First comment was from William Dudley of the New York Fed. Mr. Dudley said, "new Fed asset purchase programs will grow its balance sheet to $2.5 trillion, which is above the peak in December."
Next we have James Bullard from the St. Louis Fed saying, "if you permanently double the money supply, you will eventually double prices. It takes time for price levels to rise."
"The Fed can never and will never shrink its balance sheet. The Fed filled a giant capital hole in the banking system with newly created (printed) money; it cannot "take back" money any more than a surgeon can give a patient a new heart then "take it back" once the patient appears to be better."
The first thing that comes to my mind is, well, so much for the Fed's exit strategy and the good ol' greenback. The bigger the Fed balance sheet grows, the longer this crisis will last. All they are trying to do is buy time for the "toxic assets" to get back to fair value. How are they going to do this? Kill the U.S. dollar and inflate the hell out of the economy. The money supply has more than doubled and as Bullard said, the Fed can't take the money back.
Bullard should have used a better choice of words. Something that stuck out to me was his comment that "the surgeon can't "take back" the heart once the patient appears to be better." Appearing to be better and actually being better are two completely different things. Appearing to be better makes me think of some type of mirage. Sort of like the mirage of wealth people around the world thought they had before asset prices started declining the past two years; or perhaps the appearance that the U.S. economy is stabilizing.
Our authorities want to make things appear to be getting better. From an operations stand point, I applaud U.S. companies for having such strong control over operations management, which is why most companies beat 2Q estimates. This is a bullish sign and a testament to those companies. The quicker companies can get their finances stabilized, the quicker the economy can reach a bottom. Unfortunately, sales in almost all sectors deteriorated sharply....not bullish.
One way that companies appeared to look strong was with the relaxation of mark-to-market rules. Rather than pricing assets at current market values, authorities think they should be priced at some fictional/historical based value. Example: I own a house that could sell for $250,000 at current market prices. I really like this house and just a few years ago it was worth over $400,000, so I think that I'll list its value as $385,000. But wait...if the house can sell for only $250,000 right now, how can I value it at $385,000? Isn't the price of any asset the amount it could be sold for in the market? That's what I thought, but apparently our authorities don't agree.
Mark-to-market mostly helps banks. If the banks balance sheets appear to be healthy, then we're on the road to recovery. What if they banks appear to be healthy, thanks to the accounting rule changes, but deep down are masking a disease? What if the banks just used the last bullet in their gun to beat 2Q estimates. Underwriting equity and debt offerings along with decreased competition (remember Lehman, Bear Stearns, Merrill Lynch?) will provide banks with nice cash flows. Now that the underwriting is going to slow down, where are the cash flows going to come from? Add to the fact gov't wants to regulate the amount of risk that the "big" banks can take.
These appearance games will continue. I think the gov't is buying the perception is reality idea. As long as things appear to be getting better, they must be getting better...right? After all, this is the age of self evidence.
Anyway, I like this quote and I find it fitting to end this blog. Good luck tomorrow.
"People do not wish to appear foolish; to avoid the appearance of foolishness, they are willing to remain actual fools."
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