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News Link • Federal Reserve

Charles Gave Warns...

•, by Tyler Durden

We agree completely with Gave on his proposed "permanent asset hypothesis" (as explained further below) which is a simple derivation of what happens in a world in which the Keynesian multipler is now negative. It is what we have been saying for over a year, namely that in an environment of permanent low interest rates there is no impetus on behalf of the private sector to spend for growth, either in the form of capital spending or the hiring of incremental workers. The only net money exchange is the issuance of debt to fund dividends and stock buybacks: or simple EPS-boosting balance sheet arbitrage as shown most recently here.

We also obviously agree that if and when Bernanke finally loses control, there are simply no words to describe what would ensue as a situation like that - one where not just the Fed, but every single central bank has gone all in on reflating the world's biggest asset bubble - has never been encountered before.

However, we disagree that the final outcome will be a "profoundly deflationary failure." This will be an interim step. Recall that the Fed and its private bank conspirators simply can not accept deflation as a resolution. Which means that faced with the specter of full on deflationary collapse, Ben Bernanke will simply resolve to doing what he has hinted, if jokingly, in the past: he will literally paradrop money out of helicopters.

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