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Who can forget the following immortal paragraphs from Bernanke’s: “Deflation: Making Sure “It” Doesn’t Happen Here “

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

 

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

 

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. 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 devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

 

Each of the 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. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

 

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.

And there you have it: in five paragraphs, or just 590 words, Bernanke predicted not only the deflationary crisis its policies would create, but its one and only recourse: injecting gobs of liquidity into the system.

More importantly, since the Fed will once again fail at its task – to reallocate capital from the market and into the economy – it also gave us a flowchart of the next steps: monetization of not only US but foreign debt, as well as outright monetary finance, in the form of either a money-financed tax cut funded through even more QE, or, a Treasury program to purchase private assets. In other words: the Fed’s remaining “Helicopter Drop” tools will make Weimar seem like a walk in the park.

And all this happened 11 years ago today on November 21, 2002.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Bpm6iaM4oFU/story01.htm Tyler Durden

Torture doesn’t work to produce actionable intelligence. Indeed, it harms our national security and creates more terrorists.

Because torture is blatantly illegal, the Bush and Obama administrations have tried to hide America’s torture by shipping prisoners to foreign countries … so they can torture them for us.

Similarly, mass spying by the NSA and other agencies doesn’t prevent terror attacks … but actually interferes with our ability to stop them.

Because mass spying on Americans is blatantly illegal (and see this), the Bush and Obama administrations have tried to hide America’s Big Brother act by shipping Americans’ most confidential, sensitive information to foreign countries like Israel (and here) the UK and other countries … so they can “unmask” the information and give it back to the NSA.

In other words, the NSA is subverting the legal prohibition against mass spying on Americans by shipping data overseas … and then having our allies give it back to us.

The list of countries which are doing this for the NSA are almost certainly as follows:

• Israel

• Canada

• Britain

• Australia

• New Zealand

Postscript: Unfortunately, the American elite aren’t particularly concerned with protecting the basic rights – let alone the sovereignty – of the American people.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RrlxJe6cXmw/story01.htm George Washington

“In some stocks,” Starwood Capital’s Barry Sternlicht warns, “we are seeing irrational exuberance with silly valuations.” The outspoken asset manager warns that the signs are coming from the credit markets of “silly debt deals” with no covenants – which is helping equities melt-up but is a sign of a bubble. Perhaps his answer to what the Fed will do and when is the most succinct (and likely accurate) summation of the current idiocy, “very little and never,” as the anchor grinningly suggests how great higher stock prices are for ‘investors’ before Sternlicht exclaims that may be true for the minority who hold stocks, “enjoy it is an investor,” he suggests, “but don’t love it as an American.” Sternlicht goes on to address the dysfunctional political class and the Fed’s enabling of that to continue as well as where the real estate bubbles are in the US.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ARMrvV3G1g8/story01.htm Tyler Durden

“In some stocks,” Starwood Capital’s Barry Sternlicht warns, “we are seeing irrational exuberance with silly valuations.” The outspoken asset manager warns that the signs are coming from the credit markets of “silly debt deals” with no covenants – which is helping equities melt-up but is a sign of a bubble. Perhaps his answer to what the Fed will do and when is the most succinct (and likely accurate) summation of the current idiocy, “very little and never,” as the anchor grinningly suggests how great higher stock prices are for ‘investors’ before Sternlicht exclaims that may be true for the minority who hold stocks, “enjoy it is an investor,” he suggests, “but don’t love it as an American.” Sternlicht goes on to address the dysfunctional political class and the Fed’s enabling of that to continue as well as where the real estate bubbles are in the US.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ARMrvV3G1g8/story01.htm Tyler Durden

The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NMDLaIMFOY/story01.htm Tyler Durden

The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NMDLaIMFOY/story01.htm Tyler Durden

For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke’s centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec’s chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market.

But the truly stunning aspect of RenTec’s October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a “hedge” fund’s exposure – shorts.

From RenTec:

Where did RIEF’s alpha come from? The answer is that it came from the short portfolio. In fact, we made so much alpha in the short portfolio that we made positive profits from our short positions despite the S&P 500’s 4.6% return in October. Drilling down further, we note that almost half of RIEF’s alpha was made in the Barra Biotechnology and Drugs industries. Within those industries, RIEF is short in many of the smaller and (presumably) more speculative names. Those issues fared particularly poorly in October as the two industries combined had a cap-weighted return of 2.8% but a flat-weighted return of -4.3%. Since RIEF is long overall in Biotechnology and Drugs, but made its alpha in the short portfolio, the fund’s gains are a result of stock selection rather than sector or industry selection.

 

The good news: alpha generation still works. The bad news: one has to be a math genius or a robot to figure out how to do it. For everyone else – especially those 90% of hedge funds underperforming the S&P for the fifth year in a row – the Pied Piper of Marriner Eccles has an unbeatable deal on all time high beta-chasing margin debt.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lMWnw1l_Dnk/story01.htm Tyler Durden