Going beyond the final frontier...

In a rare appearance before national broadcast, Ben Bernanke yesterday on CBS gave comment on the state of the economy and his intentions further up the road. Apparently it took 1 bad number - November pay-rolls released last Friday - to ring the alarm bells inside the FED. Just 1 month after QE2 has been announced, it seems QE3 is already being prepared

On growth, Bernanke was blunt: We are not very far from the level where the economy is not self-sustaining.We need at least a 2,5% growth rate to stabilize the unemployment rate and that's about what we are getting right now. So it could take 4 to 5 years before we are back to a more normal unemployment rate of about 5 to 6%.

Remarkable as well is that Bernanke points to China once again as the great source of evil. China's pegged exchange rate regime is hurting the global recovery and more specifically the US economy:"China's currency manipulation is not only bad for the US economy, it's bad for other emerging countries and it's bad for China because amongst other things, it imples that China can't have its own independent monetary policy."

The most interesting part however covered current policy, the inflation outlook and policy going forward :"The purchase of more bonds than originally planned is certainly a possibility, it all depends on the efficacy of the program and the outlook for inflation and growth. By lowering interest rates, we hope to stimulate the economy and to grow faster. Current fears of inflation are overstated. Furthermore, we have been very clear that we will not allow inflation to rise above 2%. We could raise rates in 15 minutes if we have to, so there is really no problem with raising rates, tightening policy, slowing the economy and reducing inflation at the appropriate time. The trick is to find the appropriate moment when to begin to unwind this policy."

Before turning to the last comment, we would like to remind chairman Bernanke that a lot of leading emerging markets are pointing to US monetary policy as a source of evil because its purpose is to weaken the USD and instigate asset price inflation across the globe.

On inflation and policy going forward, it is first of all strange to be informed that the FED apparently targets 2% inflation as a maximum threshold, and that it has been repeatedly clear about this. We knew this from Trichet and the ECB, for me this FED confession is a novelty. On executing more bond purchases as planned, it apparently depends on the efficacy of the program. Well, we are afraid to say so but up until now, it hasn't really worked out quite as foreseen in terms of credit and job creation. But in view of slow growth - according to US standards - and unemployment rearing its ugly head again, it seems the chairman is convinced that more of the same potion is required. Doubtful whether the marginal utilty of adding another 600 bio USD extra will mean a significant change, without even mentioning the negative side-effects. And as for efficacy : since the announcement of more permanent open market operations on 03/11 (weekly bond purchases), yields on US Treasuries have risen by 44bp on the10y and 27bp on the long bond. The only thing one has achieved is that the FED has now become the largest US bond holder in the world, passing China and Japan.

"We can raise rates in 15 minutes if we have to and unwind the current policy"

1. On raising rates in 15 minutes, we have to go way back in time to find some evidence or track record within the FED (Volker). Since Greenspan, the FED was very convincing in lowering rates at split second but raising rates, no, not really.

2. How to unwind nearly 2,000 bio USD in bonds on the FED balance sheet with the possibility that another 500 bio or more are added in the meantime ? It's virtually impossible to do this in a swift and decent fashion without creating turbulence in financial markets. So we are most definitely on course for a very slow normalization and we can only hope that the FED will not be running behind the curve.

And the world's hunger for more astronomical numbers continues today with the IMF now urging Europe to boost their rescue fund (currently 500 bio eur EMU- 250 bio IMF) and step up bond purchases to insure against a fresh financial crisis. In order to step up bond purchases, there is still a problem being Berlin/Frankfurt. Also the idea of jointly issuing E-bonds (Junker/Tremonti initiative) is running into German opposition because it would trigger fundamental changes in European Treaties. Belgian Finance Minister Reynders is pro the idea of Rescue Fund enlargement and added that when doubled, the IMF would have to act likewise. Reynders stated that Strauss Kahn (IMF) would already back this idea. This would seem strange because then again we would get strong oral opposition from the Asian/EM delegation within the IMF. They were not happy last May that the IMF concluded a rescue deal with Europe without consulting them first and at "reasonably fair" conditions, certainly in view of the more harshprescriptions EM countries in need used to receive from the IMF (eg Asia 1998).

"Double up", "all in" or whatever it takes. And it seems we are far from being out of chips. And if we are, we manufacture some more, easy. Another day, another chapter in de current crisis, another big number being added to the game.