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The blame for the current global economic mess should be borne not by any Federal Reserve Chief or for that matter anyone from his ranks, or even someone from the political class; the problem could basically be traced..

10 Jul 2013

By Rakesh Neelakandan
In the morning we saw how Ben Bernanke would be deemed as the man who delivered a gold bull with one hand and grabbed it back with the other. Year 2011 saw gold climbing to insanely high levels in the futures mostly aided by Quantitative Easing. Recent figures at $1200 were aided by Ben Bernanke’s June comments hinting possible tapering of QE measures.

May be it is now worthwhile to see how QE measures have helped the economy.

But before that let us just initially see in a snapshot on how QE helped the commodity/equity boom.

In a QE, the Federal Reserve engages in a bond buy-back programme. The US Treasury would have issued bonds of different tenures to raise money from the international debt markets. This would normally be bought by mammoth financial institutions and banks. What the Federal Reserve would do is to print some more money—trillions—and buy the bonds issued to these institutions. Here, in a practical sense, the government is seen lending to itself; no mean privilege!

The banks or the institutions that have sold the bonds and secured the money pumped a significant portion of this green back into equities and commodities. The result was that it created a bull market in the midst of a recession, Great Recession, to be precise. Both equities and commodities rallied. Middle-class people, as and when they saw the S&P go up, cheered and hailed the policies of the government.

That was how the end began!

When the commodities went up, it resulted in a boom in the resource sector. Invariably, mining companies and oil firms began to dig more trying hard to develop the marginal resources as well.

But, where would they find the additional money from?

Again Ben Bernanke comes to the picture. Anticipating (?) this scenario, he had hammered down the interest rates to near-zero levels. This was an incentive for the companies in the resource sector to borrow as much money for the resource-finding or exploration initiatives. They began to dig and dig viciously and ruthlessly.

This went on for a while. All is well that proceeds well!

But what goes up always has to come down! The bull markets cannot remain in perpetuity. And it did, as and when the markets hit the psychological barriers, gold and other commodities came down.

We are two years away from the 2011 peak of $1900/oz for gold. And we are in a bear market.

What next?

Well Bernanke has announced the tapering of QE measures provided the job markets recover and inflation remains subdued.

It is as if that the job markets are indeed recovering. Inflation does not appear to be a cause of worry. So we can taper.

But there is a problem! Tapering would strengthen US dollar further. To prevent this excessive appreciation, one may have to tighten the lending rates in US. Well, commodities are now in a bear market and marginal cost of production has only increased for the miners as currencies lost strength and inflation bit. Now with commodity prices down, how will they service their debts? Or for that manner, how anyone who has borrowed at this environment of ultralow interest rates and stalled growth figures would service his/her debt given that the refinancing windows are shrinking?

The question is: did not Ben Bernanke and his team know about this, that as they tighten the belt, they will have to see defaulting and other catastrophes?

The politicians and at their instance, the bureaucrats, always have to play for the gallery. They are like erstwhile Gladiators, glorified slaves who should win the crowd!

Getting out of the recession is the toughest task and it has to be earned by the sweat of one’s brow. Cheap money is not an alternative. It warrants original belt tightening and some work under the sun with a come-what-may-I-will-get-it-done-attitude. And it has to be done by not me or you and not alone; but the polity, the teeming multitude numbering billions over an extended period of time.

But the quick fix economy and 101 guides are what the crowd wants. And the politicians and bureaucrats dance to the tune.

The blame for the current global economic mess should be borne not by any Federal Reserve Chief or for that matter anyone from his ranks, or even someone from the political class; the problem could basically be traced back to a leadership crisis. A great leader sets the tune, dances to it and teaches others too to dance with him! And the leader comes from the crowd! And the crowd is formed by you, me, him and she!

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