On Tuesday, a $38 billion Treasury auction drove 2-years bond-yields down to record lows. (0.665 per cent) Investors are willing to take less than 1 per cent on their deposits just for the guarantee of getting it back. Bond yields are a referendum on the Fed's policies; a straightforward indictment of Bernanke's strategy. Three years into the crisis and investors are more afraid than ever. The flight to Treasuries is an indication that the retail investor has left the market for good. It is a red flag signaling that the public's distrust has reached its zenith.
Presently, big business is awash in savings ($1.8 trillion) because consumers are on the ropes and demand is weak. The government's task is simple; make up for worker retrenchment by providing more fiscal and monetary stimulus. If private sector and public sector spending shrink at the same time, the economy will contract very fast and recession will become unavoidable. So, Go Big; create government work programs, help the states, rebuild infrastructure and support green technologies. The economy is not a sentient being; it makes no distinction between "productive" labor and "unproductive" labor. The point is to keep the apparatus operating as close to capacity as possible--which means low unemployment and big deficits.
Increasing the money supply does nothing when interest rates are already at zero and consumers are slashing spending. Bernanke has added over $1.25 trillion to bank reserves but consumer borrowing, spending and confidence are still flat on the canvass. The problem is demand, not the volume of money. Bernanke knows what to do, but he refuses to do it. He'd rather line the pockets of bondholders, bankers and rentiers.
The cutbacks will ravage local governments, state revenues and public services. Emergency facilities by the Fed provided $11.4 trillion for underwater banks and non banks, but nothing for the states. The GOP is helping the Fed strangle the states by opposing additional aid for Medicare payments and unemployment benefits. Many cities and counties will be forced into bankruptcy while Goldman Sachs rakes in record profits on liquidity provided by Bernanke. It's a disaster.
The bottom line? When Wall Street is hurting, money's never a problem. But when the states are on the brink of default and 14 million workers are scrimping to feed their families, it's time for belt-tightening. Explain that to your kids.
