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CREDIBLY THREATEN
Dum dee dum dee dum dee da. Im in San
Francisco now, and I already have some
great observations about this place, but
they will have to wait. First, we have
to talk about Jackson Hole (hereinafter
known as the J-Hole).
Interestingly enough, it is coming up on
a full ten years since Ben Bernanke gave
his original helicopter speech (all the
other speeches since then have been
variations on the theme).
Ten years!
It is almost as if he saw it coming,
it being this depression we are in or
whatever you want to call it. There are
still buildings, though.
It is human
behavior that has changed.
So lets begin with an excerpt from that
grand old speech, in fact, the most
important part. Ctrl-C, Ctrl-V:
What has this got to do with monetary
policy?
Like gold, U.S. dollars have
value only to the extent that they are
strictly limited in supply.
But the
U.S. government has a technology, called
a
printing
press
(or,
today,
its
electronic equivalent), that allows it
to produce as many U.S. dollars as it
wishes at essentially no cost.
By
increasing the number of U.S. dollars in
circulation,
or
even
by
credibly
threatening
to
do
so,
the
U.S.
government can also reduce the value of
a dollar in terms of goods and services,
which is equivalent to raising the
prices in dollars of those goods and
services. We conclude that, under a
paper-money
system,
a
determined
government can always generate higher
spending and hence positive inflation.
That
could
be
the
most
important
paragraph in monetary history.

Do you remember where you were when that

speech came out?
I was trading the
index arbitrage at Lehman Brothers.
I
was very interested in money markets
(index arb traders are, by nature) but I
still didnt grasp the enormity of this
speech. I remember people making a big
fuss about it, though. But I think the
idea that the Fed would ever have to
actually print money just seemed so
distant and so surreal. I mean, at the
time, interest rates were nonzero, and
strongly positive.
So when Ben Bernanke runs around telling
people that the Fed is actually not
printing
money,
you
can
say,
au
contraire, Monsieur Fed Chairman, it
says so right here in black and white in
your
speech.
In
fact,
you
seem
exceedingly glib about it. Lets parse
it a little more. There are some great,
great concepts in here.
First of all,
Bernanke recognizes that anything has
value, gold or dollars, to the extent
that the supply of it is limited.
But
here is the real key--by increasing the
number of U.S. dollars in circulation,
or even by credibly threatening to do
so, the U.S. government can also reduce
the value of a dollar in terms of goods
and services.
Emphasis on credibly
threatening.
Thats what Bernanke has been up to the
last few months, and thats what he did
again, at the J-Hole.
Bernanke hasnt
actually printed any money.
He hasnt
actually done QE3. But he has credibly
threatened to do so.
The markets have
responded in turn.
The markets have
responded as if he printed money, but he
hasnt. Cool trick, actually. But once
again, it was right there in black and
white in his helicopter speech.
The
funny thing is that powerful people
usually write what they are going to do

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before they actually do it, but nobody

reads it.
Have you read either of
Obamas books? Didnt think so.
Well, Bernanke is mostly out of room to
credibly threaten to do anything at this
point; he is going to have to pull the
trigger at the Sep FOMC meeting, or else
the market isnt going to believe him
anymore.
And thats what I think he
will do.
And thats what the precious
metals markets think he will do (I am
long in various forms).
Here is the last
sentence again:

point.

Read

this

We conclude that, under a paper-money

system, a determined government can
always generate higher spending and
hence positive inflation.
The key word in here is determined. A
determined
government
(also,
an
interesting choice of words; notice, he
didnt say central bank) can always
create inflation.
It might take one,
three, ten, or a hundred trillion
dollars,
but
if
a
government
is
sufficiently
determined
to
create
inflation, it will happen.
But there
are a lot of people out there who think
that no amount of money printing is
going to make it happen (typically the
LC permabears), pointing to Japan as a
case in point. My argument to the Japan
counter-example, which I have made many
times before, is that Japan was not
determined
enough.
Their
QE
was
tiddlywinks compared to ours, and still
is, in spite of the BOJ buying things
like ETFs and REITs. They dont really
want to create inflation, at least not
right now.
Debt monetization one note samba.
you in September. It will be fun.

See

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VOL 4 NO 163

The Tall Poppy Syndrome

I am much less interested in politics
than I am social psychology.
I am
saying that up front.
I am going to
dissect a political phenomenon, but from
a social psychology standpoint.
You
have been warned.
I started thinking about this when
Maureen Dowd started taking some shots
at Paul Ryan.
First of all, the
interesting thing about anyone taking
shots at either of these guys is
that...what are you going to say?
I
mean, Paul Ryan is in tip-top physical
condition. Chris Christie on the other
hand, is overweight.
Who do you think
is going to have a tougher time of it?
It is more nuanced than you think. You
see, in 2012, we attack the good for
being good, and we excuse or accept
mediocrity. The late-night crowd and a
few commentators and politicians have
gotten a few laughs at Paul Ryans
expense because he is in great shape.
Because he is Mr. Perfect.
And Romney
is Mr. Perfect, too. Great-looking guy,
great
shape
for
his
age,
rich,
successful, beautiful family...and we
absolutely hate his guts.
Am I saying that we would have been
better off with Chris Christie?
Yeah,
but thats not the point. The point is
that we, as a species, go through these
convulsions where we rip apart the good
for being good and we celebrate the
vices of the depraved.
Actually, the
human race is like this most of the
time; it is brief interludes, like in
the nineties, when were not, when we
actually engage in hero-worship.
Remember that EN7Y piece I did? That is
really
just
the
beginning
of
the
conversation.
Let
me
tell
you
something.
I had a number of (left-

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leaning) Facebook friends live-blogging

the Republican convention.
You know
what they said, over and over?
Ann
Romney.
Ann Romneys $78,000 horse
(actually,
the
tax
deduction
was
$78,000, not the horse, but whatever).
Richie Rich. Mitt Romney, Richie Rich.
How dare you try to take a walk in my
shoes. I had about five to ten Facebook
friends that were just seething envy at
these
people,
and,
by
extension,
wallowing in their own inadequacies
(because that is how envy works).
It
was amazing.
I still think that the election will be
very close, and that Mitt Romney has a
decent chance.
But I will say for the
umpteenth millionth time that a rich man
will have a very difficult time getting
elected President in 2012.
Look.
The
You cant build it statement was the
most incredible anti-achievement thing
you could ever possibly say, and it was
smart for the Republicans to start a
backlash, but now there is a backlash to
the backlash.
Once again, Facebook
friends are echoing the Presidents
sentiment that you really didnt build
that; there is this spam photo-meme that
is going around with a picture of a guy
in front of a hardware store and a sign
out front saying, I built it, and then
a number of annotations to the picture,
pointing out public contributions to
his effort, like roads, power lines,
etc. I find this amazing. I find this
more amazing than the original You
didnt build that statement, the fact
that there is an intellectual movement
in support of it.
Were doomed.
Look up The Tall Poppy Syndrome on
Wikipedia. You wont be sorry. I know,
you have stuff to do, you just got back
form a long weekend. Gee whiz, it will

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just take you a second.

Enchant
I have a client/friend who moved to
France (sort of coincident with Hollande
getting elected, interestingly enough),
and I am still in the process of
gathering intelligence from him, but it
sounds
like
an
interesting
place.
Remember I said that the best way to
learn about a place is to travel there,
and even better, live there!
Well, my friend says that short French
sovereign debt has to be the easiest,
most dummy trade on the planet. He says
its a banana republic in a AAA package.
Makes no sense. He thinks a dirtnap is
imminent.
The reason we got on the subject is
because I forwarded him an AP article
about a policy that Hollande is going to
implement with the aim of reducing youth
unemployment.
The French government is
actually going to pay the salaries of
young people hired by private companies,
up to seventy-five percent of it. It is
going to cost a few billion euros. Huh?
This is the worst economics in the
world.
The reason it is so bad is
because it is bad economics piled on top
of bad economics; the government has
made it so hard to fire people that now
the government has to pay to hire
people.
Wasnt Bastiat French, or
something?
So, the United States may be doomed, but
France is really doomed, because they
have not realized that libert and
egalit are mostly mutually exclusive.
Not much else to say, except: can I get
a borrow on that bond? Or EWQ, for that
matter?

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