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.
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.
Not full-dovish, risk assets face tremendous downside potential. Key highlights: YELLEN SAYS FOMC SEES SIGNIFICANT UNDER-USE OF LABOR RESOURCES; YELLEN SEES ROOM FOR WAGE INCREASES THAT DON'T BOOST INFLATION; YELLEN REITERATES ASSET BUYING TO BE COMPLETED IN OCTOBER; YELLEN SAYS FASTER PROGRESS ON GOALS MAY BRING RATE RISE SOONER
Going into this year’s Jackson Hole meeting, it does not appear to BofAML's Ethan Harris that the FOMC is leaning toward a policy change as in 2010, let alone on the verge of a big shift as in 2012. Instead, the Fed is in a bit of a limbo state as it waits for clear evidence that 1Q GDP was a fluke and convincing signs of stronger wages. With significant policy changes a long way off, and with the intense market focus on Jackson Hole, we expect the Fed Chair to try to say nothing interesting about the policy outlook.
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.
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.
The Fed is now pre-occupied with an unanswerable and fanciful question, according to Jon Hilsenrath’s pre-meeting missive on the Fed’s current monetary policy “debate”. Figuratively estimating the number of angels which can dance on the head of a pin, Fed officials and economists suppose they can specify the the appropriate money market rate down to the decimal place for virtually all time to come... Of course, every one of these three magic numbers are perfectly arbitrary, academic and silly. Due to the structural failures of the US economy owing to decades of destructive Washington policies, the “unemployment rate” today is not remotely comparable to what was being measured in the 1950s and 1960s when today’s Keynesian theology with respect to the Phillips Curve, Okun’s Law and full-employment policy was being formulated.
"The responsibility of any central bank is price stability. I was at the helm at that time. Price stability is two percent inflation, which we can’t closely control anyway. They ought to make sure that they are making policies that are convincing to the public and to the markets that they’re not going to tolerate inflation... The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me. Your teachers must be telling you that if you’ve got expected inflation, then everybody adjusts and then it’s OK. Is that what they’re telling you? Where did the question come from?"
Timothy Geithner is likely to go down in American history as one of the most dangerous, destructive cronies to have ever wielded government power. The man is so completely and totally full of shit it’s almost impossible not to notice. The last thing we’d ever want to do in our free time is read a lengthy book filled with Geithner lies and propaganda, so we owe a large debt of gratitude to former Congressional staffer Matt Stoller for doing it for us. Stoller simply tears Geither apart limb from limb, detailing obvious lies about the financial crisis, and even more interestingly, Geithner’s bizarre bio, replete with mysterious and inexplicable promotions into positions of power..."Geithner is at heart a grifter, a petty con artist with the right manners and breeding to lie at the top echelons of American finance..."
The best lies contain elements of truth. The truth here is that the East is forming alliances in opposition to the West, the West is involved in underhanded covert operations all over the planet, and both “sides” are in fact on the verge of a catastrophic battle for supremacy. The great lie is that important details have been left out of our little story. Both sides are merely puppet pieces in a grand game of global chess, and any conflict will ultimately benefit the small group of men standing over the board. They include the international financiers who have influenced the very policy fabric of each government toward a climactic crisis which they hope will finally give them the “New World Order” they have always dreamed of.
Paul Volcker Proposes A New Bretton Woods System To Prevent "Frequent, Destructive" Financial CrisesSubmitted by Tyler Durden on 06/01/2014 19:32 -0400
We found it surprising that it was none other than Paul Volcker himself who, on May 21 at the annual meeting of the Bretton Woods Committee, said that "by now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth." We can, indeed, agree. However, we certainly disagree with Volcker's proposal for a solution to this far more brittle monetary system: a new Bretton Woods.
After the crisis, many expected that the blameworthy would be punished or at the least be required to return their ill-gotten gains—but they weren’t, and they didn’t. Many thought that those who were injured would be made whole, but most weren’t. And many hoped that there would be a restoration of the financial safety rules to ensure that industry leaders could no longer gamble the equity of their firms to the point of ruin. This didn’t happen, but it’s not too late. It is useful, then, to identify the persistent myths about the causes of the financial crisis and the resulting Dodd-Frank reform legislation and related implementation...."Plenty of people saw it coming, and said so. The problem wasn’t seeing, it was listening."
So far we have experienced 7 million foreclosures. Beyond that there are still 9 million homeowners seriously underwater on their mortgages and there are millions more who are stranded in place because they don’t have enough positive equity to cover transactions costs and more stringent down payment requirements. And that’s before the next down-turn in housing prices - a development which will show-up any day. In short, the socio-economic mayhem implicit in the graph below is not the end of the line or a one-time nightmare that has subsided and is now working its way out of the system as the Kool-Aid drinkers would have you believe based on the “incoming data” conveyed in the chart. Instead, the serial bubble makers in the Eccles Building have already laid the ground-work for the next up-welling of busted mortgages, home foreclosures and the related wave of disposed families and social distress.
Rickards does not expressly say one should put 33% of one’s wealth in gold but suggests that an allocation of between 10% and 33% would be prudent. In this regard, he echos Dr Marc Faber who suggested a 25% allocation to precious metals last week.
A week ago we wrote: 'While it has been public for a long time that i) JPM is eager to sell its physical commodities business and ii) the most likely buyer was little known Swiss-based Mercuria, there was nothing definitive released by JPM. Until moments ago, when Jamie Dimon formally announced that JPM is officially parting ways with the physical commodities business. But while contrary to previous expectations, following the sale JPM will still provide commercial gold vaulting operations around the world, it almost certainly means farewell to Blythe Masters." Sure enough:
JP MORGAN COMMODITY CHIEF BLYTHE MASTERS LEAVING, WSJ SAYS
Farewell Blythe: we hope your replacement will be just as skilled in keeping the price of physical gold affordable for those of us who keep BTFD every single day.