Things That Make You Go Hmmm...
I was just a kid during the golden age of heavyweight boxing.
I would lie in bed in the middle of the night listening to fights being held in faraway places between giants whose names were all too familiar to me. Ken Norton, George Foreman, Joe Frazier, Ernie Shavers, Leon Spinks, and, of course, the greatest of them all: Muhammad Ali. Before cable TV, all we had in the UK were radio commentaries, but as a young boy with a vivid imagination, I could picture every punch landing as the commentators described the violent dance that was unfolding in places I had never even heard of. Zaire and Manila meant nothing to me but conjured up images of palm trees and jungles, and I reveled in every stolen moment of every fight.
I was seven years old when Ali fought Foreman—in what was then Zaire but now goes by the far less evocative name of the Democratic Republic of the Congo—in the famous Rumble in the Jungle, and I was eight when Ali and Frazier met in the Thrilla in Manila a year later.
Back then, heavyweight boxing WAS Muhammad Ali. Foreman, Frazier, Norton, et al. were all benchmarked by how they fared against Ali. When they fought each other, it was always an event, but when Ali took his place in one corner of the ring, it became a spectacle.
In July 1979, having reclaimed the heavyweight title after a shock loss to the unfancied Spinks eight months earlier and in the process becoming the first man to win the world heavyweight title on three occasions, Ali announced his retirement.
As a young boxing fan, I was devastated that the greatest boxer of my (or arguably any) lifetime was hanging up his gloves and that I would never again listen to him fight (though history and hindsight have taught me that relief and delight were the appropriate emotional responses to the news). Yes, Ali was going out on his own terms as a legend, but for one young boy in England, the realization that I had listened to him dancing round the ring on the other side of the world for the last time was a hard thing to come to terms with. The beauty of listening to Ali's fights on the radio was that, in my mind's eye, he was forever Cassius Clay—young, lithe, and lightning-fast. The reality, of course, was that by 1979 he was a shadow of his imperious younger self.
Had I known then what I know now about human nature in general and the egos of athletes in particular, I would have known full well that I hadn't heard my last Muhammad Ali fight, but the circumstances under which I would witness his return were tragic in the extreme.
In early 1980, Ali announced that he was coming out of retirement to face the new, undefeated heavyweight champion of the world, his former sparring partner, Larry Holmes.
Holmes was eight years younger than the 38-year-old Ali and was in his prime. He had taken the title by defeating Norton in June of 1978 and had been unbeaten ever since. Holmes was in great shape, and his body had suffered a fraction of the damage that had been inflicted upon his former employer, but Ali was still Ali, and fans around the world truly believed that their hero could defy both time and the ageing process to beat Holmes and cement his legacy once and for all. For Ali, alongside a longed-for return to the spotlight, an $8 million purse was temptation enough to bring him back to the sport that had given him everything and to which he had given everything in return.
Around the time of this fight, Ali had begun to ail, and although it wasn't widely known, his health had begun to deteriorate quickly. It was only with the subsequent release of Thomas Hauser's book "Muhammad Ali, His Life and Times" in 1989 that the truth became clear:
(James Slater): Now, for the first time, it was apparent just how dangerous it was for Ali to have fought again. No doubt the majority of fans will be aware of the 1980 findings of the Mayo Clinic; how they noted that Ali had "mild ataxic dysarthria," which is a problem using the muscles required to coordinate speaking, and how Ali had problems even conducting a basic finger-to-nose coordination test. Despite all this and more, however, the most beloved boxer in history was allowed to risk serious injury, perhaps even a fatality, against a primed and peaking heavyweight champion of the world.
Ali's rapidly deteriorating health was hidden by his bluster, hyperbole, and outlandish statements about how fit and strong he was. His confident assertions were enough to fool fans into thinking this was a fight in which he stood a good chance of winning, even though, deep down, they most likely all knew something was wrong.
(James Slater): People had such faith in the great man that if he said he was going to do something, no matter how illogical it seemed, they believed he would do as he said. No one was ever going to tell Ali he was a shot fighter and that he was unable to do what he said he would. Ali was bigger than life, and even members of his own family were unable to stop him doing what his ego told him he still could. Putting it more succinctly, promoter Don King asked, "How are you gonna tell God he can't make thunder and lightning anymore?!"
By now, a couple of pages into this week's Things That Make You Go Hmmm..., you are possibly wondering once again where the hell I am going with this. Well, seeing as you've made it this far, I'll tell you.
Ali was so confident and had so much apparent belief in what he said about the state of his health and his chances of success that a public who genuinely wanted to believe in him were easily convinced that he would triumph even though the cold, hard facts should have been apparent to any objective observer.
There is absolutely no difference whatsoever between the reality behind Ali's pronouncements and those of today's politicians and central bankers, and the reaction of boxing fans in 1980 and those of the investing public in 2012.
Investors desperately want to believe the words of the likes of Schaeuble, Geithner, Merkel, Bernanke, Obama, Hollande, and the rest of the gang, while they in turn are desperate to convey a sense of invincibility in the hope that nobody will see the real sickness that lies beneath the thin veneer of confidence.
As I travelled through the United States recently, I was caught up in the frantic final days of an election campaign that reached feverish intensity. The day of my arrival coincided with the release of the latest US unemployment numbers, and, with a headline number of 171,000 new jobs being created (which was far above the "estimated" 125,000), things looked good for the US economy—at least that is what the showman in the blue corner would have had you believe.
Naturally, the hype came thick and fast:
(VoA): At a rally near Columbus, Ohio, Friday, the president concentrated on the better-than-expected number of new jobs.
"This morning we learned that companies hired more workers in October than at any time in the last eight months," said Obama.
No mention, obviously, of the fact that the unemployment rate had ticked up one-tenth of a percentage point to 7.9% (after miraculously falling below the magic 8% number the previous month). Nor, for that matter, was the U16 Unemployment number referred to, as the 14.6% of the US workforce that it covers is not the kind of statistic that will win an election. The 7.9% print, whilst ignored by Obama on the campaign trail, was significant in that it represented a level of joblessness that was one-tenth of a percentage point higher than it was when he took office in January 2009. But Obama was hardly the lone cheerleader whipping up fans into a frenzy of misplaced belief. Romney was no better:
(AP): Mitt Romney says the one-tenth-of-a-point increase in the unemployment rate to 7.9 percent is, quote, "a sad reminder that the economy is at a virtual standstill."
The Republican presidential nominee says voters will decide Tuesday between what he calls stagnation and prosperity.
He made the comments in a statement while traveling from Norfolk, Va., to Milwaukee, to continue campaigning in the final days of the White House race.
Romney argues that President Barack Obama's policies have crushed America's middle class, and that the nation can do better. He's also promising to make real changes that will lead to a real recovery.
This desire to hide the truth about the dire situation facing the global economy is something that is shared by leaders all around the world and that in itself should be reason enough for investors to listen to that creeping sense of something not being right that they no doubt feel deep down inside.
It's not just Obama and Romney, though. Everywhere you look, there are political boxers telling the world why they are still "The Greatest" with all the enthusiasm they can muster and, thus far, they have been successful in generating the kind of blind belief the world had in Ali in 1980—the belief that, no matter how strong the evidence, they will be able to win the fight.
At some point, though, these clowns are going to have to get in the ring with a global economy that is meaner, more menacing, and far nastier than Larry Holmes ever was.
When the dancing around in the form of Quantitative Easing, LTROs, OMTs, and Operation Twist has run its course, when the boasting is done and the seconds are called out from the ring, we will be left with the sad sight of pale, past-their-prime governments and central banks being pounded by a remorseless economy. It will be a one-sided fight, and investors will be begging for the referee to step in and stop it, just like Ali's fans did 32 years ago. Unfortunately, the referee that night allowed the fight to continue way too long—simply because Ali was Ali and he had persuaded everybody that he was far healthier than he actually was. After several years of rose-tinted prognostications by anybody with a political interest in things getting better, don't expect the referee to step in anytime soon once the bell rings and the battering begins.
This past week, Greece has once again become the focus of the world's interest (despite the fact that many believed that Greece—and its €208 billion economy—had been discounted long ago) as the game continued to keep it from defaulting and being forced back to the Drachma.
Amazingly enough, Greece managed to sell €4 billion in short-term debt (and when I say "short-term," I mean €2.76 billion of FOUR-WEEK bonds yielding 3.95% and a further €1.3 billion of three-month debt yielding 4.2%). Of course, this wouldn't have been possible without the ECB once again relaxing their collateral rules to enable Greek banks to buy these bonds from the Greek government and then deposit them back at the ECB as collateral for "real" money. As Ponzi schemes go, this one really is up there, as you can see from the graphic on the next page.
There are two variables at play on the Greek fiasco right now; time and money. The money variable (i.e., the willingness and the ability to increase the amount of it thrown pointlessly into the Black Hole of Greek finances) is, at this stage, pretty much exhausted—which basically leaves the time variable. Greece is asking for two more years to get its house in order, and it looks as though it may well get it, despite the recent Troika report, which was scathing in its assessment of all things Greek. Unfortunately, though, relations between the IMF and European governments appear to be a little shaky right now:
(UK Daily Telegraph): Jean-Claude Juncker, president of the Eurogroup of finance ministers, announced Greece would be given an extra two years to meet its debt reduction target of 120pc of GDP by 2022 instead of 2020.
"The target, as far as the time-frame is concerned, has been postponed to 2022," he said.
A visibly angered Mrs. Lagarde, the managing director of the IMF, shook her head and rolled her eyes at the announcement that breaches the Washington-based fund's condition that Greek debt must become sustainable by 2020.
"We clearly have different views," she said. "In our view the appropriate target is 120pc by 2020. It is critical that the Greek debt be sustainable."
The 2020 "debt sustainability" target was agreed as the condition for the IMF's involvement in the second Greek bail-out agreed in March this year and an EU decision to breach it could jeopardise the whole international package.
The one thing that wasn't up for discussion, however, was the possibility that official holdings of Greek debt would ever take a haircut. Or was it?
Belgian Central Bank Governor and ECB Governing Council member Luc Coene seemed to think it was inevitable that a public-sector haircut would be necessary in order to deal with Greece's mounting debt problems:
(Reuters): Resolving Greece's problems will probably require a writedown of at least part of its debt, and Spain urgently needs to seek a bailout, European Central Bank Governing Council member Luc Coene was quoted as saying.
Coene made the comments at a debate at the University of Ghent, Belgian daily De Standard reported on Thursday.
On Greece, Coene appeared to share the position of the International Monetary Fund, which believes that some Greek debt must be written down to make the burden manageable.
A matter of a few hours later, Europe brought out the big guns to make it abundantly clear that no such thing was going to happen:
(Vancouver Sun): The European Union's top economic official sought to rule out any write-off of Greece's debt to governments on Thursday after a European Central Bank policymaker said for the first time that a "haircut" on part of it was probable.
A row between euro zone governments and the International Monetary Fund over how to make Greece's giant debt mountain manageable is holding up the release of 31 billion euros ($39.5 billion) in emergency loans needed to keep Athens afloat.
IMF officials have argued privately that some writedown for euro zone governments is necessary to make Greece solvent, but Germany, the biggest contributor to the bloc's bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.
EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Helsinki: "The solution will be a combination of various elements, one is not enough.
"But it is essential that the principal not be touched. There is a strict unanimity on this within the euro zone."
Just in case Olli Rehn wasn't a big enough name, Angela Merkel sought to add her considerable (political) weight to the debate:
(UK Daily Telegraph): I hope that the time is near when we can reach the solution that is needed [...] we did not talk about debt haircuts, you know our view and that has not changed, nor should it.
Ahhh... the good old clarity of message from European leaders.
All this noise came in the wake of the latest Troika report, which attempts to provide the world with an unequivocal view of the reality of the situation in Greece, and nobody should ever feel as though perhaps they are pulling the kind of tricks that Muhammad Ali did thirty years ago in trying to make everybody believe that Greece's health is far better than it actually is. I mean, why would they?
The Troika have a long history of accurate forecasts and can be relied upon to, if anything, err on the side of caution when it comes to making prognostications about future economic growth in a particular country.
Their track record on predicting the likely path of Greece's economy is, frankly, nothing short of 100%—which, in such a difficult arena as economic projection, is a very difficult trick to pull off. There's only one, tiny problem...
As you can see from the chart (below), their forecasts have become steadily more optimistic as the Greek economy has fallen further and further into recession/depression.*
*delete where applicable
Jean-Claude Juncker, the man who admitted that "when it gets serious, you have to lie," assured the world that Greece "will" be given an extra two years and that extra time "will" mean they are able to hit their target. Hmmm...
(Economist): ...extending the bailout by two more years means Greece will need to borrow some €32.6 billion more from its euro-zone partners. That amounts to a third bail-out.
Even if this extra help is agreed somehow, Greece will be far from safe. The previous bailout, which included a big haircut on private bondholders (aka Private Sector Involvement, or PSI), was supposed to bring Greece's debt below 120% of GDP by 2020. That will be missed by a wide margin.
Quite how wide is still a matter of dispute. The "debt sustainability analysis" has been omitted from the troika's report. But sources say the IMF reckons Greek debt will be around 160% of GDP in 2020, while the European Commission puts it lower at about 140% of GDP. Massaging of the figures, which are sensitive to forecasts of the rate of economic growth (or Greece's case, of shrinkage) and the interest rate should eventually reconcile the two.
Wolfgang Schaeuble seemed to think that perhaps the targets were unrealistic:
(UK Daily Telegraph): Wolfgang Schaeuble, Germany's finance minister, risks widening the rift with Christine Lagarde by describing Greece's 2020 debt sustainability target as "possibly a little too ambitious".
He also said that the €32.6bn (£26bn) funding gap created by the two-year extension should be plugged by lowering the rate that Greece pays on its loans, NOT via governments taking a writedown on their holding of Greek bonds, something that the IMF has long advocated.
Amazingly enough, in a sign that capitulation may, in fact, not be so far away, Schaeuble seemed to confirm a story in Bild that there was a plan afoot to give Greece the next three tranches of bailout funds (€31.3 billion due now, €5 billion due in Q3, and €8.3 billion due in Q4) in one go as if they are sick of listening to the Greeks continually begging for more money.
"Fine! Take all your money, but don't come crying to me when it's all gone." Yeah, right.
So Europe's leaders dance around, talking smack and telling the world that everything is under control—just like Ali did—but they are not the only ones trying to create the impression that things are a lot better on the surface than they are beneath.
Take the UK government, for example.
Last week, the UK government announced they were suspending their Quantitative Easing program due to the fact that the effects of it were not easily provable (hello?? It cost you £325 billion to work that out???).
(UK Daily Telegraph): When QE was last raised in July, there was more pessimism about the outlook, but the long-term projections were not much different.
No, what changed was the Bank's view of QE and whether doing more money printing would help growth. Spencer Dale, the chief economist who has long had his reservations about QE, was the first to have a stab at the problem—warning that rather than driving growth, it was fanning the fires of inflation. As inflation has arguably been the strongest domestic headwind to recovery, he concluded that more QE could actually be harmful.
Last week, the respected former rate-setter Charles Goodhart added his voice to the argument, suggesting QE might be "counterproductive" by pushing up pension deficits and forcing companies to divert cash from investment into their retirement schemes.
Others, such as Charlie Bean, the deputy governor, have said QE works but might not be delivering much economic value anymore. Paul Tucker, the other deputy governor, put it more pithily—saying the policy was losing its "bite". In other words, the MPC appears to be falling out of love with QE in its current form.
So let's get this straight; the chief economist thinks that printing money out of thin air might increase inflation, a "former rate-setter" thinks that it might cause problems for pensions, and the deputy governor of the Bank of England believes that pushing on a string might not work very well?
Ladies and gentlemen, I give you some of the finest financial minds in British public service.
This announcement was closely followed by the announcement that there had been a "shock" rise in UK inflation:
(UK Daily Telegraph): UK inflation jumped to a surprise five-month high of 2.7pc in October as higher university tuition fees and food costs pushed up the cost of living for British households.
The figures from the Office for National Statistics were higher than expected. Economists had forecast that the consumer price index (CPI) would rise from a 34-month low of 2.2pc in September to between 2.3pc and 2.5pc in October.
The figures also showed that the Retail Prices Index (RPI), which includes housing costs, rose to 3.2pc in October from 2.6pc in September as mortgage rates also increased. The RPI rise between September and October was the largest monthly increase for two and a half years.
Source: UK Guardian
The interesting thing about UK inflation statistics is that, in January 1989, with the traditional measurement of RPI (Retail Price Index) standing at 7.5%, the government decided to adopt the CPI as its measurement of inflation. The CPI basically stripped out a bunch of housing-related costs and taxes, oh, and happened to instantly lower "inflation" to 4.9%.
Float like a butterfly, sting like a bee.
The talk about ceasing the BoE's QE program was quickly denied by none other than Merv The Swerve himself:
(UK Daily Mail): But answering recent speculation that the Bank may be stepping back from further QE, Sir Mervyn [King] said in today's quarterly inflation report: "The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."
But hidden amongst the weeds was the real reason for halting QE (albeit temporarily):
(Jeremy Warner): So now we know why the Bank of England's Monetary Policy Committee called a halt to more Quantitative Easing this week—it's because the Chancellor and the Governor of the Bank of England have concocted a backdoor way of doing the same thing.
The latest little (actually quite big at a tidy £35bn) money printing wheeze comes about as close to outright monetizing of government spending as it is possible for the Bank of England to go without simply creating the money and handing it by the lorry load to the Treasury, a la Weimar.
What the Treasury has decided to do is take the accumulated interest payments on the stock of government debt the Bank of England has bought under quantitative easing, and credit it to the Government's books rather than the Bank of England's. The total is £35bn, of which the government intends to take £11bn this financial year and £24bn next.
Amazingly enough, the government then went on to justify its actions in the most extraordinary way possible—by basically saying "It's OK. The other kids do it all the time":
(Jeremy Warner): The Government excuses its actions by saying that it is only bringing itself into line with practice in Japan and the US, the other major economies to be practicing substantial QE right now. It might also be argued that to the extent the European Central Bank indulges in bond purchases, it practices something quite similar too.
Each economy is as sick as the next, and now the central banks are pointing to each other as the reason for continuing to do what they are doing to disguise the truth about their health. It has become so bad that late last month, Japan's economy minister laid his cards firmly on the table:
(Mike Shedlock): Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is "falling behind" in monetary stimulus and is at risk of another credit-rating downgrade.
"There's a high chance that Japan's economy will have two consecutive quarters of contraction through December," said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. "The slump in advanced nations is spreading to emerging economies." ... In a speech in Tokyo today, BOJ Governor Masaaki Shirakawa vowed to conduct "seamless" monetary easing as the Japanese economy is "leveling off."
And there you have it. "Falling behind." It has officially become a race to debase currencies.
Sorry? What is "seamless monetary easing"? Well, I'm not entirely sure. Let's ask Mish:
(Mike Shedlock): Inquiring minds might be wondering "What the hell is seamless easing?" (as opposed to good old-fashioned QE).
It's a good question, and one I cannot answer for sure, but I very much suspect Governor Shirakawa is simply adding superfluous words to make it sound important, so as to appear as if the BOJ is not impotent (which of course it is).
Adding superfluous words to change perception? Come on now, surely not. Ali would never have done that...
Japan's former prime minister and now prime-minister-in-waiting (for such is the nature of Japanese politics) seemed to get the message this week and placed the easing bit firmly between his teeth:
(Chicago Tribune); Japan's main opposition leader Shinzo Abe said on Wednesday that the Bank of Japan should continue monetary easing until it achieved 3 percent inflation, signalling the central bank could come under more political pressure after the next general election.
Abe's Liberal Democratic Party (LDP) leads in opinion polls, which puts the former prime minister in pole position to become the next premier in an election expected within months.
"The Bank of Japan basically needs to continue unlimited easing till 3 percent inflation is achieved," Abe told a gathering of business executives and academics, stressing that beating deflation and countering the yen's strength were Japan's most urgent economic policy issues.
For those of you who haven't really followed Japan (except to have a vague understanding that whatever they have been doing is, apparently, not the way to go), a little history lesson is in order and what better (and faster) way to do that than via a picture?
In the chart below, the blue shaded area represents the time over the last 25 years that Japan has had inflation at or in excess of 3%, demonstrating just how Herculean a task Abe-san has set himself.
It's a long way from -0.5% to +3% and, whilst getting there in a vacuum may just be possible, trying to do it when just about all the major currencies against which you are trying to ease are attempting to do the same thing may be a bridge too far for Japan.
Although Abe's words this week seemed to be taken at face value as volume in the EWJ ETF exploded, the yen flirted with the 81.5 level, and the Nikkei 225 breached 9,000, it remains to be seen whether all the bluster is just more Ali-type hype. Time will tell.
And that brings us to perhaps the biggest showboats of them all: Barack Obama, Nancy Pelosi, Harry Reid, and John Boehner.
This week has seen a cacophony of noise around the Fiscal Cliff as all parties tried to convince the world that there was a strong likelihood that a deal could be struck in time to avert disaster. But before we get to the main protagonists, let's turn things over to a man whose job title should be "First Cheerleader," Timothy Geithner:
(The Hill): Treasury Secretary Tim Geithner said Friday that he believed a budget deal could be accomplished "within several weeks" and stated that the tone of a meeting with congressional leaders was "very good."
"You heard each of the leaders say coming out that it was a very constructive meeting," Geithner told Bloomberg TV. "You know, they said what you'd hope for them to say at this point, which is that this is something we can do, we're committed to do it, we want to do it as soon as we can, we know the stakes are very high."
(USA Today): "I believe that we can do this and avert the fiscal cliff that's right in front of us today..."
(USA Today): "It has to be about cuts, it has to be about revenue, it has to be about growth, it has to be about the future," she said. "[The meeting] was good. I feel confident that a solution may be in sight."
(BBC): "I think we're all aware that we have some urgent business to do. We've got to make sure that taxes don't go up on middle-class families, that our economy remains strong."
"So our challenge is to make sure that we are able to cooperate together, work together, find some common ground, make some tough compromises, build some consensus to do the people's business," Obama said.
Wait a minute... "remains'"strong? OK... another time.
This is certainly better than the kind of hardline rhetoric we saw in August of 2011 during the debt ceiling negotiations, but I can't help but feel as though this is a whole bunch of Ali-style showboating, designed to disguise the fact that there is a serious division amongst Democrats and Republicans after four years in which the two parties have somehow managed to drift even farther apart (see previous Things That Make You Go Hmmm...) and now find themselves in a situation where the GOP feel as though, based on the close popular vote, they have a mandate from the people of the US, whilst the Democrats—returned to the White House in an electoral-college landslide—feel likewise:
(UK Guardian): President Barack Obama used the first weekly radio address of his second term Saturday to vow that he would stick to an election promise to raise tax contributions from the richest Americans to tackle the "fiscal cliff".
Obama's first order of business following Tuesday's victory at the polls is to tackle a series of tax hikes and spending cuts that will be triggered in the new year if there is no wide-ranging deal with Congress on a deficit-trimming budget.
If such a deal fails, many experts are predicting the US economy could fall back into recession. But the Republican-controlled House of Representatives has said it will not countenance any tax rises as part of the agreement.
In his new address, Obama said that was not acceptable: "I refuse to accept any approach that isn't balanced. I will not ask students or seniors or middle-class families to pay down the entire deficit while people making over $250,000 aren't asked to pay a dime more in taxes."
The president added that he believed this election victory over the Republican challenger Mitt Romney had given him a mandate to carry out his promise. "This was a central question in the election. And on Tuesday, we found out that the majority of Americans agree with my approach," he said.
The simple truth is this: Obama is a lame duck and will be unable to get anything enacted into law without the acquiescence of the Republican House which, in turn, cannot enact any legislation that the Democrat majority on the Senate doesn't approve of and that President Obama doesn't sign into law.
Now, showboating aside, does that sound like a situation whereby a solution is going to be easy to come by? I don't think so either.
So we find ourselves in the bizarre situation whereby the only people capable of effecting policy in the United States (at least for the time being) appear to be Academic-in-Chief Ben Bernanke and the Fed governors.
What is their plan to solve things? Why, moneyprinting, of course:
(Bloomberg): A number of Fed officials said the central bank may need to expand its monthly bond purchases after the expiration in December of a program known as Operation Twist that swaps $45 billion of short-term Treasuries on its balance sheet each month for longer-term debt, minutes of the Federal Open Market Committee’s Oct. 23-24 meeting showed yesterday. The FOMC in October voted to keep buying $40 billion in mortgage bonds per month to spur the job market.
Federal Reserve Bank of San Francisco President John Williams said the central bank will probably buy about $85 billion in bonds per month starting in early 2013 and continue purchasing securities well into the second half of the year.
So... in a nutshell, the likely "Grand Plan" is to double the amount of Treasuries purchased through Operation Twist?
As my great friend Billy Baars used to say sing: Second verse, same as the first, a little bit louder and a little bit worse.
Folks, ignore the showboating. Ignore the promises that everything is going to be OK and that everything is all under control. It isn't.
Just as, thirty years ago, Muhammad Ali tried to trick the world into thinking he was still his once-mighty self, the politicians and central bankers of the world are desperately trying to trick us into believing the same thing—that once-mighty economies are still the force they were.
Whether it's Greece's chances of staying in the euro (they can't), Germany's chances of agreeing to pay for their profligate southern neighbours (they won't), the UK's idea that fictional interest payments are actually real money (they're not), or the US's belief that their economy remains strong (it doesn't)—eventually, reality is going to hit home, and hit home hard.
For Muhammad Ali, the day when reality finally crashed through his carefully constructed facade of invincibility was October 4, 1980. There's no telling when the various days of reckoning are coming to global economies, but one thing is for certain; no matter how hard they try to dance around the issues, no matter how strong we are told they really are, ultimately, the "seconds" will be told to leave the ring, and they will have to stand and fight on their own.
I fear the battering they are in for will be similar to that Ali suffered at the hands of Holmes that night—only this time, there is no referee to stop it.
I will leave you this week with a great observation from JPMorgan's Kenneth Langdon, who had this to say about the coordinated interventions of central banks and politicians in the global economy:
The net result of this partnership between fiscal and monetary authorities is a continuous drain of productive capital from the private sector into the non-productive public sector. Little of that capital will be put to productive use once in the hands of government bureaucrats. As a result of this decimation of capital formation in the private sector, growth will be permanently lower, which in turn creates a negative feedback for the collection of taxes. Major economies are literally being bled to death by this drain of capital from productive uses. Voters are sanctioning this economic suicide.
Amen, Kenneth. Amen.
Until next time...
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