Sean Corrigan Butchers The Chairman's Inversion Of Cause And Effect, Discusses The Fed's Brand New "Unbridled Imperial Arrogance"
Diapason's Sean Corrigan is out in full force for the second week in a row, this time looking at the consequences of a QE2, in which as he explains, the very premise of cause and effect has been inverted by the Federal Reserve, and which will result in even more dire consequences bequeathed by the launch of the HFRBS QE2. Yet in the last ditch effort to preserve a crumbling system, Bernanke is willing to sacrifice it all: the middle class, the dollar, and now logic. Here is how... and why.
So the Bernanke Fed has finally launched its next great economic experiment, undertaking to buy some $600 billion in US Treasuries over the next eight months, in addition to acquiring an estimated $250-300 billion more by way of reinvested MBS proceeds.
Monetization on this scale will mean that Tim Geithner (or whoever may end up replacing him in the aftermath of the mid-term massacre) can look forward to sending the entire bill for the Federal deficit straight to the Marriner Eccles building and not having to fret about finding a real investor to cover any part of that monstrous shortfall.
Nor will he have to worry any further about being overly polite to those annoying foreign central bankers to whom he could otherwise have expected to have flogged another $400 bln or so, over the same period. Now, backed by the might of the domestic printing press, he can affect a posture of unbridled imperial arrogance in his dealings with his fractious creditors, secure in the knowledge that he can henceforth dispense with their services as committed takers of Uncle Sam's prolific IOUs.
Yet, where Corrigan's ire really shines through (and we don't blame him as we had the same reaction), is in his reponse to the Chairman's soon to be legendary WaPo Op-Ed, which basically confirmed the Bernanke Put will never go away, and only those who believe the Fed may be wrong (which it, of course, is and laughably so - when has central planning ever worked?), should not be buying stocks.
"This approach [of buying longer-term securities] eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Underpinning this apotheosis of moral hazard (you know, the thing that got us into this mess in the first place), Bernanke further emphasised the Fed's determination to keep Wall Street in bonuses by avowing that:-
"We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change."
The madness has indeed progressed greatly from a passive observance of the false precepts of the Jackson Hole doctrine - whereby the FRB should play the role of Three Wise Monkeys in the face of a burgeoning asset bubble - to more of a Jackson Hose approach, whereby it judges policy to be successful only when it has created just such a bubble in the course of its own deliberate actions!
And here we come to the core of the argument: that in his pursuit of reflation at all costs, Bernanke has inextricably inverted cause and effect, and that the whole premise behind wealth effect as generated on artificial basis is flawed at its core, which in turn means that the logic behind QE2, as defined by Bernanke, does not exist!
So the cycle of error is perpetuated, with cause and effect both being confounded and wrongly assumed to form an easily reversible reaction. The fact that rising real asset prices are a result of increasing prosperity no more guarantees that their prior, artificial inflation will subsequently augment that same prosperity than does the act of spraying your driver with champagne while he still sits on the grid make him a certainty for a podium place at the race's conclusion.
Continuing to debunk the very premise underlying QE2, Corrigan goes back over 300 years to a text by Dudley North, which our most revered chairman-cum-historian has handily ignored in his deliberations to flood the world with worthless pieces of paper:
As long ago as 1691, Sir Dudley North was dismissing such cart-before-the-horse crankdom in his 'Discourse upon Trade', by writing:-
"It will be found, that as plenty makes cheapness in other things, as Corn, Wool, &c. when they come to Market in greater Quantities than there are Buyers to deal for, the Price will fall; so if there be more Lenders than Borrowers, Interest will also fall; wherefore it is not low Interest makes Trade, but Trade increasing, the Stock [wealth] of the Nation makes Interest low... It is said, that in Holland Interest is lower than in England. I answer, It is because their Stock is greater than ours. Thus when all things are considered, it will be found best for the Nation to leave the Borrowers and the Lender to make their own Bargains, according to the Circumstances they lie under; and in so doing you will follow the course of the wise Hollanders, so often quoted on this account: and the consequences will be, that when the Nationa thrives, and grows rich, Money will be to be had upon good terms, but the clean contrary will fall out, when the Nation grows poorer and poorer."
Not that we expect such tested wisdom to carry much weight in the rarefied, DSGE Councils of the Mighty today. Consequently, not the least of Bernanke's many mistakes in, implementing this shallow conjurer's trick is the conflation of a higher nominal price for some claim to goods with that greater command over valuable, real resources which is actually the only true measure of "wealth"
Simply to pump in money in order to swell the price of a parcel of farmland is not to generate any greater cultivable acreage, nor to boost the yield of the land already in existence and, hence, is not to enhance its ability to better nourish its owners or their customers. If that were only the case, we could end Man's long battle with poverty at a stroke, simply by pencilling in a few extra, terminal zeros on the denominations of all our banknotes - a palpable fantasy by which ex-BOE MPS member Willem Buiter, for one, seems to be deliriously and incurably gripped.
And here is where Krugman, who ridicules Jim Rogers' understanding of assets and liabilities, should pay particularly close attention, as it is none other than his own master, Ben Shalom, who appears to have a fundamental misunderstanding of how assets are appraised, and that their true worth is not based on a ever more dilutable piece of monetary equivalency, but something much more intrinsic.
Assets, after all, are claims upon actual or potential streams of an income which must never be judged solely in pecuniary terms but rather on the basis of what it contributes to the satisfaction of material human wants. If that stream of income is unaltered, the price of the asset can only make a difference to the owner's standard of living if parts of it are broken off and sold to another, so realising an otherwise entirely notional increase.
Even then, the asset-seller's immediate material gain must come at the cost of the buyer's deferred benefit, unless this latter avoids such a temporary sacrifice by borrowing some newly-created, 'fictional capital' with which to make the purchase. Should he do this, however, it must be seen that he is only helping transfer the inflation from one involving the asset which he buys to one concerning the real goods which his seller wishes to acquire in its place.
The seller may not realise it, under the confusion of money illusion, but what he has, in fact consumed is some of his hard-won real capital. The buyer, too, seduced by the allures of a bull market, is helping to drive down the real translatable value of his own purchase in the same measure as he is pushing up its nominal cost.
Though this process may take some time to come to fruition - and though winners and losers may not be so easily disentangled, especially where the process is protracted and where titles changes hand.s many times at escalating prices - herein lies the essential truth of the Austrian contention that while we may be forced to take our losses in the Bust, we actually make them in the preceding Boom.
Not content with destroying the fundamental fallacy behind monetary intervention, Corrigan then goes on to ridicule the primal flaw behind that other core precept of Keynesian economics: fiscal stimulus.
Unchallenged here goes the usual canard that in some strange way, /wealth' is about destruction, not generation; i.e., that what the world is lacking is an orgy of consumption of the most final, exhaustive kind and so, if we can once inveigle or coerce people into burning, rather than building, things by fooling them as to how well off they are, economic 'recovery' will at last be assured.
Perhaps we should lust impose candlelight and thatched roofs, ban fire insurance, and outlaw smoke alarms by way of a 'stimulus package'.
And the final nail that obliterates the any last trace of credibility behind (the lack of) Bernanke's logic:
What Bernanke and the other Nomenklatura fail to appreciate is that what must be facilitated is the selling, not the buying, of valued goods and services at a price others are willing to pay: that this is the key to wealth creation for, by this means, the vendor furnishes himself with the wherewithal to buy any of the myriad non-competing goods available him through the efforts of all his possible counterparties while also allowing him to secure whatever inputs are necessary for him to repeat this mutually enriching process in the future. Somtimes, this, perforce, must include selling at a lower price than before - a necessity utterly abjured by the mainstream as comprising a maelstrom of 'deflation', a condition erroneously presumed to be coterminous with a self-aggravating depression.
The truth is that no amount of a macromancy aimed at shifting the monetary valuations of asset holdings can have more than a passing influence on such a continually evolving, but also continually renewing dynamic of want-satisfactions - of the earning and enjoyment of an income.
Having destroyed the premise behind the QE2 argument, Corrigan then goes on to imply that the effects of this action are also broadly misunderstood, and that there isn't really any true appreciate in assets values in non-dollar denominated terms. The underlined text is what everyone who is participating in this "bull rally" is so blatantly missing.
One further unanswered question is whether the FRB moves can increase the value of US assets in anything other than the chronically depreciating dollars to which they are giving rise. If not, we are only adding another inflationary veil of illusion over a loss of, not a gain in, the value of financial capital. The undeniable fact that record low yields have done nothing to move T-Note futures beyond a TWI-adjusted, 28-year mean, while the TWI-adjusted S&P500 labours where it was back in the mid-90s, suggests this is no trivial challenge to overcome.
Another side effect of QE2 is what we discussed will soon become evident to the poorest segment of society, who will soo see their food and energy prices skyrocket, despite what the core CPI is telling them about prevalent deflation.
We might also ask whether higher asset prices will help the poor, huddled masses who have so few savings to begin with or whether lowered mortgage rates can do much to help those suffering a deficit of collateral value (i.e., negative equity) against which to refinance. Yes, it may allow some fixed- value debts to be discharged through the surrender of such newly-inflated claims as one may hold, but this is nothing which a direct renegotiation between borrow and lender could not achieve with far less risk of further distorting the overall capital structure of the economy.
One group that is sure not to complain about any aspect of QE2 is Wall Street, as the past 48 hours of non-stop punditry on CNBC demonstrates:
The fact that the Fed has made its programme so blatantly open-ended and expediency-driven has already triggered talk of an eventual QEIII and, moreover, has so far dispelled fears that the market impact would be one of ennui shading into disappointment, replacing this with what Mohamed El-Erian called "turbo-charging the direct policy impact before those purchases have even been specified."
But while fine and dandy for the wealth shufflers on Wall St., for the wealth creators on Main, this could be counterproductive for the very reason alluded to in the preceding paragraph: viz., that in an economy suffering from that widespread discoordination of means and ends, prices and costs, which has been engendered in the Boom and then made dispiritingly concrete by the application of so many ill-advised anti-recession measures taken in its aftermath, only greater discoordination lies in store - not least through the pestilential effects of wild foreign exchange swings (and the crude political reaction these tend to spawn) which are being disseminated across the global trading network like a Genoese hold full of black rats, or the surge in input costs which the incipient Flucht in die Sachwerte and out of the Greenback is everywhere now provoking.
The final word belongs not to Corrigan, but to BOE Governor Eddie George who 3 years ago stated why QEX is irrelevant and doomed to failure:
In defiance of the injunction, 'de mortuis nil nisi bonum', we can only recall the words of then-retired BOE Governor Eddie George to the Treasury Select Committee in March of 2007 — four years after he had handed the baton seamlessly onto his willing deputy Mervyn King and just as the first cracks were appearing in the precarious CDO-sub-prime LBO superstructure he and Alan Greenspan had helped to put in place after the Tech Bubble in which they were also instrumental:-
"You have to step back from this. You have to recognize that when you're in an environment of economic weakness at the beginning of this decade, you only have two alternatives of sustaining demand. One was public spending, the other was consumption. We knew we were having to stimulate consumer spending. We knew we pushed it up to levels which couldn't be sustained. That pushed up house prices. It increased household debt. My legacy to my successors has been, sort this out. We didn't have much of a choice."
If you listen closely, you can hear the stonemasons, already chiselling out Ben Bernanke's legacy on the tombstone of sound money — and possibly on the mausoleum of dollar hegemony. It will be left to all of us to mourn the inheritance he has bequeathed us in his lunatic's charter of 'quantitative easing' and Keynesianism a outrance.
The entire world has now daringly embarked on the most doomed from the beginning voyage of the HFRBS QE. The inevitable collision with an iceberg of reality and common sense is inevitable. In the meantime as nothing can be really done, is to sit back and listen to the wonderful music and watch as the deck chairs are rearranged ever faster by those who delude themselves there are lifeboats available for them somewhere on deck.