More Unconventional Ways The Fed Can Add Liquidity

Nobody expects the Spanish Inquisition!

Our chief weapon is surprise. Surprise and fear. Fear and surprise.
Our two weapons are fear and surprise. And ruthless efficiency.
Our three weapons are fear and surprise, and ruthless efficiency and an almost fanatical devotion to the Pope.

Our four...no...amongst our weaponry....amongst our weaponry are such elements as fear....I'll come in again.

-- Terry Jones, Monty Python's Flying Circus

Here are my top five guesses as to how the Fed plans on increasing liquidity, countdown from five to one.

5. Forget the loans, just buy the collateral. Last week Jeffrey Lacker, President of Federal Reserve Bank of Richmond, re-iterated that the Fed's discount window is wide open and it will take mortgage backed paper, auto loans, even boat loans as collateral.

4. Break out the comfy chair. Ben Bernanke, a great student of the Spanish Inquisition, has used its chief weapons to perfection.

3. Buy it Now on eBay. If the Fed really wanted to put money in home owner's hands, it could use its eBay account ("HelicopterBen") to raise the bids on all kinds of stuff. Underwear, unused wedding dresses, keys to my old car, mac and cheese (hmm-hmm good). That would put cash dollars right into the hands of consumers who have to sell all their belongings to meet the higher mortgage payment from their reset ARMs.

2. A new Bravo reality show. Five Fed Governors go head-to-head trying to save the financial system, one foreclosure at a time. These deeply flawed, yet lovable characters race against the clock (and each other), trying to flip a house before the foreclosure auction ends and another hedge fund blows up. Ben is the brainy academic who tries to lead his team of talented but socially misfit governors, Don is the cranky and stubborn bank veteran, Kevin is the naive one who can't ever stand up to the others, Randy is the cocky one who knows his mad central banking skillz trump all the others, and Fred just tries to make it to the next round by not doing anything too daring or too stupid. Find out whose left after this weeks episode of "Property Bailout".

1. Carpet bomb the US with cash. Screw the helicopters, bring out the big guns. Instead of dropping wads of cash on Iraq, Bernanke should direct our commander-in-chief to fire bomb cash dollars onto the worst areas of the housing recession - Florida, Arizona, Nevada and California. Bernanke, a great student of dropping things out of helicopters, has stated that, while unconventional, carpet bombing money is also an effective monetary policy tool. The government already tested this technique in 2002 by sending every parent in the US a $400 "tax credit". This averted a more serious recession and only had the minor side-effect of raising the CPI from 1.2% to 3.0%. Bernanke speculates the only side effect of carpet bombing bags of money is inadvertently killing some of the intended recipients.

This Article is from contrahour.com

The Business Cycle And the Future

The Business Cycle And the Future

The Domino Effect

The events that followed 1987 were all too easy to foresee. The G5 talked the dollar down by 40% between 1985 and 1987 essentially telling foreign capital to get out. The Japanese obliged and their own capital contraction led to the next bubble top at the peak of the 8.6-year cycle that was now due 1989.95. As the Japanese took their money home for investment, the value of their currency rose as did their assets thereby attracting global investment as well. Everyone was there in Tokyo in late 1989. Just about every investment fund manager globally was touting the virtues of Japan. As the Japanese bubble peaked, capital had acquired a taste for foreign investment. That now savvy pool of international investment capital turned with an eye towards South East Asia. Right on cue, the capital shifted moving into South East Asia for the duration of the next half-cycle of 4.3 years until it too reached its point of maximum intensity going into 1994.25. At this point, international capital began to shift again turning back to the United States and Europe, thus causing the beginning of a new bull market in a similar manner to what had happened in Japan. In fact, 1994.25 was once again the precise day of the low on the S&P 500 for that year. As American and European investment returned home, the steady outflow of capital from South East Asia finally led to the Asian Crisis in 1997. In both cases, Japan and South East Asia blamed outsiders and sought to impose punitive measures to artificially support their markets. In Japan, these interventions have left the Postal Savings Fund insolvent as public money was used to support the JGB market. Financial institutions were encouraged to hide their losses and even employees from the Minister of Finance were installed in some cases engaging in loss postponing transactions of every kind. Major life companies were told not to hedge their risks for fear that this would make the markets decline even further. Thus, the demise of Japan that would have been complete by 1994 was extended by government intervention that has most likely resulted in a lengthening of the business cycle decline into 2002.85.

The next peak on the 8.6-year business cycle came in at 1998.55, which was precisely July 20^th, 1998. While the intensity was defined rather well by the model’s forecast of 6,000 on the Dow by the quarter-cycle target of 1996.4 followed by 10,000 for 1998, the development of highly leveraged hedge funds created a trap that was not fully anticipated. It was clear that the European markets had captured the greatest intensity between 1996 and 1998 and that Russia too had reached our target for maximum intensity. However, the excessive leveraging of funds like Long-Term Capital Management had significantly created the peak in volume as well. Thus, the spread trades were so excessive, that the collapse that was to be expected, took on a virus type of affect. As Russia moved into default, and LTCM moved into default, the degree of leverage caused a cascade of liquidation that was spread around the world. Everything became affected causing the collapse in liquidity and credit to further undermine the global economy as a whole. Despite the new highs in US indices into 1999, the broader market has failed to keep pace and the peak in both liquidity and volume remains clearly that of 1998.55.

The Future

While this business cycle can be calculated on quarter-cycle intervals of 2.15 years into the final peak for this major wave formation of December 24^th, 2032. Though this is long beyond my life expectancy, there is so much more behind the true understanding of the driving forces within the business cycle. I have learned that it is easy to claim coincidence and ignore the telltale signs of a hidden order. It is easy to argue that there is no basis for such a model without ever making an effort to test results. If everyone stopped with such criticism, most of ancient Greece would still be buried and Homer would still be considered a book for children. Man would not fly or travel to the moon. A cure for cancer would not be sought and progress would simply not exist. But furthering our understanding is part of humanity. Like law, that when strictly enforced deprives society of justice when circumstances are ignored, it is also the sin of ignorance toward new concepts that deprives mankind of progress and ultimately our posterity.

The Economic Confidence Model in 2.15-year intervals

1998.55... 07/20/98

2000.7.... 09/13/00

2002.85... 11/08/02

2005.... 01/02/05

2007.15... 02/27/07

2009.3... 04/23/09

2011.45... 06/18/11

2013.6... 08/12/13

2015.75... 10/07/15

2017.9... 12/01/17

2020.05... 01/26/20

2022.2... 03/22/22

2024.35... 05/16/24

2026.5... 07/11/26

2028.65... 09/04/28

2030.8... 10/30/30

2032.95... 12/24/32

By Martin A. Armstrong

Princeton Economic Institute
© Copyright September 26, 1999