Friday, March 1, 2013

Dissension is Overrated - Part II

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

On Wednesday, February 20, 2013, RORO (risk-on, risk-off) hit the RO switch (risk-off) when the Federal Reserve released minutes of its January 29-30, 2013, FOMC meeting. The media explanation for tumbling commodities and stocks was that "many" of the attendees, rather than "some" (at the previous meeting) voiced misgivings about money printing.

This is nonsense. "Dissension is Overrated" (January 10, 2013) addressed the 2013 FOMC lineup. Federal Reserve Chairman Ben S. Bernanke has a lock on 10 of the 12 votes. He can expand the Fed's balance sheet at will. Currently, the Fed is buying $85 billion of U.S. Treasury and mortgage-backed securities a month. He has made it clear the only direction is more.

Taking the media's explanation for the February 20 sell-off as is, the market reaction to the Fed minutes lacks an understanding of central bankings' modus operandi. Debtor nations intend to devalue their currencies more than the competition. Only one can win. United States officials have served notice that the U.S. dollar will depreciate the most. Do they have what it takes?

We will know in time. If past is prologue, the United States will win ("win" as established within the upside-down world of central banking), with all paper currencies losing considerable pricing power in their race to the bottom. The only sensible course is to buy gold.

It is instructive to recall how selfishly American officials treat the rest of the world. The 1971 decision to abandon the Bretton Woods agreement (by which, the U.S. was contractually obligated to pay an ounce of gold in exchange for $35 to foreign governments) was a default on an obligation. Yet, Martin Mayer wrote of the meeting at Camp David (where the decision to severe the gold link was reached): "The fact that this procedure would violate American treaty obligations does not seem to have been mentioned by anyone..." The sole motivation among the gathered seems to have been Nixon's reelection campaign.

In December 1971, the Group of 10 met (representing home-turf currencies). The consequent Smithsonian Agreement established relative exchange rates. President Nixon who really should have known better (this three-day meeting was the first multilateral attempt at negotiating currency parities since Bretton Woods and the first attempt ever at fixing rates-of-exchange among purely fiat currencies), concluded the meeting by proclaiming this "was the most significant monetary agreement in the history of the world."

Within weeks, the U.S. clawed for a greater devaluation of the dollar. The United States was among the Group of 10: all large creditor, nations: except for the U.S, the sole debtor in the Group. The new Secretary of the Treasury, George Schultz, tried to align the U.S. with the less developed countries, as a "member of a forum at which the voices of the poor [countries] would be heard." This was a disgraceful maneuver, and Schultz failed. In Martin Mayer's words, Schultz wrapped himself "in the mantle of pious internationalism that comes so naturally to Americans who are misbehaving." The pattern of U.S. misbehavior remains true to this day.

The weekend before the FOMC minutes were released, February 15-17, 2013, the G-20 finance ministers met in Moscow, a gathering promoted as an end to "currency wars." Among the points-of-view were countries battered by rising prices. Besides being a complete disaster in the U.S., Bernanke's quantitative easing drives up grain and energy prices around the world. (Gas prices are up 50 cents in the U.S. since Simple Ben started QE3).

Representing these interests (not in an official capacity), Brazilian Finance Minster Guido Mantega has blasted the too-big-to-think central banks for years. In 2010, he accused the United States of starting the "currency war." His admonitions in Moscow were to no avail. For instance, on Sunday, February 17: "There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue."

There was not a chance of a currency agreement, regarding the yen or anything else, from the moment Ben Bernanke arrived. He stepped down from his troika on Friday, February 15 and declared: "The United States is using domestic policy tools to advance domestic objectives." The Fed chief added: "We believe that by strengthening the U.S. economy we are helping to strengthen the global economy as well," donning, as he was, the mantle of pious internationalism that comes so naturally to Americans who are misbehaving.

Back to FOMC dissenters and their influence on markets: Bernanke made it clear his is the only opinion that matters: "With unemployment at almost 8%, we are still far from the fully healthy and vibrant conditions that we would like to see."Bernanke will inflate at an accelerating pace. The other central banks will chase him.