Getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages. This sequencing implies that Wall Street prices must become very rich relative to Main Street prices in order to achieve so-called escape velocity from the Liquidity Trap. At the transition point, Wall Street prices will be rationally “overvalued” relative to their long-term “fair value.” The dominant risk for Wall Street is not bursting bubbles, but rather a long slow grind down in profit’s share of GDP/national income. And you can stick that into a Gordon Model, too! Bonds and stocks may at present be rationally valued, but borrowing from the lyrics of Procol Harum’s Keith Reid: Expected long-term returns are turning a more ghostly whiter shade of pale.
This is why Capitalism is failing in the US: because not only is it now clear that the US economy is, for the most part, a rigged game… but that NO ONE involved in the rigging is punished.
The single most important item for investors to understand is collateral. Specifically, how there is a huge shortage of high grade collateral backstopping the trillions in derivatives trades owned by the TBTFs
Remember, it's for Main Street...
At the end of the day, everything the Fed has done has been focused on propping up a broken system. Eventually the Fed’s efforts will fail at which point so will the Fed (just as the last two Central Banks in the US failed).
Bank of England plans to make bondholders and depositors bear the cost of bailing out failing banks has led Moody’s to downgrade its outlook on the UK banking sector.
Here are some of the choice excerpts from the man who is baffled by a new effort to punish him, proud of past triumphs and incensed by criticism: “You’ll have to ask those people, ‘What do you have against Mozilo, what did he do?’” he said in a 30-minute call with Bloomberg News before Labor Day, one of his few interviews since the firm’s downfall. “Countrywide didn’t change. I didn’t change. The world changed.” Mozilo doesn’t understand why he and his firm, blamed by lawmakers and authorities for lax underwriting and predatory lending, have been seen as villains. “No, no, no, we didn’t do anything wrong,” he said, adding that a real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.” Yes, the Moz talks about himself in the third person.
Although I never thought it was possible, it makes me angry to write this book review. I'm not angry because I don't like the book. On the contrary, this is the best economics book I've ever read. Indeed, it may be the best and most influential book I've ever read in my life. I only wish I had read it the moment it was published in April 2013.
The sheep have been told their confidence is at a 7 year high by the propaganda peddlers working at the behest of the oligarchy. The sheep are also told that 10 million jobs have been added since the GOTUS played his first round back in 2009. The sheep have been told the record highs in the stock market prove that all is well. If the .1% are doing fantastic, some of the wealth must be trickling down. The sheep are told that QE and ZIRP were really to save Main Street and not the bonuses of Wall Street (at record highs by the way). The sheep are told to fear ISIS, Iran, Assad, Putin, and China. The sheep are told U.S. energy independence is just around the corner and to ignore the fact that gas prices have tripled since in the last ten years. The sheep are told drones will keep them safe and the DHS militarizing the police is just for their safety and security. The sheep are told guns are dangerous in their hands, but not in the hands of the government. The sheep passively eat their iGadgets and barely bleat while being led to the slaughter house.
The Status Quo is desperate to mask the declining fortunes of those who earn income from work, and the Misery Index 2.0 strips away the phony facade of bogus unemployment and inflation numbers.
If you’re a girl and you’re old and you’re grey and you’re the size of a hobbit, who’s going to get angry at you? If your predecessor had all the qualities anyone could look for in a garden gnome, and his predecessor was known mainly as a forward drooling incoherent oracle, how bad could it get? Think they select Fed heads them on purpose for how well they would fit into the Shire? Janet Yellen has a serious problem: the story no longer fits.
The Fed likes to claim that its policies are aimed at helping Main Street. Ben Bernanke began this argument when he was still Fed Chairman. Janet Yellen has since taken it a step further claiming that she comes from an “intellectual tradition” that it is important to use “public policy” to “make the world a better place.”
The arrogance, hubris and contempt for morality displayed by the ruling class is breathtaking to behold. They think they are untouchable and impervious to norms followed by the rest of society. They may have won the opening battle, but will lose the war. Discontent among the masses grows by the day. The critical thinking citizens are growing restless and angry. They are beginning to grasp the true enemy. The system has been captured by a few malevolent men. When the stock, bond and housing bubbles all implode simultaneously, all hell will break loose in this country. It will make Ferguson, Missouri look like a walk in the park.
Nobody really believes the official narrative that the "recovery" is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve's free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared. This leads us to wonder if capital inflows into the U.S. aren't a largely overlooked driver of rising U.S. markets.
A month ago, Carl Icahn told told CNBC that he was "very nervous" about US equity markets. Reflecting on Yellen's apparent cluelessness of the consequences of her actions, and fearful of the build of derivative positions, Icahn says he's "worried" because if Yellen does not understand the end-game then "there's no argument - you have to worry about the excesssive printing of money!" Today he follows up that warning with an op-ed that states "we are in a major asset bubble that continues to grow," supporting Stiglitz comments that "these very strong stock market prices are in a sense a symptom of the weak economy, not a symptom that we are about to have a strong recovery to our real economy."