Glenn Jacobs

More About: Economy - Economics USA

Ben Bernanke as The Bounty Hunter

The Outlaw Josey Wales is my all-time favorite western. Clint Eastwood (who else) plays the title character, a dirt farmer who joins a band of Confederate guerillas after Union troops massacre his family.  After the War Between the States ends, Wales refuses to surrender and makes his way south to the Mexican border. There he attempts to find peace and, along with a his newfound “family,” settles near an old Texas silver mining town.

Unfortunately, Wales can’t escape his past and in this scene he is confronted by a bounty hunter in the town saloon. The scene goes something like this:

Bounty hunter: “I’m looking for Josey Wales.”
Josey: “That’d be me. You a bounty hunter?”
Bounty hunter: “A man's got to do something to make a living in times like these.”
Josey: “Dying ain’t much of a living, boy. You know this isn’t necessary. You can just ride on.”
The bounty hunter considers this for a moment, then leaves the bar. A moment later he returns.
Bounty hunter: “I had to come back.”
Josey: “I know.”
Needless to say, things don’t turn out so well for the bounty hunter.

It was the nature of the bounty hunter to do what he did. Literally, that’s what bounty hunters do. Hence, it was the bounty hunter’s nature that doomed him. Now, imagine that Fed Chairman Ben Bernanke is playing the role of the bounty hunter and the market is playing the role of Josey. The nature of a central banker is to try to control the market. The nature of the market is to circumvent this control. As the central banker exerts more control, the market’s reaction becomes increasingly more destructive to these interventions and the resulting distortions and bubbles.

Currently, the market is attempting to purge itself of the monumental distortions that 100 years of Fed inflation and intervention has caused. The central bank is reacting with ever increasing amounts of inflation, of course, hidden behind the euphemism “quantitative easing.” The latest incarnation of QE announced yesterday will be the biggest yet. It is open-ended, meaning there is no time limit on how long it continues. Meanwhile, the Fed is continuing Operation Twist, designed to drive down long-term interest rates. Together, these two programs will add $85 billion a month to the Fed's balance sheet.

Instead of allowing the natural process of deflation and de-leveraging, the Fed is intention on inflating. When it comes to restarting the economy, QE1 didn’t work. QE2 didn’t work. Operation Twist has not worked. All these programs accomplished was to put money into the pockets of Wall Street and the big banks while creating an inflationary time bomb for the rest of us. QE3 will do more of the same.

Big Ben is just doing what central bankers have to do. The market is going to do what the market always does. The outcome is not going to be pretty for the Fed or the rest of us. If you haven't taken steps to protect yourself, please do so as soon as possible.

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