The Federal Reserve as Superhero?

The United States has a very long tradition of superhero worship. The ongoing popularity of superhero movies, such as The Watchmen and Hancock seems to justify what we see. There is, perhaps, nothing that the average American audience likes more than a plain schmoe who's a superhero and a regular guy at the same time.

In the past, we've seem to remember that the Federal Reserve was a plain and relatively straightforward organisation. Even under the much-maligned Sir Alan Greenspan, the Fed was pretty vanilla. No off-balance-sheet loan programs, no toxic mortgage debt... in a word, no mystery whatsoever.

Then Mr. Ben Bernanke came along, and then the crash in October 2008 occurred, and suddenly the Federal Reserve is looking even spookier than Goldman Sachs. Now, far from being a stoic, conservative organ of finance, the Fed has turned itself into a front-line warrior, running around like a berserker of old with monetary axes in each hand. Yet, it still lays claim on being a classic, responsible central bank.

Take, for instance, the recent news that the Fed will buy $300 billion of U.S. long-term bonds, as well as $750 billion of mortgage-backed securities. This, added to about $1.25 trillion of toxic assets with unknown -- probably zero -- value, around $1 trillion of government agency debt, and $2 trillion's worth of mystery, creates a balance sheet that would make a hedge-fund manager blanche.

Perhaps the cultural idiom of hero worship has gone to Mr. Ben Bernanke's head. Maybe he sees himself as the mighty superhero Helicopter Ben, successfully fighting off the minions of the evil genius, Deflation Man. We don't know for certain, since we've never met the man, but he strikes us as just an academic schmoe with delusions of grandeur. Whatever the case, though, Mr. Bernanke is putting what's left of financial stability in the United States at risk with his heroics.

The Dark(er) Side of Raising Taxes

As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.

As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:

According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!

But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.

With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.

Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!

Ingredients for the 2008 Depression

'Why is this happening?' is a question that will defy a rational explanation. Our previous post suggested because the Depression is an unstoppable force, but that is hardly satisfying to the inquiring intellect. What are the ingredients that were thrown into the economic pot that triggered this Depression? There has been a bit of speculation on this subject, and as the Depression becomes increasingly self-evident, the attempts to rationalise it will become abundant, and politically motivated. One can never know for sure, but we shall offer our opinion of what the ingredients have been, both in this post and future ones.

Here is today's list: falling real median wages in the USA; too much debt just about everywhere; a speculative mania in housing in most countries; a speculative mania in housing -related investment securities; a speculative mania in securities backed by consumer debt; a speculative mania in exotic investment vehicles such as bond insurance and credit default swaps; a speculative mania in companies which separate speculators from their money such as mutual funds and hedge funds; corruption and mismanagement in financial institutions, their auditors, and their regulators. To this we could add some factors that are probably be at work: fiat (i.e. "paper") money; resource depletion issues; consumption of previously-formed capital, including social capital.

Every item in this list has quite a story behind it, and though they may seem abstract, their effects are most definitely present in your life. In future posts we will touch upon all these ingredients (and more). If you deem any to require expedited discussion, please leave a comment.