Jackson Hole: Bernanke as a Magician
by Gary North
This appeared on MarketWatch on August 23: Get Ready for a Jackson Hole Surprise.
After recent tough going in global markets and a raft of dismal economic reports, investors and institutions around the world are looking to the Tetons for Fed Chairman Ben Bernanke and the cavalry to ride to the rescue yet again.
This is no doubt true. The investment world really does await an announcement of an economic cure-all. But what can the Federal Reserve do that will restore the lost productivity? What can restore the weak recovery that never did get off the ground on Main Street? The world answers: “Federal Reserve digits.” The investment world desperately wants more fiat money. Its plans call for fiat money. The world’s experts are convinced that only a new round of fiat money can save this stock market.
Their faith is in magic: the magic of something (economic recovery) for nothing (cost-free digits).
As the Fed conclave begins this week, the question on everyone’s mind is will it be, as Yogi Berra said, déjà vu all over again? And how can one position a portfolio of exchange-traded funds for either a “yea” or “nay” on more Fed action coming from Jackson Hole?
Proponents of a new round of quantitative easing say that the Fed will have to act to try to avert what could quickly become a double dip recession. Certainly the recent spate of dismal economic reports would indicate that the soft patch in this economy just got longer and softer.
Particularly dismal was last week’s shocking decline in the Philadelphia Fed Index to -30.7 from a previous +3.2. This indicator has never been at this level without a recession going along with it, not to mention that it’s the lowest reading in this indicator since March 2009.
How will Federal Reserve inflation reverse this? The FedFunds rate is at near zero. Fear of recession had driven down longer rates. What can additional monetary expansion accomplish? Businesses are not expanding. They are not borrowing. They haven’t in in two years. Why will another round of expansion persuade small business owners to borrow to expand?