inflation to war

 The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

-- Ernest Hemingway

Speculation Encouragement

Needless to say, if you bail out speculators, they will simply speculate more. And if you do it over and over and predictably so, you will extinguish the fear of risk and loss, which is the only thing which keeps the speculative impulses in check.

-- David Stockman (as quoted in The Daily Reckoning) Sept. 24, 2019 (slightly edited)

faulty Fed figuring

[Federal Reserve Chair Janet] Yellen said at least one thing of importance last week.... She confessed to the frightening truth that the Fed formulates its policies and actions based on forecasts of future economic developments. [Unfortunately] our monetary politburo couldn’t forecast its way out of a paper bag.... [I]t’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed U.S. economy and that balance sheets don’t matter....

[T]he economy is now seamlessly global, meaning that everything which counts -- such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks -- is planetary in nature.... Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidge to confirm the U.S. economy’s strength and that the Keynesian nirvana of full employment is near at hand....

[I]n today’s world of global labor competition in goods, offshored business services, episodic domestic gigs, temp agency labor delivery, and Wal-Mart style labor scheduling by the hour and time of day, week, month, and season, the whole idea of “full employment” is a relic.... [Labor distribution factors] shift and morph steadily over time and in response to new technological and cultural developments. They are utterly beyond the reach of 25 basis points of interest rate shifts on the money markets. So the unemployment rate tells you almost nothing useful. By contrast, there are an immense number of leading indicators which track the global credit bubble and false boom it enabled. They bear far more directly on the main street outlook than does the Fed’s primitive bathtub model of the US economy. 

-- David Stockman (The Daily Reckoning) Dec. 22, 2015

equilibrium interest rates?

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates "artificially low." Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by "the markets." The Fed's actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate.
 -- Ben Bernanke (Brookings Institution blog posting) March 30, 2015 




There is no affirmative case that control of interest rates spurs a magic elixir called more debt and higher leverage ratios which, in turn, generate improved economic performance and greater societal welfare and wealth. Accordingly, the Keynesian central banking remit, perforce, rests on the default case of prevention of business cycle instability and warding off the alleged suicidal tendency of capitalism toward depressionary swoons.... [But] the blinding empirical reality is that since the arrival of Keynesian central banking under Greenspan and his successors we have had the "Great Immoderation," not the nirvana of stable, endless growth and a recession-free world....

The Fed does not need to manage interest rates, and therefore does not need to embrace Bernanke’s spurious answer to the question of "what rate." Bernanke’s comments on the "equilibrium real interest rate" ... amount to pure gibberish -- academic jargon for unbounded, plenary power to manage the entire pricing machinery of the world's $300 trillion financial system. Indeed, lurking in the intellectual mush ["healthy operation of the economy, full employment of labor and capital resources"] ... is the true rationale for the greatest exercise in mission creep during the entire history of the modern state....

There is nothing in [the Fed's justification] that can be objectively measured or tangibly pegged....  [T]he real world of capitalism is far, far too complex and dynamic to be measured and assessed with the exactitude implied by Bernanke’s gobbledygook. In fact, what his purported necessity for choosing a rate "somewhere" actually involves is the age old problem of socialist calculation. It can’t be done -- and most especially not in the most fluid, complex and fastest moving markets known to man. That is, the global financial markets for debt, equity, loans, commodities and all their derivatives.

-- David Stockman (The Daily Reckoning) April 1, 2015

rigged markets

Markets are so rigged by policymakers that I have no meaningful insights to offer. I am simply stunned that our policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being told to double up on these same policy decisions [that have failed]. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people.

If you listen to the [policymakers in the US and Europe], it seems that the only solution they can offer up is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again greedy enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now "richer." When —- as they do by definition —- these bubbles burst, those who have been suckered in will realize that their "wealth" is instead an illusion, which in turn will be replaced by default risk...

When looking for where the bubbles may be, realize this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere — in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices — you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market... When this bubble bursts, I don’t think there is an easy way out. Who will be the bailout provider?

The longer we have to wait for the final resolution to the global financial crisis, the bigger and more devastating the final leg lower will be.

-- Bob Janjuah, Nomura Investments (February 20, 2012)

economic correction continues

If the Feds would just leave well enough alone, Mr. Market would have handled the whole thing;  and we’d be out of this Great Correction by now. He would have knocked down almost all of Wall Street. He would have put dozens of our leading companies into Chapter 11, blown up trillions of dollars in derivatives, and forced thousands of bankers, brokers, businessmen, and hedge fund managers into early retirement.

That problem of unequal distribution of wealth, the rich getting richer and all? He would have taken care of it! And he would have done it all in a few short weeks in late 2008. By now, we’d have full employment again. And people building real wealth.

In other words, if the feds had not poured trillions of dollars down so many rat-holes -- good money after bad -- the whole thing would be over by now. We’d have a growing economy;  we’d have real businesses producing real stuff and paying real wages to real workers.

But the feds are on the job, and the job they’re on is to protect their voters and their campaign donors -- from Mr. Market. Of course, all they can do is delay the fix.  They can make the problem worse;  they can make the losses bigger;  but they can’t fix anything. Fixing requires pain, and the feds try to avoid pain at all costs -- especially when they are the ones who will feel it. So, they borrow and spend, and then print and spend, until the whole thing blows up.

-- Bill Bonner, The Daily Reckoning (June 6, 2012)

misinformation

"If you don't read the newspaper, you're uninformed.
If you read the newspaper, you're misinformed."
-- Mark Twain

policy short-sightedness

"The fallacy of overlooking secondary consequences ... is the persistent tendency of man to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups."
-- Henry Hazlitt, Economics in one Lesson (1946)

inflation not anticipated

"Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here."
-- Ben Bernanke, speech to the Economic Club of Washington, D.C. (Dec. 7, 2009)

free market

"I have abandoned free-market principles to save the free-market system."
-- George W. Bush

risk

"Risk comes from not knowing what you're doing."
-- Warren Buffet

deficit spending

"...Reagan proved that deficits don't matter."
-- Vice President Dick Cheney (Jan. 11, 2004)