falls to 6.5 percent or something really bad happens.  Here are some choice selections from Wednesday’s FOMC statement

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

“In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 0.25 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

From our perspective, nothing good will ultimately come out of creating $85 billion per month from nothing to prop up the mortgage debt and government debt markets.  Nonetheless, Wall Street celebrated the news by bidding the Dow up 55 points.

Dark Clouds on the Horizon

Of course, the time to make hay is while the sun shines.  For the stock market, the sun hasn’t shined so brightly since fall of 2007.  Speculators are using record levels of margin debt to buy stocks.

Obviously, buying stocks is what the Fed wants.  Fed policies have made it practically impossible to earn a return on treasuries or certificates of deposit.  After the Fed’s handiwork, stocks are the only game in town.

The Fed believes that pumping up the stock market will make people feel wealthier.  This, in turn, will entice them to buy stuff.  If enough people start buying stuff, before long, a real economic boom will be underway.  Companies will begin hiring.  Unemployment will go down.  Everything will be grand.

But what’s this?

Is that a dark cloud from Cyprus on the horizon…here to rain on the Fed’s parade?

Perhaps it’ll only bring a light shower; enough to irrigate the markets so they can grow bigger and bear evermore plentiful fruits.  Or it could bring the great storm…that spreads across Europe and the rest of the Western world.

Imagine the possibilities.


MN Gordon
for Economic Prism

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