Last Thursday, there was quite a surprise : contrary to what the majority of market participants were anticipating, Ben Bernanke decided not to taper his QE (quantitative easing). Thus, $85B a month is still being created by the Fed to keep buying $45B of federal debt and $40B of mortgage-backed securities. Markets have been caught wrong-footed.
As we had mentioned here, two weeks ago, we thought QE would go on and even at a greater pace when the next Fed Chairman takes over, this coming January 31. We shall see. But, by having renounced to any tapering, even symbolically, like $10-15B, which would have been nothing, really, Bernanke is in fact confessing to the gravity of the crisis in the United States and to the fact that there is no serious economic recovery to speak of.
Bernanke is also recognising, implicitely, that there are too many bubbles in the US (Dow Jones, real estate in certain areas) and in the world (many commodities, emerging countries, currencies and stock markets), and that even a meager tapering could well provoke a series of crashes.
Bernanke also knows that the Eurozone is in temporary remission but that its basic problems remain. His ECB collegue, Mario Draghi, just announced he wouldn’t exclude some new enormous long-term loan (LTRO) for the european ailing banks. Obviously, those 1,000 Billions of euros loaned at the end of 2011 and the start of 2012 aren’t enough. This is quite worrisome… And we just learned that Monte dei Paschi, an Italian bank (the world’s oldest bank, founded in 1472… quite symbolic !), just defaulted on the payment of the interest on its debt and was urgently looking for private investors lest it be nationalised by the Italian state, itself crumbling under its own debt… In fact, the global financial and economic system is fragile to the point that a tiny change in the Fed’s policies could provoke its shipwreck. This is the situation.
There was also some good news on Thursday that was only a few lines long : the price of gold surged. Now, this is a sane reaction, because gold can’t be printed ! Amidst all this liquidity, we can rest assured it will keep afloat.
The stock market also reacted positively to Bernanke’s announcement, but not for the right reasons. Of course, it’s benefiting from all this liquidity, it’s one of many bubbles. Ben Bernanke is stuck and his only leeway is in maintaining his QE until his successor takes over, and hoping that a crash doesn’t occur until then. The only ambition of the Fed Chairman is to save (his and) the Fed’s face.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.