Guest Post: The "Out-Of-Touch-With-Reality" Crowd

Tyler Durden's picture

Submitted by Michael Panzner of Panzner Insights,

In “The Biggest Myth About the Fed,” David Beckworth, an assistant professor of economics at Western Kentucky University, suggests that the pessimists are wrong to be concerned about what Mr. Bernanke and Co. are up to.

There many myths about Fed policy over the past few years, but the biggest one has to be that the Fed has been monetizing the national debt.  This simply is not true, but it does not stop some folks from making this claim.  For example, at last week’s Cato Monetary Conference we find former Fed officials pounding the Fed-is-monetizing-the-debt drums:


Mr Warsh and Mr Poole (who was filling in for Allan Meltzer) made a sharp distinction between the “legitimate” efforts to fight the crisis and the subsequent easing actions that were, allegedly, unjustified by the economic fundamentals.


According to them, the interventions of 2007-2009 were required to ensure that “the markets could clear”, as Mr Warsh put it, while the second round of easing was done to satisfy “political masters” by monetising the debt. In fact, Mr Warsh said that the Fed was being actively unhelpful by “crowding in” Congress’s supposedly poor policy choices.


My first response is how can they can say this with historically-low U.S. treasury yields and muted inflation expectations? Surely, if the Fed were truly monetizing the debt we would be seeing a 1970s-repeat in the bond market, but we are not.  And this is happening, in part, because the Fed is not that big of a treasury purchaser.  Consider the figure below.  It shows the Fed’s stock of treasuries by remaining maturity compared to the total stock of marketable treasuries as of the end of October, 2012.


Though the Fed’s share of treasuries increases by remaining maturity, at most it hits 32% of the total for 10-30 years category. That means that after many months of Operation Twist that roughly 68% of long-term treasuries are still held outside the Fed. Overall, the Fed holds about 15% of marketable treasuries as seen in the “All Years” category.  It is hard to square these numbers with the allegations that the Fed is monetizing the debt.

Leaving aside the questions of whether:

  • the Fed’s share of the Treasury market will remain as low as it is now if other investors start heading for the hills;
  • the central bank’s intentions with respect to their securities holdings will remain the same if the economic, financial, political, or social landscape changes for the worse; or,
  • we can really know for sure that the debt has been monetized until after the fact;

the notion that current benign market conditions are a reason for optimism sums up just how out of touch with reality most academic economists (and other alleged experts, including journalists-cum-forecasters who parrot this nonsense) are.

By this sort of logic:

  • Mid-2005 was the right time to be optimistic on housing
  • January-2007 was the right time to be optimistic on the banking sector
  • The spring of 2007 was the right time to be optimistic on credit markets
  • The fall of 2007 was the right time to be optimistic on global equity markets
  • Mid-2008 was the right time to be optimistic on commodities
  • This past September was the right time to be optimistic on technology stocks

Of course, we know how those all worked out (hint: not well).

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Joebloinvestor's picture

I bet the guy owns gold.

Skateboarder's picture

DOW at 5k, coming to a shanty near you.

Whatever's left of your 401k is gonna get slaughtered next year.

"Oh I've got to be strong. I'm falling off the edge of the world.
Think you're safe but you're wrong. We. Are. Falling off the edge of the world!"
-Ronnie James Dio

Supernova Born's picture

An assistant professor at a university in west Kentucky?

From Bumfuck Gulch to the bright lights of the Fed? An assistant professor can dream...

Oh please, almighty Bernank, save me from my dreary life in the dismal science.

Supernova Born's picture

Someday, 'round your fireside, with your grandson on your knee, he'll ask: "What did you do in the Great Depression II?" and you'll WILL have to say, Well... I shoveled shit for the Bernank in west Kentucky.

tmosley's picture

Someone with some understanding of planning fallacy would see that projections made by central planners (or ANYONE making plans) will always be WILDLY optimistic, with the real case tending to come in just a bit worse than the worst case scenario.

If central planners understood cognitive science, they might just realize the futility of their planning.

RockyRacoon's picture

"Quack economists at the Bureau of Labor Statistics do to numbers what guards at Guantanamo did to prisoners. They rough them up so badly, they are ready to say anything..."

Vampyroteuthis infernalis's picture

Raccoon, that is the way almost any job today goes. Play along with the insane asylum or get canned. The incentive is too strong.

mumcard's picture

"It is difficult to get a man to understand something when his salary depends upon his not understanding it." - Upton Sinclair

This isn't a recent thing, it's been going on for quite some time.

Leopold B. Scotch's picture

... and the debt of Italy, Greece, Spain, etc. etc., was all pristine just a few short years ago, as well.... According to the yields.

Chuck Walla's picture

An assistant professor at a university in west Kentucky?

Believe it or don't but a lot of real talent doesn't want to play the big university games and just want to teach.  Larry LaFore and Dr. David Krein come to mind. Excellent historians who buried themselves by choice in small schools despite being recruited by the elites.

LawsofPhysics's picture

Then why make such blatantly propagandistic claims?  Wake me when the Fed sells it's toxic crap at par.  All academics must "play along" at some level, otherwise they don't get tenure.

All Risk No Reward's picture

Actually, I think this guy is right - at least up until the point it won't matter anymore.

The Fed doesn't "print," rather it issues debt.  Debt based money is bifurcated.  There is an obligation portion and then there is a spendable currency portion.

The MBS QE is all about taking toxic assets from their criminal corporatocracy and replacinig it with cash at or near par.

One point of view is that the difference between the money paid out and the actual value of the toxic trash is "printed."

I would argue that this "printed" aspect is simply a temporary mirage - but one that could last for years and has the potential to have real consequences on the economy for years to come.  Or not - that all depends on the oligarch club plans.

I am convinced that the difference in value will be recognized at some future point and will be deemed debt owed to the Federal Reserve criminal cartel by the mostly wilful American debt serf class.  Why are we wilfull serfs to a large degree - because of all the mirages set up to fool us and keep us from recognizing the ultimate outcome of this financial Art of War campaign engineered to impoverish us so we can be more easily robbed and controlled.

When that day of recognition comes, "printed" will not suffice to describe it.  Weapons of Mass Debt will suffice, though - although most probably still won't get it, just like they didn't get that they were conned in the original "Roaring 20s / Great Depression" societal asset strippiing financial Art of War operation.

Because the debts are unpayable BY DESIGN...

Debt Money Tyranny

...society can never pay back these fraudulent debts.  However, the purpose of the debt money fraud will have already been accomplished by the time the debts are eventually zeroed out.  The oligarch front corporations will have asset stripped the majority of the remaining serf illusion of wealth and solidified their control over the traitorous national government "representatives" they finance and promote.

It's all a con.  The biggest misconception about the Fed is that they are legitimate and not a criminal cartel and the Trojan Horse being used by Big Finance Capital to bring down America to its knees and seize authoritarian control over it.

Must Reading:

Tragedy and Hope by Carroll Quigley

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

Must Viewing:

The Ultimate History Lesson

Gatto Paraphrase: There was a second American Revolution in the late 1800s.  It wasn't won through force of arms, but through force of insight into how to create public opinion.

False Narratives "creating" public opinion:

1. The Fed has a dual mandate.  No, their mandate is singular and they've broken it for almost 3 decades.  Look it up the source document - "Section 2A of the Federal Reserve Act" - and read it yourself.

2. The Fed is supposed to keep inflation low.  No, the Fed is supposed to keep prices stable with no inflation at all.  Again, read the source document referenced in #1.

3. Fluoridated water is a scientific marvel with a great cost/benefit ratio.  No, the "EPA scientists oppose water fluoridation."  Search the quoted text to find the NTEU link (s/b first link) to find out why and verify their source data.  Got dementia on the installment plan to generate Big Phosphate and Big Aluminum toxic waste sales profits and Big Pharma profits?

4. If they don't talka about the underlying math of a debt based monetary system, it will not hurt you.  No, it will bankrupt your nation, your community and very, very likely, you and yours as well.  In due time, of course - so don't expect it today - unless you were one of the thousands caught in the trap today...  more and more every day.  See the first link posted in this comment in order learn exactly how it works to enslave society to debt.

5. If they never discuss the fact it is legal for the "news" to lie to you in order to benefit those who finance/own/control their operations, then the "news" must be telling the truth as best they can with no hidden agenda.  At least "your news" - whatever false narrative a given person has fallen for.  No, the news media went to court to soldify their state sanctioned right to lie to the people all day long in order to serve their self interest at the expense of everyone else - including your children.

Unsettling Accounts

That's just a smidge of the deception in play.

BTW, I agree on the control exerted over the mis-education system.  Nobody will ever teach the truth...  Debt Money Tyranny, to the students.  If they did, it would be the end of them.  Certaiin disagreement is allowed in order to further the agenda of "free ideas," but there are lines in the sand that few dare cross and there are "consequences and repercussions" (Eddie Murphy) if they do.

disabledvet's picture

the fact that the debt market front runs the fed doesn't somehow make "the ownership rate" a meaningful indicator vis a vis monetization. in fact it makes it totally irrelevant. one could argue the Fed is SUCCESSFULLY monetizing the debt...but to claim they are not monetizing is already PROVEN TO BE FALSE by none other than Bill Dudley who heads the FRBNY and isn't sitting at a desk pontificating about "things" in Western Kentucky while all the coal mines shut down. anything is possible with markets as with people...obviously i'm not in the Dow 5,000 camp. I am in the "Government simply does not state the real rate of inflation" camp however. Prices have been galloping higher at a 10 percent clip going on two years now...eventually the market will sniff this out...which could cause a nasty price shock.

in4mayshun's picture

No kidding, I paid $10.99 for an 8 pack of polish dogs at the grocery store today.

All Risk No Reward's picture

I think you've missed the point I was making.  "Monetizing the debt" means to issue money that will never be paid back in order to pay off the nation's debt.

All the money he's created over and above the value of the toxic trash WILL BE EXPECTED TO BE PAID OUT OF SOCIETY'S WEALTH AN LABOR - THEY JUST HAVEN'T MADE THAT CLEAR YET.

Oh, but they will.  In due time.  If society knew a pound of flesh would be required for these "bailouts" (well marketed thievery, in point of fact), they wouldn't allow them sittinig down.  Hence the charade that they won't eventually recognize those losses and DEMAND that they be covered by the schmoe citizenry.

That day is coming - bookmark this post if you must.

As I said, the debt is mathematically unpayable because this Debt Money Tyranny is a fraud engineered to bankrupt the host nation.

Therefore, this debt that is being created to fund this QE theivery won't be paid off and then what is happening now will be understood as a kind of demonic "monetization" of the debt.  There is no need to worry - hyperinflation won't come until the nation has been asset stripped first.

This is a Sun Tzu Art of War campaign being waged against the entire planet by a few criminal Big Finance Capital types, some key lackies and various gullible populations.

sessinpo's picture

"All the money he's created over and above the value of the toxic trash WILL BE EXPECTED TO BE PAID OUT OF SOCIETY'S WEALTH AN LABOR - THEY JUST HAVEN'T MADE THAT CLEAR YET."


Until default. Enough said as it ends the debate.

sessinpo's picture

You are joking right?

"They can say this with historically-low U.S. treasury yields and muted inflation expectations? Surely, if the Fed were truly monetizing the debt we would be seeing a 1970s-repeat in the bond market, but we are not."


Apparently this Professor, and I will assume a PhD, a degree in theoretical crap, hasn't considered that with so much debt, that all the monetization, all stimulus through QE whatever, is simply fighting severe deflation of deleveraging that debt of Trillions.


This professor is a perfect candidate for the head of  the FRB, IMF, Global Bank or the US Treasury. An assinine individual that I would personally like to kick in the ass just so he can meet reality with my foot up his ass instead of his liberal left wing fantasy world.

Kitler's picture

And others are there simply because they can't cut it. Beckworthless is one of those...

The Wall Street Examiner November 20, 2012 5:53 PM

OK. So over the past week, the Fed closed on $60 billion in MBS purchases from the Primary Dealers. At the same time, the Treasury floated $45 billion in unscheduled Cash Management Bills, for which the Primary Dealers were almost the exclusive buyers.

Each month the Treasury floats about $70-80 billion in net new debt. Each month the Fed closes on the purchases of about $70-80 billion of MBS from the Primary Dealers, who then use that cash to fulfill their obligation to purchase the new Treasury debt.

But the Fed isn't monetizing the debt. No sirree Bob. No it's not. Why not? Because you said so. And you're an economics professor. That's why.

Lee Adler
The Wall Street Examiner

Way to go Lee.


Jack Burton's picture

Indeed Kitler! There is more than one way to monetize a debt and the Fed sure knows how to get the job done without appearing to be the direct buyer of the US debt issuances.

Just let the Fed step aside completely and see what happens to the market for US debt, if they were not in there with their billions every month helping to get those bonds sold via the backdoor, then what happens? Disaster of epic proportions.

disabledvet's picture

aging boomers explains the "front running" better in my view. am i calling it a bubble? no way. but has the Fed push prices far higher and yields far lower than they otherwise should be? in my view ABSOLUTELY. Sorry but equity premiums don't just "come about." and they come about through massive counter-cyclical fiscal and monetary policies, bailouts, dollar debauching and lying about actual inflation while stating it as a policy goal. leaving aside the price of gold for second all we need to do is look at this price right here: lumber? in North America? You know how much timber is actually available for use in our so called housing recovery? the word "infinity" comes to mind! hell they use wood chips to generate electricity in New Hampshire! and of course for all the naysayers "here's a stock price to go with it": that's home depot folks. up over 100 percent in ONE YEAR. i'm sorry are they selling something that Wal Mart isn't? ONLY LUMBER.

Supernova Born's picture

Just because the author is a Bernanke acolyte doesn't mean the school isn't a fine institution.

However, Western Kentucky University is oddly: "Located atop one of the highest points in Southcentral Kentucky." I suppose the Southern University of Central Kentucky was a bit long and would have had an unfortunate acronym.

Also, using the term Bumfuck Gulch was a mistake. A more appropriate term (in jest) would be Bumfuck Knob.

ceilidh_trail's picture

 Stupornova- Let me guess... You live in NYC, Chicago, LA, DC? Good lord! Get out a bit more. You might be surprised that the rest of the country isn't a bunch of bumpkins. Most CEOs and business leaders actually went to smaller schools. Most of the media and politicos went to the ivy schools. I actually moved here from NY years ago, and never regret it. Oh, by the way, just got in from Chicago, spent the holiday grazing Michigan Ave. I saw more BUMs there than I have ever  seen in my part of the world. The new scam is they beg for money with their young kids with them- disgusting passing on of values. WKU is not near my neck of the woods, but I was there for my daughter to receive a Duke University TIP award last year. They have a very well regarded gifted student/honors program. Do a little research before saying stupid nonsense. I long for the days when ZH didn't have so many zeros such as yourself leaving assinine comments. Are you the ghost of Harry Wanger???

Missiondweller's picture

Yep, and the Dow/ Gold ratio will be 1 once again as it has every 18-20 years.

CunnyFunt's picture

This winter is the right time to be optimistic on toilet paper.

Quinvarius's picture

That dude needs to give his degree back and take up ditch digging,

BeetleBailey's picture

...or muck out horse stalls at the local track.


Better yet.....clean the public restrooms - lots of those need attention.

Tinky's picture

Restrooms at the track? They're actually quite nice at Arlington; too bad the racing in Chicago has sucked for about the last 25 years.

thomasincincy's picture

hawthorne is a fun track to play. would like to visit sometime

OneTinSoldier66's picture

My attempt at humor: You mean he's not trying to help dig the ditch deeper and deeper now?

MillionDollarBoner_'s picture

Ditch digging?

But that's honest work. This clown is totally unqualified for honest work.

knukles's picture

Or colonic cleansing


(Look, it is California, for shit's sake)

LawsofPhysics's picture

All those new drugs that noone can afford, all designed to save people, insuring we have more useless eaters.  This should turn out well.

Skateboarder's picture

"Feeling down? Take this pill. It'll cheer ya right up, pal."


*cue lifetime of enslavement to bigPharma*

Wakanda's picture

I'm optimistic about a cold, Blue Moon harvest pumpkin ale.

Skateboarder's picture

If you haven't yet, please try the Hobgoblin ale from Wychwood brewery (UK). One of the tastiest beers ever for wintertime.

Their motto even goes "Afraid you might taste something, Lagerboy?" ;)

fonzannoon's picture

skateboarder is your dow 5k call predicated on the fed bailing out of QE and letting markets clear or do you think the market finally throws in the towel somehow even with him pumping massive amounts of morphene into it?

stant's picture

well here in ky we tend to get optomistic after a bit of burbon. but he must be chasing it with moonshine

IndicaTive's picture

I usually end up buying some overpriced silver on ebay after a bit of burbon. 

Rathmullan's picture

Until the fed sells the crap it purchased, it has monetized the US debt period.

Most alcoholics, I mean, academics, assume the fed as a given. A good academician would look at the behavior of the fed, competition (or lack thereof) in the financial intermediation industry and the rationality of a fiat currency in questioning a system that has a "fed" in the first place.

western kentucky (aka methland) indeed (still better than "haved" u) 

Martdin's picture

Lehman is fine, housing isn't in a bubble, dotcom boom etc... Stop me if I'm going in the wrong direction.

ebworthen's picture

"We needn't worry about those icebergs, because the Titanic is unsinkable."

FED intervention is just that, INTERVENTION.  How do you have a market with intervention?

When the FED and CONgress intervened to prop markets and reward the shadow banking system for their skullduggery they prevented any clearing of the market.

Why can't these fools see the simple facts?

Do they really believe this cotton candy spun fairy tale that the FED saved anyone or anything other than the bankers?

Their heads are very far down the hole.