Right now, thanks in large part to Federal Reserve policy, Uncle Sam can borrow at an average cost of just 2.5 percent. The average borrowing cost over the last three decades was 5.7 percent. Our debt is now $14 trillion and scheduled to grow to $25 trillion by the end of the decade. If interest rates normalize over that period the added interest costs in 2021 alone will be $800 billion—more than 20 times the mere $37 billion in budget cuts that tore up Congress in March. It would take virtually all of the cuts in the Ryan budget just to cover that added interest, much less to start bringing down the national debt. Unfortunately, the Fed is now in a fiscal box. A normalization of interest rates would break the Treasury. Hence, a normalization of rates really can’t happen—we’re stuck in a world in which the Fed must keep rates artificially low in order to prevent a budget disaster.
– Lawrence Lindsey writing in the Weekly Standard June 13, 2001 (and you think we won’t print more!!!)
QUESTION: During the Japanese lost decade in the 1990s, you strongly criticized Japan’s (inaudible)policies . Recently, Larry Summers suggested in his column that the U.S.is in the middle of its own lost decade. Based on those points, with Q.E. II ending, what do you think of Japan’s experience and the reality facing the U.S.? Are there any historical lessons that we should be reminded about? Thank you.
BERNANKE: Well, I’m a little bit more sympathetic to central bankers now than I was 10 years ago.
– Q&A During The Bernank’s Second Press Conference Yesterday
The Bernank Flop: Part Deux
That’s two press conferences laden with softball questions from “the press” and two epic flops by The Bernank. Two extremely important things that came out of the disaster that was this event yesterday. First, I want to point your attention to the quote I pasted at the top. In response to the question of where The Bernank stood on monetary policy in light of his prior arrogant and cocksure statements a decade earlier about how the Japanese were being too passive in their methods he stated “Well, I’m a little bit more sympathetic to central bankers now than I was 10 years ago.” BINGO. That was far and away the most important thing he said the whole press conference. Why? Well, for several reasons. First, it was pretty much the only spontaneous unscripted thing he said the whole time. Second, because this is him basically admitting that sitting in an ivory tower telling others how to save the free world via monetary policy was a naive and idiotic thing to do (why people still believe in central banking, I mean planning, is beyond me). Talk is cheap and The Bernank now has had time to test his sad statist theories and guess what happened? He failed miserably in front of the entire world. By saying that he is “more sympathetic to central bankers” he is saying that theories are one thing and he now realizes that. This is HUGE. The Bernank has no clothes.
Ok, so what else did we learn? Well, what happened after the press conference was very significant. For one thing the stock market tanked. Interestingly, guess what else happened? Oil prices started to soar and closed up. While off their highs gold and silver were also strong on the day and the gold miners were up. This drove these guys absolutely nuts. Remember what happened after the first disastrous press conference? Gold soared and then flew higher again the following day. What was The Powers That Be (TPTB) response to that? Well they miraculously rolled out Bin Laden and then initiated the monster raid on silver immediately afterwards. The lesson that we all learned from that prior episode is that TPTB are petulant little children. When markets do not act as they decree they whine and lash out. Since they possess all of the mechanisms of control they can create certain moves in the short term and “pain” for those that bet against them. In light of that, we should have all expected a panicky response today…and boy did we get it.
Widespread Panic
So right on cue, TPTB freaked out and showed their desperation by coordinating a 60 million barrel release of oil from OECD inventories (of which 30 million barrels is to come from the U.S Strategic Petroleum Reserves). Brilliant strategy guys. First of all, the world consumes around 85 million b/d of oil so this release isn’t even one day’s worth of demand. It’s a joke. Second of all it just demonstrates how completely desperate they are to just delay the inevitable. Just like global leaders have shown no interest in dealing with the economic imbalances of the globe resulting from a pyramid scheme global monetary system where money consists of digital confetti that can be and is being printed into oblivion, they have NO INTEREST in dealing with the real issues of peak cheap oil. Just as the solution to every other structural problem has been to pretend it doesn’t exist and place band-aids on cancerous tumors, their solution to real, serious long-term issues in oil are to release reserves? My lord this is sad.
More than sad; however, this move makes me much more bullish on oil over the next two years than I was before. First of all, the Saudi’s just said that they would increase production to 10 million barrels of day on their own (from 9.3 million b/d), effectively ending OPEC as an organization. Because this didn’t do what the petulant children in charge wanted they resorted to this tactic. First it was speculators. Now it is supply and demand. What is it really? I’ll tell you what it is. They have no freaking clue what they hell they are doing. Just like The Bernank.
As a result of this action and the direction that TPTB are heading in (price controls), my ultimate forecast for where crude might go is now higher than it was. Whereas I previously thought we would see $150-$200/b oil within the next two years I now think that it will be over $200/b. The reason for this is simple. The reason price controls like this do not work is because they destroy supply/demand signals, which then ends up causing supply shortages down the road. Let’s think about this pathetic move from two angles. First, from the perspective of an oil company. Oil exploration, development and production is extraordinarily capital intensive. From the exploration to the development phase of a large field we are talking at least 5-10 years. So let me ask you. If you are running an oil company and you see this type of action are you more or less willing to drill that marginal production or exploration well? The answer of course is much less willing. Furthermore, we have recently seen cost overruns all over the commodity space. Let’s look at what just happened with Woodside Petroleum’s flagship Pluto project offshore Australia. They just announced a 25% cost overrun and a 15 month delay to the project and Standard & Poor’s took down the credit outlook for the company as a result. I will tell you without any shadow of a doubt that this policy by the “authorities” to control oil prices via manipulation will kill the supply side relative to demand and cause oil prices to ultimately soar to unimaginable heights. Sad but true. This is Why Central Planning Fails 101.
Then what about the demand side? Well of course by unnaturally knocking down the price of the most important commodity in the world demand will be maintained at artificially high levels for longer. So demand is kept up artificially while supply growth constrained. Can you say complete unmitigated disaster.
Speaking of Panic…
Speaking of panic, it looks like after a couple of weeks of begging and pleading I have scored a ticket to the Widespread Panic show at Red Rocks this weekend. Apparently some guy that was driving up from Memphis for the show can’t make it so I get his seat. I am supposed to pick it up at the show so we shall see how this works out…Anyway, have a great weekend! God Bless the Central Planners. They are gonna need it.
Peace and wisdom,
Mike
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