Nothing really has changed. Nearly three years after the Ponzi-scheme financial system all but collapsed, causing a swift and severe decline in economic activity, all the fundamental weaknesses remain, hidden from view by massive amounts of currency printed just for the purpose. The money creates an illusory euphoria. Yet in the US, the man mainly responsible for the money orgy believes the Bacchanalian excess must continue, from Bloomberg:
Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June.
The Fed chief’s top two lieutenants said this month the economy and inflation are too weak to warrant the start of a monetary-policy reversal. Investors and economists including David Kelly at JPMorgan Funds see that as a signal the Fed will keep its balance sheet at current levels by replacing about $17 billion a month in maturing mortgage debt with Treasuries.
Ending the reinvestment policy and the $600 billion program at the same time would be like quitting stimulus “cold turkey,” said Kelly, who is based in New York and helps oversee $400 billion as chief market strategist at JPMorgan. “It does make sense to reinvest for a while,” he said. “Then they could watch how bond yields react to that.”
“Cold turkey” is an apt metaphor. It’s borrowed from the world of heroin addiction, used to describe what a heroin addict experiences when he finally resolves to face reality and get off smack. When he’s using, a heroin addict focuses on nothing else but the singular purpose of getting the next hit. As one of the world’s most famous of former heroin addicts, Keith Richards, explained in his autobiography, Life, “Heroin is aptly named. She is a seductive bitch.” The lure of illusion that free money provides is much the same. Ben Bernanke is a drug dealer. Money, meant to stand as a proxy for the real value of goods and services produced through the creative efforts of economic actors, is instead corralled to foster illusions; to create a sense of euphoria, an economic high. So taking away the money would be like taking away an addict’s fix. Going cold turkey in a heroin addict causes days of extreme physical discomfort and emotional distress. The duration and severity of the discomfort and distress is correlated to the depth and duration of the addiction. Because it is so painful, most addicts only get straight when forced to because of external circumstance or the debilitating effects of the drug on their lives and bodies. Or the drug kills them. Either way, heroin addiction is not a long-term sustainable way of life.
The US economy has been a money addict at least since the rescue of Long Term Capital Management in the late nineties. It had grown addicted in the seventies but beat that one cold turkey in the early eighties through the steady hand of a dealer that saw his addict tripping close to oblivion. Dealers that wish to stay in business don’t want to destroy their addicts. Dealers need addicts as much as addicts need them.
The depth and duration of the current economic addiction to free money means that going cold turkey now would be excruciatingly painful. Even a methadone step-down program would cause serious pain. The addiction is so severe until reaching that illusory high requires a massive dosage. It took the biggest, purest hit of smack in all of history in the mid-aughts to get back that euphoric feeling. It took an even bigger one to pull out of the crash when that hit wore off. And now the dealer is using, too. Don’t ever trust a dealer that’s using. A dealer that’s an addict has the same singular focus on getting the next hit as his addict customers. A dealer that’s using sees his addict customers as competition, which is about how the financial system engineered by Mr. Bernanke views the rest of the economy. Guess who’ll get to go cold turkey first when the smack runs out?