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Long Live The Bubble King!
For decades now, broad-based "monetary stimulus" operations has been referred to as "medicine" by various "mainstream" economists and financial analysts. Central Bankers are surgeons and the world is theirs for the taking to operate on in times of economic stress.
If only we STIMULATE the economy, it is said, can we get out of this economic malaise. The PATIENT needs an INJECTION of LIQUIDITY. Etc, etc, etc.
To wit, here is Bernanke calmly explaining in a 2002 speech how "enlightened Central Bankers" can "cure" deflation in the price of goods in a modern economy:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Really, Ben? 1+1=2? Amazing.
But why do you think a general decline in prices is even a bad thing in the first place, Ben? From the same 2002 speech:
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive.
In other words, if the fall in prices becomes so precipitous that willingness to lend declines, there is a problem.
But why would prices fall so calamitously in the first place, Ben? Could it be because an unsustainable surge in credit has resulted in consumers and businesses up to their eyeballs in debt? Could the surge in credit have occurred because interest rates were kept disgustingly low for decades and made simple savings less attractive?
Look Ben, don't you get it by now? "Curing deflation" is a side effect of monetary policy that any 8 year old could identify and is not in itself a sufficient justification for printing money for the banks in order to "ease credit conditions."
Your policies are not "injecting stimulus" to the patient. The patient is not the financial sector. You are recapitalizing the banking system sure enough, but it does not treat the underlying cause of the imminent crunch in credit.
You can pump all the money you want into capital markets and banks and the credit ponzi scheme will continue once again and some of the money will even trickle into the real economy and halt deflation in the price of goods.
But unless you reroute the money directly into the hands of the consumers and businesses across America underwater in debt (or facillitate some sort of financial restructuring whereby the speculating banks take the brunt of the damage), nothing is cured.
A recapitalization, or a decrease in the debt to equity ratio, of the American People is what is needed. I know you understand this when you monetize government debt and unfortunately, monetizing the debt is something that has to happen absent the political will to reign in spending.
But when you spend obscene amounts of money on propping up corrupt and failed lenders and fully expect the initially unsustainable lending party to continue.... well that is just going to lead to hyperflation.
If Bernanke was a doctor and a morbidly obese woman came into his office and complained that she was too large to make herself food to eat (achieve "growth"), Bernanke would advise a reverse liposuction procedure that would suck out her excess fat, increase the fat concentration of said fat, and then re-inject the new and improved fat into the woman ("injecting liquidity into the system"). Like this example, Bernanke's vision of growth is toxic.
The system must deflate and be purged, although household and firm debtloads should at least fall alongside whatever fall in gdp precipitates.
Money injections must not be seen as a drug injection, but of a forced redistribution of a society's wealth. Since households and firms are the producers of our wealth and since banks more or less perpetuated asset bubbles and excessive leverage, it makes more sense to restructure the balance sheets of households/firms than parasitic and fraudulent banks.
A strategy of subsidizing and recapitalizing the banks first and foremost will not solve our economic woes and, perhaps more importantly, shifts the balance of our wealth even further in the favor of an already overgrowth of a financial sector. This sector is supposed to support growth through capital allocation, not act as the primary growth driver.
And finally, I leave you with yet another example of King Bernanke's legendary economic forecasting feats, which concluded the 2002 speech:
Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures [by maintaining a policy of inflation-affinity and credit profligance].
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Yeah, the biggest issue here is that the Fed operates serving the interests of its member banks... and not the American people. And while Congress (supposedly) provides a check and balance, they have no true audit authority.
Sure, the Fed could provide "liquidity injections" to fix household balance sheets (with a little help from the Treasury)-- but it simply doesn't serve their interests.
What serves their interest is keeping the banking system afloat-- even if that means printing money, assuming very toxic assets, and subsiding poorly run entites until the cows come home. Moo.
What's interesing is that no matter that the Fed does to try to spur lending, banks are generally not doing so. Or put another way, new loans are generally not raining down on households.
The exception is "cash for clunkers", which makes as much sense as me taking an ice pick to my brain to see if I have nerve ending there.
If the market service providers can't agree on the issued capital of a company, what hope has the general public of working out the investment mathematics?
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
3 dollars
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Americans in denial again and high on OBIUM !
Before they were high on BUSHweed !!
Great post. You highlight something very important and it is perhaps the reason why Bernanke thinks he can get away with the Fed's Project Zimbabwe. Perhaps he thinks/knows the liquidity injection and monetization won't fully impact the real economy. As of right now, it hasn't had an impact. Those of us working in finance in the real economy haven't seen much impact, if any. Other than near-zero Fed Funds, there has been no impact upon what I do and how I do it.
i am so glad i left the US - sometime one has a better perspective from abroard and whilst it is naive to deny the existence of corruption I never in my wildest dreams considered that the US taxpayer could be fleeced on such a massive scale
you touch on a very complex matter....the
american is conditioned to think of his
government as pristine purity....he is also
taught to worship power and majesty - so he
has come to admire the plutocrat...the educational
system - especially higher ed - churns out
people who believe might, credentials, and
authority make right....he is also
taught to believe everything he has heard on
tv....(anyone dumb enough to believe the
warren commission is dumb enough to be fleeced...)
the american has also been so comfy and cozy
that he has never been motivated to take an
interest in anything but himself....the actions
taken by the oligarchs are also extensions of the
socialism which he has learned in school...so it
seemed like a good fit at the time...
worst of all the american has learned to shut
up and go with flow and not to fight...it's
engrained in the educational system...especially
those in corporate settings....
the confluence of the above influences has
created strong delusion disabling critical
thought....the american generally lives in a
fantasy land where evil, corruption, and
conspiracy are things which happen to other
people and countries....the usa is so above all
that dontcha know....
i know many will strongly disagree and perhaps
you do as well but i am clearly unimpressed
with how america responded to the crisis starting
last august....i was lambasting my congressman
from day one to vote against bailouts but it
went through without even a belch - unless you
count the first failed vote a belch...
a long history of fleecing exists here going back
to 1913.....
Is there but one fair orifice, that remains undefiled by BB's tools?
i think bubble king is going to find himself busier than a 1 armed paper hanger in sept/oct....there are huge banking problems in the middle east which have very serious chance of causing major melt downs in the usa given our fragile banking situation....
no one stopped to ask by the fdic commandeered bbva to take over guaranty.....it is because there are no solvent usa banks to take on that much risk and loss....the usa banking system is in absolute shambles and no one knows it....
bubbles bernanke and sir greedscam have completely nuked the the usa economy.....it could be just desserts that bernanke was reappointed......
hell's arsiing...the 4 horsemen gallop toward the ghostrider in the sky....
Bubble Ben might somehow keep the US banking plates spinning but there is Europe, UK, Iceland, China and Real Estate etc
So many point of potential crisis - he and the other banksters have to trip up somewhere.
One could view the bank issues as one of loan valuations....
However a bank could lose regarding RE valuations ....but more quickly attain more corporate paper valuations cumulatively than what was consumer produced RE by simply changing tax structure....thus enabling more sustainable US based enterprises....
Very well said PragmaticIdealist.
Bernanke is trying to solve the probelm of a leaky pipe by trying to force more water through the pipe to compensate for the leakage, instead of cutting off the water entirely to fix the pipe and let it run normally. Forcing more water will work until it wont, and the pipe will spring more leaks until it will eventually fail altogether.
Nice post. I wonder if even the very goal of steady 2% inflation is in itself an impossibility. Some interesting excerpts from Ludwig von Mises, "The Causes of the Economic Crises":
"To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. The monetary system would still continue to function. However, this prospect scarcely resembles reality...
...As long as the continuation of monetary depreciation is expected, the money lender demands, and the borrower is ready to pay, higher interest rates. Where trade or legal practices are antagonistic to an increase in the interest rate, the making of credit transactions is severely hampered...
...If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold onto their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun...
...The process of driving notes out of service as money can take place either relatively slowly or abruptly in a panic, perhaps in days or even hours."
Fun reading. Anyway, my gut suggests the Fed will take us on a rollercoaster of inflationary followed by deflationary scares over the next few years before the inflation really sets in for good.
The fact that 2% is a goal is
disturbing. I googled your excerpt
writer, read the first few pages.
Wow, very interesting...thanks.
The gullible keep on coming. It's tulip time in the US where us taxpayer money floats the market with no real value other than the gullibility of people to try to cash in on the next great stock, urged on by the players on the street. BB is a joke on us as the Fed and GS grinds this country into the ground using guile and desception to make it happen. Very sad to see in this once great nation.
FAIL - audit the FED. We are not idiots. Stop raping us and nothing less than full disclosure will be tolerated.
Tyler is getting angry.