The Daily Nugget: Bernanke Hits The Panic Button

Opinions on QE3 were definitely leaning towards the "DON’T DO IT" viewpoint yesterday. In a poll of US economists, Bloomberg found only 20% thought it was a good idea whilst 49% believed monetary policy was already too loose. This is no surprise considering data yesterday showed producer prices soared by 1.7% – up from 0.3% in July.

But, Bernanke decided to ignore inflation concerns and just focus on jobs data in order to justify his decision to launch an open-ended round of quantitative easing. The FOMC has decided the Fed will expand holdings of long-term securities and buy $40bn of mortgage debt a month, with no view as to when this would end. Interest rates are also set to be kept at rock bottom until mid-2015.

It was like everyone’s Christmases had come at once as Bernanke gave the markets what they were looking for, and more. European stocks advanced to a 14-month high whilst gold and silver prices jumped as investors looked to protect themselves from Bernanke’s cheap money.

As Bill Bonner wrote yesterday "phoney money does not make a real economy." Unfortunately Bernanke isn’t convinced of this, analysts believe he will continue down this easy money path until a real turn in the economy is seen, unfortunately it’ll be the kind of turn which ends you up in a big mess.

No-one is that surprised at the FOMCs decision, as we’ve been saying for a while; if it wasn’t going to happen yesterday then it would definitely happen before the election.

Whilst the front pages and leading items of many of the financial news this morning runs with headlines shouting about the gold price leaping after the FOMC announcement, few seem to be focussing on why gold goes up when more money is created. Whilst many who have rushed into gold will be short-term speculators, the gold price goes up as investors seek to find a safe haven from debasement and impending inflation – both of which gold bullion is a hedge against.

It’s not over yet…
Now it feels as though there is nothing else to look forward to, but fear not there are plenty of opportunities for governments and central banks to show us how much more they can screw up when next week the Eurogroup meeting on the 14 and 15 September will focus on the Spanish bailout, and possibly the next Greek one too if IMF reports are to be believed.

Germany is once again proving they’re not easily swayed. Finance Minister, Wolfgang Schaeuble has expressed concerns at Spain requesting an international bailout saying it would ‘be daft’ for them to seek more money on top of that already given. The media and other countries comment whenever Germany’s ministers and central bankers offer such warnings, but no one seems to be asking what it is in the German psyche which makes them cautious in such times.

Fitch has given the EU banking union its full seal of approval, which means it’s going to be a roaring success and all doubt should be dashed straight away. The ratings agency believes the union will provide long-term stability to the region. That’s just what the Eurozone countries needs, yet more integration.

Northern Rock anniversary
Let’s also not forget that today is the five year anniversary of the run on Northern Rock. Sound bites from politicians, central bankers and regulators are full of "lessons must be learnt," but five years on, what have they learnt? Very little it seems. The collapse of "The Rock" seems to have been an excuse for yet more regulation, demands on the Bank of England to act as lender of the last resort and still no change to how banks handle depositors’ money.