by JDH on September 21, 2013

The Bernank decided to keep printing money.  What a surprise.  What a shock.  Who could have predicted that?

If I was The Great Bearded One, and I had spent the last few years printing money to prop up the stock market, and my term in office would end in the next few months, I would deduce that I have two obvious choices:

  1. Keep printing money, so that the balloon stays inflated until I leave, or
  2. Stop printing money, so that the markets crash before my term ends.

That’s a simple decision: keep printing money, so that there is no crash before the term ends.

If the new FedHead decides to slow down money printing and the economy crashes, Big Ben can say “hey, everything was great when I left!  The market was making new highs, all was good!”  If the new Boss keeps printing money the Day of Reckoning may be delayed for a year, or more, by which time when the market crashes Ben will have been out of office for long enough that he won’t get the blame.

Either way, he looks good.

He can go on to a lucrative speaking and consulting career, and write a book, and all will be well.

Let me re-phrase that: “All will appear to be well”.  Allow me to illustrate.  Here is a chart of the SPX over the last 20 years:


Looks pretty good, eh?  The peak of the internet bubble is obvious in in the early part of the millennium, then the crash into a base in 2003, then the peak in 2008 before the financial market crash, then the Fed-induced rally taking the markets to new highs today.  Fantastic.

Benny the FedHead has obviously saved us from the crash, and all is good.  Except for one piece of the puzzle.  Here is the same chart, but I have used the US Dollar Index as the unit of measure:


It’s not quite as pretty a picture, is it?

I realize that this analysis is imprecise, a “back of the envelope” type of calculation, and those of you with math and economics degrees can point out all of the flaws in this analysis.  I realize that I am showing the US Dollar using the SPX as the unit of measure, so I have added many variables that render my analysis almost meaningless.  Almost. I get it.  My point, however, is this:

To make the stock market go up, the Fed has crashed the dollar.

It is essentially that simple.  That’s how math works.

The more dollars you print, the less valuable each becomes.  Of course Ben doesn’t talk about printing dollars.  He talks about “buying mortgage backed securities” and “quantitative easing”.  George Orwell would be proud.  The effect, of course, is more dollars, rendering each dollar less value, which becomes obvious when you denominate the stock market in adjusted dollar value terms.

When the balloon pops, it will not be pretty.  Instead of allowing our debt to be liquidated in the normal course, as happens in a bankruptcy, we have continued to borrow, so the resulting crash will be much worse.  That is obvious.

What is not obvious is the timing.  When will the end arrive?

I have no idea.  It is very possible that Ben2 will keep on printing, and hold the market aloft for many months or years.  I have no idea.  So I stay the course.  Hold gold.

Until next week.