Now, about that Bernanke Put.
Many people believe that because Bernanke once talked about dropping money out of helicopters to fight deflation that he literally meant that he would do this if push came to shove. He didn’t. The whole thing was a bluff meant to prop up the markets: the famed Bernanke Put.
Truth be told, this bluff is probably the smartest thing Bernanke ever did. By threatening to leave a paperweight on the “print” button, he convinced the market and all of Wall Street that the Fed would always be there to step in and save the day.
Let’s say the Fed just hits “print” and prints TRILLIONS of dollars to monetize everything under the sun. If this happens then the bond market will implode taking down the US financial system with it (85% of the $224 trillion in derivatives sitting on US bank balance sheets are related to interest rates).
Moreover, it’s not as though “printing” solves a solvency crisis. Instead it results in a loss of faith in the underlying currency, which causes hyperinflation (this is exactly what happened in Weimar). Most people forget that hyperinflation is the SAME as defaulting: in both situations the underlying currency becomes worth much less if not worthless.
So printing is ultimately a useless concept. But what about debt monetization? Couldn’t the Fed just print tons of money to buy Treasuries and other debt instruments?
The answer here is ALSO a resounding “NO.”
The reasons are three-fold:
2) Political consequences
3) Draining Treasuries from the banks
The last time the Fed instigated QE, food prices went through the roof resulting in riots and civil unrest around the globe. Today, food prices are already soaring due to severe droughts. The Fed’s hands are tied here.
If the Fed engages in QE, the political consequences would be severe. QE 2 alone made the Fed front page news in a BAD way, resulting in the Fed going into major damage control mode: op-eds about Bernanke being a regular guy, town hall meetings, etc.
Finally, one has to question… does the Fed really want to be draining Treasuries and Agencies from the banks’ balance sheets? After all, the big banks, which sit on over $200 TRILLION worth of derivative trades, only have $7.12 trillion in assets.
If the Fed were to engage in QE it would suck some of these assets out of the banking system resulting in the banks being even more leveraged and susceptible to collapse.
Bernanke knows this. He even admitted it recently, saying, “If the Fed owned too much TSYs and Agencies it would hurt the market.“
So the Bernanke Put is a lie. The markets will be realizing this in the coming months if not sooner. When they do, we’ll see the REAL Collapse: the one to which 2008 was just a warm-up.
This is the kind of “unquantifiable” research that we specialize in at Phoenix Capital Research: finding the insights and data that lurk between the financial statements and press releases… the insights that will really move the markets.
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Chief Market Strategist
Phoenix Capital Research