The biggest news of the week for me wasn't the storming of the US Embassy in Libya but Ben Bernanke saying he's just going to leave the tap on until stuff gets better. Indefinitely.
''We are trying to create more employment … the tools we have involve affecting financial asset prices,'' Bernanke said at a press conference after the Fed's announcement. Companies felt there was not enough demand for their products, and if the value of homes, shares and other assets improved, Americans would be ''more willing to go out and provide the demand'', he said.
The open-ended nature of the stimulus is one measure of how hard the Fed is now pushing. Another is the fact that it has softened a focus on containing inflation that has dominated central bank thinking for decades.
Bernanke insisted yesterday that the Fed was not intentionally trying to raise inflation to a point where it more aggressively depreciated America's daunting $US16 trillion debt load, an option that has been there from the moment the global crisis began.
It was, however, ''not going to [be] premature in removing policy accommodation'', he said, adding: ''Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we're not going to rush to begin to tighten policy. We're going to give it some time to make sure the recovery is well established.''
The success or failure of the ''do what it takes'' quantitative easing strategy that is being rolled out on either side of the Atlantic depends on whether companies and individuals respond. In the US at least, the capacity to do so has been demonstrated before.
That's some pretty drastic tap turning. They're already at 0% interests rates, and committed to that for a long time to come. now they're going to spend 40billion a month buying crap paper, printing money to do it. Tea Party types are going to have a stroke. Gold investors are going to have jism-spasms. Commodities are going to rise again and save Twggy Forrest.
I've had a little l think about what all this means because since the GFC, central bankers and treasury officials from around the world have done this thing of trying to stimulate the economy. This includes things like the TARP bail outs as well as the Rudd Government's big stimulus package which staved off a nose dive into a depression (and the more time goes on, we have to give him credit for that decision lone).
The problem is, at this point we're having to wonder about the 'moral hazard' that was decried at the time by certain people who felt that bailing out bankers was one thing but bailing out everybody was a terrible thing because they might just keep doing what they were doing that got us all into the mess. Note, they weren't as hard on the bankers as they were on socialist governments that just gave out the money for people to pay down their credit card debts.
But 4 years removed from that chaotic time, the great danger seems to have been the possibility (or even probability) that asset prices might go into reverse and we have a deflationary spiral. The big fear, as it were, seems to be that if everybody ends up being foreclosed upon by their banks and are forced to sell their houses, then there would be all these homeless families who owe more money to the banks even after being forced out of their homes. And this seems to be the scenario everybody is furiously trying to avoid, both over in the USA and over here in Australia.
So we come back to the moral hazard bit. Just as a token of understanding, RBA boss Glenn Stevens was saying earlier in the year that it wasn't acceptable for people to be assuming that property only goes up; and yet we have governments around the world totally invested in making sure they never come down. You'd be stupid not to buy into the Property Ponzi scheme that gets bailed at the first sign of a crack. Nobody is willing to give up their houses. Should they be made to by market forces? It seems the Federal reserve in the USA says no and, - this is the amazing bit - What they're saying is that they're going to take the value off the house by stripping the value out of the price tag on your house.
Yes, you can still keep your $700,000 price tag on your house; you won' be foreclosed; but that $700,000 won't be worth the $700,000 you bought it at, because we're printing money to destroy the value faster than before. And it won't show up in inflation figures because people won't sell their houses often enough to make it matter.
In the long run, the property bubble in the first world racked up a certain sum of unrealistic prices, which has to be wound back. Rather than let the deflation give back those prices, they're going to switch on inflation so that the dollar value diminishes to match the real value.the point is, going forwards, there is nothing to say that Real Estate is a better investment than shares or bonds because they're going to inflate away any gains you make beyond the market. It's probably a good thing if it blunts property speculation, but judging from the news this week, overseas investors are piling into Sydney Real Estate, most likely because of the moral hazard or actual lack thereof.
Somewhere Steven Keane is laughing and crying.
Eying The Charging Bull
Are things really that bad in America right now? Don't look now but the Dow Jones finished at 13,593.57, marking a 5 year high. by which we mean, it's the highest it's been since the GFC started 5 years ago.
US stocks rose for a fourth straight session on Friday to close out the week at nearly five-year highs after the Federal Reserve took bold action to spur the economy, a move that could keep equities buoyed in the coming months.
Shares of Apple Inc, the largest US company by market value, ended at an all-time peak, and Exxon Mobil , the second biggest, hit a four-year high.
Equities are in a run-up that has pushed the S&P 500 to end higher for four consecutive months. The extended advance has come mainily from actions by Europe's and the United States' central banks to keep interest rates low and stimulate their struggling economies.
The Fed said Thursday that it would keep up its aggressive bond-buying until unemployment falls. Chairman Ben Bernanke said he wanted to see a convincing improvement in the economy that could deliver sustainable job creation.
Bernanke's comments are "going to create an artificial floor on the market, meaning that we could see higher prices over time," said Paul Nolte, managing director at Dearborn Partners in Chicago. "Any correction that we get will be no more than a few per centage points."
The Dow and the S&P 500 both closed at their highest levels since December 2007, while the Nasdaq ended at the highest since November 2000. The small-cap Russell 2000 index closed at the highest since April 2011.
The Dow Jones industrial average ended up 53.51 points, or 0.40 per cent, to 13,593.37. The Standard & Poor's 500 Index closed up 5.78 points, or 0.40 per cent, to 1,465.77. The Nasdaq Composite Index gained 28.12 points, or 0.89 per cent, to 3,183.95.
For the week, the Dow rose 2.2 per cent, the S&P climbed 1.9 per cent and the Nasdaq added 1.5 per cent.
The S&P is now just 6 per cent below its all-time closing high of 1,565.15 despite a relatively weak economy and economic risks around the world.
The Dow might set an all time high by the end of the year. The same thing goes with all the other American indices. This might all be 'irrational exuberance' as Alan Greenspan called the 2009 rally, but he doesn't seem to be saying it now.
I know there's a 'Fiscal cliff' coming later this year, but that is why Bernanke opened the sluice gates and let it rip. When it crashes over the all time highs, this is likely the start of a new bull run in US equities.
Lining Up For A Beating
Back here in Australia, there's been another bit of Rudd-pronouncements and a round of "is-he-won't-he". This time Simon Crean managed not to go out there and slander Kevin Rudd. The election last weekend yielded some interesting results, all food for thought and the main dish on the food-for-thought degustation is that the ALP is likely to get bollocked hard in NSW at the next Federal election.
A second backbencher from western Sydney, John Murphy, spoke up. Murphy is especially vulnerable. He holds his seat of Reid by a margin of 2.6 per cent.
He agreed with Swan that the ALP performance had been ''patchy'' and cited two contrasting local experiences. The Labor mayor of Canada Bay council, Angelo Tsirekas, managed to win a 10 per cent swing in his favour.
But in Auburn, where Labor had long held an unassailable dominance, the party had been outpolled by the Liberals by a margin of two to one.
If that's not an alarm, Murphy said, I don't know what is. We've got to take notice and get into these communities, he urged. Canada Bay and Auburn fall within Murphy's federal electoral boundaries.
Swan offered a reassurance that things would turn around but again offered no strategy. A third MP, Stephen Jones, echoed the concerns of Hayes and Murphy.
It was a moment of ironic tang for some in the room. Some caucus members remembered hearing Julia Gillard justify her coup against Kevin Rudd by saying that she was not so much troubled by the Rudd government's difficulties but by the fact that he seemed to have no plan to get out of difficulty.
Well, that would be painful in the caucus room, but really, this moment was going to come on the back of February's big leadership spill that was supposed to put paid to Kevin Rudd and allow Julia Gillard to win the electorate. Except the electorate isn't listening. I don't mean any disrespect, but I will continue to say that I won't vote for Julia Gillard because basically if the ALP was happy to risk the future of Australia in the hands of Tony Abbott, then I am not doing anything worse by taking the exact same risk, by donkey voting for the Lower House at the next Federal Elections (I'm voting for the Australian Sex Party in the Senate).
It doesn't matter what Julia Gillard has done since February or will do on to the next election. The reasons for me not voting for her have been writ in history. The ALP can't unfuck that goat.
Speaking Of Terrible Tony...
Student politics on campus is an often silly, shitty, horrible, bizarre thing. You always wonder what the storm in a teacup is, but it's always nice to know that it can have real life repercussions, for 35 years one from some SRC arguy-bargy at the University of Sydney's SRC, we've been hearing what a prick and a hostile misogynist Tony Abbott was at university.
Barbara Ramjan beat him hands down. She was of the left but her work as the SRC's welfare officer made her a popular figure on the campus. The night her victory was declared, the SRC offices saw wild scenes of bad-boy behaviour: flashing, mooning, jeering and abuse. Abbott watched all this. His loss was a very public disappointment. He approached Ramjan. She thought he was coming over to congratulate her. "But no, that's not what he wanted," she recalls. "He came up to within an inch of my nose and punched the wall on either side of my head." Thirty-five years later she recalls with cold disdain what he did. "It was done to intimidate." Abbott tells me he has no recollection of the incident: "It would be profoundly out of character had it occurred."
Pure ugliness of his character on full display. Anyway, in the wake of that publication, we've seen a few other people pop up and corroborate the account and Christopher Pyne - the evil leprechaun of the right - say it's all water under the bridge and not important enough to be talking about.
It took Tony Abbott a full week to hide from the mushroom cloud, after which he emerged and denied it. Well it is a well known rule of blame-assignation that "he who denied it supplied it" so it must have been him to cause that stink on campus back in 1977. Then he finally emerged and said a Labor dirt unit dug it up.
Fronting the media yesterday for the first time in almost a week, Mr Abbott sought to reconcile his previous statements that he could not recollect the incident and that it never happened. ''How can you recall something that never happened?'' he said.
He did admit to another allegation - that after Ms Ramjan became the SRC chairman and asked to be known as chairperson, he called her ''chairthing''.
''There were lots of silly, embarrassing, childish things done in student politics and I wasn't immune to that,'' he said.
Mr Abbott denied the wall-punching allegation and claimed the matter had been dredged up by a Labor dirt unit. ''There is a Labor dirt unit and it's feeding information to people left, right and centre,'' he said.
Ms Ramjan, who has been telling the story for years, told the Herald it was ''absolutely'' true and she rejected outright that Labor put her up to it. ''I have never been a member of a political party in my life,'' she said. ''He's a bully.''
I don't doubt that he is a bully for a moment. It's nice to know that student politics is of some consequence, when it comes back to bite Tony Abbott in the metaphorical arse - yes, the very same one he was hedging on offering Tony Windsor in exchange for being Prime Minister.
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