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Advisor

Bernank"s Virtuous Circle Theory

I never was aware of this little theory which Bomber Ben has adopted.  This post was taken from a thread on Zero Hedge this morning.  Nice to know what Bomber Ben is really doing, and what the ultimate outcome will be.   This little post is for those of you who have curious minds, Johnaa  you can read it too, it probably applies to Vikings! LMAO!    Adios Amigos. John 
 
 
 
TruthInSunshine's picture
 

Remember one thing:  Ben Bernanke's entire legacy rests on his "virtuous circle" theory. It's nothing more complicated than that.

 

As a reminder, his "virtuous circle" theory is that as equity markets reflate, the accretive "wealth" it creates (even if history proves that such wealth is repeatedly decimated, typically at far faster speeds than it was "created," and is thus quite fleeting, artificial & illusory) props up confidence of those who see their portfolios rise, and thus fills them with the courage necessary to engage in more spending, especially of the discretionary type, which then somehow reduces the slack in labor markets by putting people back to work (even if much of that which is purchased is produced overseas).

 

This is his theory, as he has explained it time and time again, including during his interview on '60 Minutes' (where he essentially admitted that the Federal Reserve was acting to jig equity prices higher).

 

Just one of the many problems with his "virtuous circle" theory is that it depends inherently, no matter how rich (aka overvalued) equities are at any given time, that equities rise even further in valuation. There's literally no level at which equities are trading whereby Bernanke wouldn't attempt to drive them higher, directly and indirectly. This, my friends, is the textbook definition of blowing bubbles.

 

Another major problem with his "virtuous circle" theory is that equity "market" activity now consists of a historically low % of direct retail participation, and is concentrated predominantly within a relatively small group of hedge funds, TBTF financial entities (supported by near-free fiat shoveled their way by the Fed), and the "always there because they have to be" pensions and mutual funds.

 

Additionally, given that Bernanke has suppressed rates to such artificially, manipulated low levels, corporations are also borrowing money on the cheap by floating bonds, and using the cash raised to engage in a historically high level of buybacks of their own shares of stock.

 

Thus, even by comparison with past, intentionally blown bubbles, such as the dot.com bubble, or the more recent housing bubble, there are far fewer participants receiving far lower (if any) benefits, of the temporary cheddar, and the stimulative effect on the overall economy is thus relatively benign, despite the fact that far more resources and tools have been devoted to this latest (and largest) bubble than the prior ones of recent history [in fact, it can be persuasively argued, and has been, that the tools, resources and other efforts implemented by Bernanke to re-flate the equity and other bubbles have had significant adverse impact on true, organic and productive real economic activity within the private sector].

 

The biggest problem with Bernanke's "virtuous circle" theory, however, is that while it requires radical, unprecedented interventionism within equity markets by what is supposed to be an independent central bank focused on monetary policy as a way of promoting its "dual mandate" (so clearly Bernanke is violating the Fed's charter as authorized by The Federal Reserve Act of 1913), there is and can never be any truly effective "put" or backstop put into place by that central bank, that will indefinitely suspend reality, and place a permanent "floor" (or create a permanent plateau, to recall the infamous language of an infamous economist during the early 1930s) underneath the equity market.

 

As a result of this reality, there is a paradoxical correlation that mandates that the more that the central bank intervenes in equity markets, and that the more resources & monetary tools are used to promote its inflation, the larger the inevitable crash will be.

 

All's well that ends well and all's not well that doesn't.

 

Bernanke's biggest prayer/hope is that he's no longer in the hot seat when the massive bubbles (neat trick that, blowing simultaneous equity AND bond bubbles of historic proportions) he has now blown pop with a thunderous boom.

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3 Replies
Advisor

Re: Bernank"s Virtuous Circle Theory

Truly amazing this guy has no clue. The only way people will spend money is if they have it, not because of some inflated value of their portfolio on their quarterly statement.

The big pop should coincide with the pop in farmalnd values as well. How about PEAK MONEY Mizzo

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Honored Advisor

Re: Bernank"s Virtuous Circle Theory

To some extent, i can see where he gets this idea.  When you only spend times with certain types of people, your thoughts at the very least gravitate towards the way those people think.  

There are quite a good number of people who select one or two basic indicators or rules of thumb to determine their financial health.  To some extent, we all do this, I believe.  

Lof course, it can be as limited a perspective as if we decided that only one physical examination result...let's use weight...was the sole indicator of our physical health.  You could weigh within healthy norms, but have ungodly high blood pressure or abnormally low blood sugar, for instance.  

 

Those folks who look at their investment account balance, or a 401(k), and make spending decisions solely based upon that could be missing the point entirely...but, Bernanke may hear that they do often enough at cocktail parties to lend credence to that effect.  You never know.

 

 

I for one would like to think that the guy running this economy has a more diverse set of inficators at his disposal, and attends to them.  There is a time and place for oversimplified notions, and while this modern Rome is burning does not seem to be the right setting for his style.

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Advisor

Re: Bernank"s Virtuous Circle Theory

I think that we can all attest to, an ever increasing rise in the stockmarket where he only players are traders in a market void of retail investors.   We can see the decimation of prudent savers interest income and retirement funds which was designed to push them into riskier and riskier investment chasing higher yields.

 

 The prudent investor NEVER invested the money of Widows and Orphans in Junk Bonds such as Trumps Casino and similar bonds, even the US Treasuries are Junk, that is why people who are more worried about Capital and Principal preservation instead of ROI are chasing hard assets, like farmland, commodities, gold and

silver.

 

The talking heads at Bloomberg have one thing right . . . if you are going to borrow money do it now, long term at these low rates, and you will be paying those loans off with dollars that will be depreciating over he life of the loan.  Soooooooo maybe it is a good time to leverage a land purchase.   Who knows!  Adios Amiigos. John

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