Yellen’s acting routine is worthy of an Academy Award. In her role, she plays a caring, sweet, grandmotherly type figure all concerned about the poor and middle-class, when reality points to a career as a staunch, frontline protector of the bankster oligarchy.
"The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be. There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed."
"First they ignore you, then they ridicule you, then they fight you, and then you win." Mahatma Gandhi
"It is no crime to be ignorant of economics... but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard
In a QE dominated world - in the Golden Age of the Central Banker - renminbi strengthening has been an unmitigated disaster. Chinese political stability depends on the actual production of actual things by actual people working in actual factories, and the prospects for that real economic growth are made significantly worse the longer the West persists in favoring financial asset inflation and the ossification of a low-growth status quo. While the West may be able to accept, even celebrate, unlimited private wealth – China cannot. Not if it wants to remain a politically unified Great Power. We think this is just the start of a multi-year weakening of the renminbi, a sea change in Chinese monetary policy that will inevitably create broad political tensions with the US and make Japan’s devaluation/inflation course infinitely more difficult to achieve.
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
As Komal Sri-Kumar points out in this harsh (but fair) discussion of the Fed, (as Tim Iacono notes) the central bank’s abysmal track record on forecasting economic growth and how they have a fantastic track record for “taking the punch bowl away” far too slowly should worry all. "The Fed has been wrong every time on its growth forecast and overly optimistic," Sri-Kumar rants, adding that "the Fed is wrong in terms of its benevolence to the markets." The current environment reminds him of early 2008 noting there are "lots of characteristics which are similar and it worries me a lot." Simply out, "they’ve had five years of quantitative easing, big bond purchases, quintupling of the Fed balance sheet. And we don’t have sustainable economic growth," but the great medication is not working, and "the remedy is that you have to take the shock."
The only thing that can be said about Janet Yellen’s simple-minded paint-by-the-numbers performance yesterday is that the Keynesian apotheosis is complete. American capitalism and all political life, too, is now ruled by a 12-member monetary politburo, which is essentially accountable to no one except its own misbegotten doctrine that prosperity flows from the end of a printing press.
Because we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data....
- the VIX is not a reliable measure of market complacency.
- the wisdom of crowds is nonexistent.
- fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
- I’d rather be reactive and right in my portfolio than proactive and wrong.
The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.
Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.
Some people are either born or nurtured into a time warp and never seem to escape. That’s Janet Yellen’s apparent problem with the “bathtub economics” of the 1960s neo-Keynesians. As has now been apparent for decades, the Great Inflation of the 1970s was a live fire drill that proved Keynesian activism doesn’t work. That particular historic trauma showed that “full employment” and “potential GDP” were imaginary figments from scribblers in Ivy League economics departments—not something that is targetable by the fiscal and monetary authorities or even measureable in a free market economy. Even more crucially, the double digit inflation, faltering growth and repetitive boom and bust macro-cycles of the 1970s and early 1980s proved in spades that interventionist manipulations designed to achieve so-called “full-employment” actually did the opposite—that is, they only amplified economic instability and underperformance as the decade wore on.
With all that has been written in respect to Thomas Piketty's new book "Capital", you would think someone would remark on the odd coincidence of timing of the rapid rise in inequality that the Professor is so upset about. It’s the issue of the hour. Yet when it comes to the timing at which this phenomenon presented itself, nada. Omerta from the liberal intelligentsia. What could have marked 1971 as the year the picture began to change in respect of inequality in America? It turns out that was the year America defaulted on its obligation under Bretton Woods to redeem in gold dollars held by foreign governments and the era of fiat money began.
The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation. Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.
One of the evils of massive over-financialization is that it enables Wall Street to scalp vast “rents” from the Main Street economy. These zero sum extractions not only bloat the paper wealth of the 1% but also fund a parasitic bubble finance infrastructure that would largely not exist in a world of free market finance and honest money. The infrastructure of bubble finance can be likened to the illegal drug cartels. In that dystopic world, the immense revenue “surplus” from the 1000-fold elevation of drug prices owing to government enforced scarcity finances a giant but uneconomic apparatus of sourcing, transportation, wholesaling, distribution, corruption, coercion, murder and mayhem that would not even exist in a free market. The latter would only need LTL trucking lines and $900 vending machines. In this context, the sprawling empire known as Bloomberg LP is the Juarez Cartel of bubble finance.
The rising price of gold is a huge embarrassment to the US government not because it devalues the dollar (it does not do this) but because it provokes a loss of confidence in the dollar. When the dollar is seen as falling in value against gold, its fall causes investors to exchange dollars and other currencies for gold as a means of protecting wealth. The rising price of gold is a blot on the prestige of the US dollar and the prestige of the US itself. The price of gold in dollars is therefore under strict government control. This fact, once derided as ridiculous, is increasingly accepted as truth by those interested in monetary matters around the world. The means for controlling the price of gold lies in the massive sales of “paper gold” which take place to suppress its price, as so many investigators have amply documented. US monetary policy considers that the dollar is here to stay forever, and that gold is no longer – and never again will be – the world’s ultimate money. The governments of several nations around the world do not share the same conviction with regard to the permanence of the dollar.
"All the Trumans – the economists, fund managers, traders, market pundits –know at some level that the environment in which they operate is not what it seems on the surface…. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end."
Klarman is here referring to the waning days of this third and greatest financial bubble of this century. But David Stockman's take is that the crack-up boom now nearing its dénouement marks not merely the season finale of still another Fed-induced cycle of financial asset inflation, but, in fact, portends the demise of an entire era of bubble finance.