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Saturday, November 13, 2010

QE2 Is A Goldmine For Traders, Shafts The Rest Of U.S.(Bob Lenzer)

Bernanke's salvo to stave off deflation
pumps up commodity prices but could
prolong an already profound slump.

StreetTalk With Bob Lenzner
Robert Lenzner, 11.13.10

We seem to be in quite a bind. Federal Reserve Chairman Ben Bernanke’s QE2 policy of a loose monetary policy is creating opposition across the globe. Presidential Obama’s inability to fix fiscal policy is paralyzed by a weak economy and stiff political opposition.

We are approaching a national emergency because the U.S. must reduce its debt and deficit while simultaneously stimulating an economy enough to avoid deflation. This is an impossible policy combination at the moment. Reducing debt and deficits will just have to wait.

Where fiscal fixes from Washington have fallen short, Bernanke is picking up the slack and embarking on a course of dollar devaluation. The devalued dollar makes U.S. exports more competitive in the world market but it also makes imports like crude oil more expensive--not to mention hugely irritate our trading partners. This is a high wire act that will make or break the Bernanke-Obama regime.

The grim reality is that total public and private debt in the U.S. has reached 400% of gross domestic product, far above even the previous record of 299% of annual national economic output in 1933 during the nadir of the Great Depression. God help us if QE2 and its potential progeny spike interest rates and make it even more costly to service the national debt, which is projected to be $900 billion a year by 2020.

Adding $600 billion to the public debt as we are in order to drive the rate of inflation up 1%-- to in effect double the rate of inflation--only underscores the predicament faced by Bernanke and ultimately Obama. There is not a lot of wiggle room in the federal budget for more of this because so much of what we’re not yet spending on stimulus or national defense goes to entitlements, a burden made ever more costly thanks to runaway health care costs.

A Congressional Budget Office chart projecting the rising cost of health care presented this week at a Goldman Sachs alumni meeting showed a sharp line going from 10% of GDP in 2010 to 20% in 2050, while the costs of Social Security remain in a flat line basically. Goldman expects only minor changes in the health reform bill passed by the Obama administration.

This is the backdrop to the next two years and the national debate that will rage about how to get back in control of U.S. finance.  Continue Reading

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