Comment Of The Day: On The Self-Destructiveness Of Fed Policy

Tyler Durden's picture

From Popo, as commented earlier

If all public companies were both efficient and trustworthy, Ben's plan might actually work.   But Bernanke has never worked for a public company and nor is he an experienced trader.  Therefore his effort to put wealth towards productive purposes will simply add to the massive bonfire of malinvestment, fraud, mismanagement, corporate graft and executive fleecing.  What Bernanke fails to understand about his master plan is that corporations are not able to invest any better than people in environments where profits are irrational and unearned.  These policies create corporate asset bubbles in acquisitions, material, personnel, technology, inventory and in every conceivable expenditure.  Bernanke is creating an unprecedented era of corporate inefficiency. 


What creates real efficiency and competition are not eras of wealth and largesse, but eras of scarcity and change.  A good analogy is that war creates better armies and better weapons, not prolonged periods of peace.   Bernanke of course has zero understanding of what happens to large companies when financial reality is made irrelevant, and capital is made plentiful.  (Growth and efficiency are by no means a logical result). This is what happens when academics who are deeply inexperienced in business run monetary policy designed to stimulate business.   The market is going to bend him over the table and humiliate him eventually.  And then all that capital that he injected into the market is going to evaporate, and a generation of Americans will be financially obliterated.

* * *

This is a delightfully concise evaluation of the practical implications of ZIRP/NIRP from an economic standpoint, and why it is self-destructive. For the market implications of the gross misunderstanding of market psychology by central planners, here are our prior thoughts:

"Presenting The Fundamental Flaw In The Fed's Thinking"

This one simple chart below shows what is possibly the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.

The chart above shows the return of two simple things: the return of 4.25% 30 Year Bond issued November 2010... and the S&P.

As is vividly shown on the chart, the return of the long-bond is nearly three times greater than that of the broader equity market in 18 short months!

And therein, ladies and gentlemen, lies the rub.

Recall that Bernanke said something substantively as follows:

"When our policy response lowers interest rates on govt bonds, it induces market participants to take more risk.  Someone selling their govt bond to us may go out and buy a corp bond, thereby lowering spreads. A bank selling their govt bond to us may go out and make a loan..." 

There is one problem with this logic: it is dead wrong. Because instead of forcing investors to rush out of the bond market, which potentially has much more upside embedded (the 30 Year is yielding 2.7% right now: this means the actual price of the 30 Year can continue going up and up and up), investors, even those "sophisticated" ones at banks, hedge funds, and prop desks who can trade CDS, IR Swaps, variance swaps, swaptions, and things the retail investor has never heard of, are doing something else, and something much simpler, entirely.

They are simply front-running the Fed!

The Fed's entire policy of boosting the economy is a failure for many reasons, but the primary purpose embedded therein - to lift stock markets, will forever be subordinated (to use the parlance of our times) to just frontrunning the Fed, which simply means buy whatever the Fed is buy, and sell whatever (if anything) it is selling.

In simpler format:

  1. Frontrun what the Fed has publicly telegraphed to be doing
  2. ...
  3. Profit

And as long as the Fed continues on the course of LSAP, either unsterilized or sterilized ala Twist, this will continue, and the Fed will continue failing upward.

Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks.

At that point the best purchase, however will not be the stock market, but wheelbarrows.

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flacon's picture

Good job Popo! You made it to ZeroHedge hall of fame! 

vast-dom's picture

If it were all so simple, then QE1 would have fixed everything.

TruthInSunshine's picture

Volcker publicly said Quantitative Easing & Large Scale Asset Purchases were major monetary policy failures just 8 weeks ago while speaking at NYU's Stern School of Business-


At 0:50:25:

Volcker Shreds Bernanke & The Radical Federal Reserve (says they're using "extreme measures" that are ineffective)


I'm sure most of you know this, but it's incredible for a former Fed Head to so savagely & publicly rip a current Fed Head and the other members of the Fed.


francis_sawyer's picture

Just think Popo... Now you can post .jpg's of your butt crack on the Xerox machine for the whole world to see...


When francis_sawyer played Monopoly as a kid, I always strangely chose the WHEELBARROW token... I must be psychic or something...

nope-1004's picture

Congrats Popo.  I read your original comment and thought it was pretty good, but not as good as the one I read last night that went "Hey, just got off work at BAC, what'd I miss?"


Max in St Moritz's picture



These policies create corporate asset bubbles in acquisitions, material, personnel, technology, inventory and in every conceivable expenditure.  Bernanke is creating an unprecedented era of corporate inefficiency.

With all due respect, I disagree with this idea that Bernanke is making corporations inefficient. So, how do you measure this?  Productivity.  Output, per Hour. And then "Profitability" juxtaposed against "Productivity."  Corporate America has NEVER been more lean and more productive and more profitable since 1985, when the following charts started:

That was the manufacturing sector, and here's the business sector:

Non-financial corporations:

Corporate profits:

One of the reasons that unemployment is still a problem is because corporate America today is requiring their employees to handle the workload that, prior to 2008, two or more people shared. Meanwhile, output/hour (productivity) and corporate profits continues their upward climb while the wages of American workers remain flat over time.

The only real exception that I could make is Wall Street.  I wholeheartedly agree that TARP, ZIRP, EQ1, etc. enabled Wall Street executives to raise their middle finger to America, lie that their banks were "well capitalized," take bonuses and run.




WTFUD's picture

B.O.B. (Beware of Ben ) he's TBTB (Too Big to Blow) and i should know!!! Timmy G (BTDT) Been there Done that. Greeeaaat tidings of comfort&joy....

slaughterer's picture

Popo is ZH god of the day.  But tomorrow the world ends anyhow.  

CClarity's picture

Malinvestment is rampant.  Good call Popo!


Relentless's picture

Because by that time, it will be too late to buy anything else that would've helped (Au, Ag, etc.)

Seasmoke's picture

We have already turned Japanese and soon the Chinese will hate us too.

ball-and-chain's picture

Bernanke's in a terrible box.

Stop printing money?  We slide into a terrible deflationary depression.

Continue to print money?  We end up like Japan.

I'm not sticking up for the guy.

He and Greenspan are the major architects of our current plight.

But what's a Fed Chairman to do?

It's a case of pick your poison.

There's no winning.

buzzsaw99's picture

the fed should just die already

cougar_w's picture

The Fed will die the day the US Congress declares itself illegal, disbands, and goes home.

Not one hour before.

WTFUD's picture

The Fed is JPM &Co/Associates
I&I personally do not feel such hostility towards bankers per say,because hubris dictum affords that if you can fuck it, even for a giggle then heh what the fuck; fuck it! fuck it till it hurts ( maybe it's just a man thing!
For some reason i get a perverse tingling thinking of the bank execs getting into work, sitting around the ( forever supper ) table and brainstorming on the next "fuck you joe ".

What gets my back up though is the slippery slime that except only 5% of the booty to sell us down the road.

But heh who deserves the biggest flogging; yep; the asswipe wingers who keep voting for the status quo!

PS the only punishment i would give to the bankers ( well the ones who keep getting caught ( not forking out enough protection lolly ) is a month on Big Brother reality show with tasks designed to give us a glimpse into the Real World.

PPS come tae grips people you gotta love the sheer audacity; better than any Jason Bourne film in my book.

Mind you all that could change if they ever tried to prize my blankety blank chequebook and goldcard away.

A good man like me " knows his limitations". bye

suckerfishzilla's picture

I feel sorry for Uncle Ben and Alan too.  They have provided the ignorant masses with cheap Silver for decades now and there is no one to thank them for it. 

bunnyswanson's picture


The Federal Reserve is a bank.  There are benefits to predatory lending.

Common predatory lending tactics include:

• Selling properties for much more than they are worth

using false appraisals.

• Encouraging borrowers to lie about their income,

expenses, or cash available for down payments in order

to get a loan.

• Knowingly lending more money than a borrower can

afford to repay.

• Charging high interest rates to borrowers that are not

based on their credit history.

• Charging fees for unnecessary or nonexistent products

and services.

• Pressuring borrowers to accept higher-risk loans such as

balloon loans, interest only payments, and steep

pre-payment penalties.

• Targeting vulnerable borrowers in need of cash due to

medical, unemployment or debt problems.

• Convincing borrowers to refinance again and again

when there is no benefit to the borrower, but severe

losses to home equity are accrued.

• Using high pressure sales tactics to sell home improvements

and then finance them at high interest rates.

bunnyswanson's picture

Replace the word "home" with "country."

ajax's picture



@ bunnyswanson: your definition of predatory lending is spot on. Trouble is there has been no predatory lending in the US - none at all. You know and I know, we all know that those jerks who've lost their homes or are losing their homes were sophisticated borrowers just gaming the system!! And the jerks lost!! Predatory lending? What's that? The Fed doesn't believe it exists either.

Karl Bass has a television in his clothes closet. Can you believe he admits to it !??

ajax's picture



Ajax to Ajax:

KYLE Bass - where did that Karl come from ??

dexter_morgan's picture

Yeah, easy for those that have never been victims, or had loved ones that were victims of unspeakable violence, and don't want it to happen to them again. Just phone 911 and if you're still alive 20 minutes later when they get there, they'll take care of you.

1100-TACTICAL-12's picture

He's a global warmer to boot. I guess he's intitled to his own misguided opions.

Solon the Destroyer's picture

Just one generation, and just Americans?  I think popo was being conservative.

cougar_w's picture

The Fed has a long reach, but I think it's correct that mostly Americans are going to suffer from Fed actions.

All the other CB are perfectly capable of destroying their respective sovereigns. I would not want to be anywhere in Europe when the socialist safety net is breached and the streets become lined with unclaimed dead.

Eally Ucked's picture

Financialy America is already obliterated. For some reason, which I don't understand, the world is supporting that pile of nothing. Maybe the reason is that all those people in power got their education in States and they are very attached to theories they were thought.

Mrmojorisin515's picture

"What creates real efficiency and competition are not eras of wealth and largesse, but eras of scarcity and change.  A good analogy is that war creates better armies and better weapons, not prolonged periods of peace. "

I don't see any of the mega multi corps asking for the period of competition or change..... we can't all blame benny boy, he's just doing what he's told.  He was always damned if you do and damned if you dont, both roads lead to destruction for his ilk.  Save monetary system but risk societal revolution with deflation, or destory system but cling to power for a few more years, maybe a decade.  never was any question on how he'd react

Mrmojorisin515's picture

It's here,,,, at this point in tribal life,,,,,,, that all of the context from above comes into play. The "reality" of life on this earth is this: ,,,,,,Some portion of society will use their influence or control of the leaders to make their debts easier to pay. In fact,,,,, it's times 2 for that number of government influencers ,,,, because even the ones that have debt owed to them will try to alleviate an impossible pay back situation to save the ones that owe them face.

You see,,,,, tribal life and the human nature that comes with it ,,,,,,,, will not allow any money system to "completely" destroy the wealth of a good portion of society. Even if everyone is plainly shown that they are going to lose something ,,,,,,they would still opt for the good of the overall tribe. This is why we return,,,, time and again to fiat monetary systems. In the few examples where a gold system brings the harsh reality of loses to bear on a nation,,,,,, usually war is the result. Not a good outcome.

Yes, we can break gold into many small parts,,,,, 'stamp it into coins and circulate gold certificates as money. We can borrow it, lend it and also circulate gold bonds as the economy grows. It is the perfect "weights and measures" monetary system. Exactly representing our productive efforts in every facet of human endeavour. But, when the losses mount, our tribal human tendencies will not allow us to support a government or banking system that forces these real losses on only a portion of the group. Never has,,,, and never will! Without this escape valve, we go to war ,,,,,, internally or on a world scale,,, so we all can share the loss,,, one way or another. As a human society of thousands of years,,, outside of war,,,,, we have learned to inflate our loses upon everyone as a whole,,,,, for the good of the keeping the whole from each others throats. Even to the point of a total loss of the current system,,,,, and all the destruction that entails for everyone.

During the period we are now entering,,,,,we can see all the ugly aspects of a fiat system that is failing its tribe. Look far and wide and witness the various groups ,,,, all jockeying for position as they use whatever influence they have to lessen their own private losses. If this had been a gold system, the outcome would be the same,,,,, as players force their leaders to lessen the gold debts that could not be paid. They would raise the price of gold and inflate their way out of it,,,,,, for better or worse ,,,, come hell or high water.


Apeman's picture

Popo for FED chairman. Or no chairman at all.

dexter_morgan's picture

better yet, no FED at all

dexter_morgan's picture

Remember to wish the Fed a happy 100th birthday this Sunday, Dec. 23. Wonder if all the Fed govs get together and celebrate Festivus -  waxing that aluminum pole and airing grievances and participating in feats of strength on that day?

D'oh, correction, only 99th birthday.......math is hard......

NOPOMO's picture

Ben B. is smarter than all of collective intellect.  

Just keep giving those EBT handouts and fostering a society that wants someonelse to do the heavy lifting.  At some point the Asians will decide they will no longer due all our heavy lifting.

Yen Cross's picture

 Who in the hell is front running the ECB, Re; European perpheral bond markets? The ECB has done a pretty good snow job on the "European Bond Markets". When will the ECB be forced to step up and put it's money where it's mouth is?

Darth Mul's picture

The US government is allowed to print its own currency.

The Federal Reserve Act is unconstitutional on its face but has lasted 100 years.


It might be time for a new challenge.



Also - the Constitution guarantees the states a republican form of government


Gentlemen, I submit to you that this clause may form the basis of legal actions against DHS and executive orders {along with SC precedent from the Truman steel mills case}


I keep wondering, again, about this Obama character.  1 term in the senate with hardly any achievement and 2 autobiographies... appears to me to be more or less a classic narcissist with no real regard for libertarian or republican  {by which I mean the Constitution's govt of limited and enumerated power} ideas...


Who's behind his throne?  And, broken record, why is just about every head of a federal agency having to do with banking/finance a Jew, and why did both he, Biden and Michelle have jewish chiefs of staff, advisors and counsels>?

Seriously - look into it yourself, and think about it yourself.  2% of the pop.  


Look at our UN vetoes.  Look at our Congress grovel before Bibi, who stole nuclear material from the US and sold US missile tech to China.

The greatest trick the ZOG ever played......

blunderdog's picture

Obama was the bankers' candidate.

cougar_w's picture

So was Romney.

Whut. You actually thought the bankers were going to let anything like a fair election mess up their world?

blunderdog's picture

My point was just that Obama was the bankers candidate in '08.  His origin, if you will.

geewhiz's picture

"And then all that capital that he injected into the market is going to evaporate, and a generation of Americans will be financially obliterated." Benny and his shadow bosses know this. They did not get that rich by being stupid. Does Greenspan look like he's suffering to anyone? This is what they do for thier bosses. Maybe everyone who did not or could not take measures to protect themselves from the ponzi scheme will be broke, but not Benny and the boys who would be the recipients of a nice chunk of that wealth transfer. I bet they won't have thier loot tied up in paper gold iou's or treasuries either. Whats more I bet when the dollar gets ravaged they'll just lop off some zeros and run the ponzi again cause they're that smart and the sheeple are that stupid.

nmewn's picture

"Bernanke of course has zero understanding of what happens to large companies when financial reality is made irrelevant, and capital is made plentiful. (Growth and efficiency are by no means a logical result). This is what happens when academics who are deeply inexperienced in business run monetary policy designed to stimulate business.

The market is going to bend him over the table and humiliate him eventually."

As only a denizen of ZH can uniquely put it...well stated popo ;-)

Jendrzejczyk's picture

Golf clap for Popo.

Clint Liquor's picture

The title of this article is irritating. If FED policy was simply 'self destructive', the world would have something positive to look forward to.

Disenchanted's picture




"Fed Policy self-destructive"


Fed Policy was a 100 year plan from the coming to fruition. The plan to destroy a nation.


"The American economy is in the grip of what the eminent Harvard Professor Joseph Schumpeter many years ago called, ‘creative destruction.' "

Alan Greenspan
Chairman, Federal Reserve Board
FranSix's picture

One thing that you might say about corporate bond markets, is that the inflow of capital may very well be curtailed, should bond markets sell off.  They haven't risen on bond market declines so far, since QE4.  People can borrow money to sell bond markets short, just as they may borrow to buy long, especially if you're a futures maven.  Of course, if corporate bonds no longer attract the same liquidity, then earnings immediately fall off, and bonds can become illiquid.

Should something like this occur, there's not much choice in a limited category of special vehicles that preserve value in a bond market decline, a corporate bond liquidity trap, a stock market sell-off and a currency crisis.

I prefer not to think about it much.

cougar_w's picture

"What Bernanke fails to understand about his master plan is that corporations are not able to invest any better than people in environments where profits are irrational and unearned. "

Let us pretend for a moment that Bernanke actually does get that part, since it would seem to follow from first principles after all.

Is there any other reason he would be doing all this given the above?

For 5,000 years the merchant class practiced an "over the horizon lay the promised land" mentality. They could grow their markets simply by running their trade caravans a little further up the road. When the world was still large that worked, but the world is now very small in comparison to modern merchants (conglomerates) and the rules of this game have changed. I get the sense that global corporations have managed to saturate the world with products and services, and are having a hard time meeting growth targets. There is no "promised land" or untapped market now. But at the same time we allowed global corporations peddling abstractions (investment) and services (banking) to become the defacto economy, divorced from anything physical or real. In that new world order you might be able to create a new horizon to cross if you swamp the landscape with imaginary customers in the form of hot money.

However the banks cannot buy from each other with money they loan to each other. That's too small a closed box. If a company's divisions were buying services from each other and booking it all as profit, it would constitute accounting fraud. But what if nobody saw it that way and let it go? It could go on a long time actually, corporations would buy and sell each other's services not with real profit from production but with Benny Bucks, and if nobody checked the books it would be fine, until ... when? When does it not become fine?

Popo is absolutely correct when saying that scarcity and change are the parents of innovation. All the spinning and whirling of the big banks and global corporations will not manage to move real goods into the hands of actual consumers, who in any case are not profiting from the Fed's largess but rather suffering from it, and therefore will not generate an actual real four-square bonafide economy. However such a real economy is indeed going to be created ... on the micro scale, locally or regionally, due to real shortages and scarcity of goods. Started by small merchants moving their useful goods in carts pulled by oxen between towns. Sound familiar? It should.

The unicorn global economy is going to die. Because nobody will need it. Governments that prop it up will die first, because they are no longer relevant to common people. And when the entire thing implodes one night in some massive legislative convulsion not many will notice and fewer will care, it having become an abstract game played by abstract people using abstract instruments to extract abstract profits from unicorn shits.

Gone with a whimper, not with a bang.

Things will get interesting again. Production and retail will become real and interesting again. Frontiers will become real and interesting again. Life will become authentic and interesting again.

Interesting with a bang, not with a whimper.

geewhiz's picture

Yup, I agree. A new kind of parallel underground ecomony run on bitcoin and peer to peer currencies governments and thier controllers will be unable to harness. Almost kind of like Galts Gulch. Its out there widespread and alive using cash now and as they try to tighten the net by substituting traceable digits for cash untraceable market driven digits will step in to fill the void. Can't hurt to keep a few bitcoin along with the bullion.

cougar_w's picture

About a year ago I read in the paper where banks were lobbying to get laws passed to regulate (ie destroy) the tiny "check cashing" industry that has sprung up to service the needs of people getting checks for wages but who do not have a bank account, or who want to take out a payday loan against their next week's wages. I'm sure there are abuses here as everywhere money changes hands (seems especially ripe for organized criminal syndicates) but my very first thought was: the global shadow banking system that controls the world's monetary system is trying to murder in its crib an emerging underground shadow banking system intended to serve the needs of real people.

tradewithdave's picture

If it runs on the world wide web, then Al Gore controls it.  Don't be fooled... jus' sayin'

ActionFive's picture

Watch for buying spikes in the miners/fed shorting as big buyers now denied phyzz amid market inflation/ try to buy what is left underground.