Wednesday, February 17, 2010

IsThe Writing On The Wall?

The piece by Hoenig is either total manipulation BS being spewed but the powers that be to quell the Tea Party followers or there is one person at the Fed that has a brain. Actually they all have brains, it it morals they severely lack.

Mish has praised Knocking on the Central Bank’s Door by Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City in his post "Three Paths Forward" - Kansas City Fed on Current U.S. Fiscal Imbalance, Hyperinflation, Printing. I guess having someone at least attempt to lay out some sort of exit strategy is nice. The only problem is he left the full frontal out of the equation.

Hoenig says, "I see just three ways forward in dealing with our current and prospective fiscal imbalances. While each involves considerable pain only the third will resolve the imbalances without eventually causing inflation to accelerate or precipitating a financial and economic crisis." 

Option 1 - Monetize. "One option for dealing with a fiscal imbalance is for the central bank to succumb to political pressure and monetize the debt. ... This process often appears benign at first, but if it goes on unchecked, the outcome is almost always higher levels of inflation and ultimately a loss of confidence in the value of the currency and the economy." News flash! We're there already. With the Primary Dealers now buying huge chunks of the auctions and promptly being refunded those funds by the Fed and the recent increase in the treasurt debt ceiling limit by $1.9 T, we're there. So seeeeerike one!

Option Two - Policy Stalemate. "The second path forward is a stalemate between the fiscal and monetary authorities. In such a stalemate, the fiscal imbalance grows while an independent central bank maintains its focus on long-run price stability. ... Eventually, this combination of large debt, and high cost of borrowing and capital weakens economic growth and undermines confidence in the economy’s long run potential. Slowly, but inevitably, if the fiscal debt goes unaddressed, the currency weakens, as does access to global financial markets. And the cycle worsens, leading ultimately to a financial and economic crisis." We're already there again. The key words are "undermines confidence" and weakens economy". What's that about China pulling out (China Pulls the Plug on U.S. Treasuries)? Who bought what last year? Large debt and high cost of borrowing will lead to that $1.9 T being spent in a few months and the drug addict will be back at the door looking for another fix. As DP used to say, "And the whiff." Steeeeerike two!. 

Option Three - Equitable Fiscal Discipline "Knowing inflation is not an acceptable alternative to strong fiscal management, a government faced with rising debt levels must provide a credible long-term plan to reestablish fiscal balance. The plan must be clear, have the force of law and its progress measurable so as to reassure markets and the public that the country has the will and ability to repay its debts in a stable currency." Steeeerike three! Flat footed watching a fastball down the middle! Plan? Anyone seen that plan laying around? You know the one with all those new job programs, ways to increase lending to small business and other measures to stimulate the economy while increasing regulations to ensure none of this ever happens again? Wait, not not that one, you mean the one to save the banks, funnel all of the TARP funds and increased taxes to the TBTFs? Oh, yeah, that one is right over here. They got a plan alright. One that puts us in the default line.

The Financial times picks up on Hoenig's speech in Lone voice warns of debt threat to Fed "The hawkish Kansas Fed president also warned against “dire” consequences of the central bank prolonging its holdings of mortgage-backed securities, which it purchased in an effort to prop up the US housing market. Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture." LOL, don't forget about the Fed's balance sheet that is absolutely bloated with toxic debt and how their efforts to save the RE/CRE markets may have amounted to a big fat zero. 

For those of you looking for a good debate on whether to hyperinflate ot not, here you go. And I quote, "While Donovan is correct in principle, the opportunity cost, should debt levels become insurmountable, of a devaluation will likely be actively considered by all financial "experts" in the administration. Coupled with a prevalent expectation that this kind of action, especially in light of Donovan's analysis, and coupled with a short-maturity focused debt curve, means that the likelihood of just such a policy is becoming increasingly likely."

You can chew on this as well - The Minneapolis Fed President Kocherlakota Warns Massive Debt Load Can Only Be Paid By Tax Collections Or Debt Monetization - Our options are fading fast and none of then are very appetizing. Tough times are coming.

Have a good one.