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Guest Post: The Global Status Quo Strategy: Do More Of What Has Failed Spectacularly

Tyler Durden's picture





 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--has only one choice: do more of what has failed spectacularly.

A key goal of propaganda is to mystify and obscure the Power Elites' real quandary and agenda. For example: we're just trying to help you out here, folks, by inflating another "wealth effect" bubble that will make you feel more prosperous. You're gonna love the warm fuzzy feeling of a return to the good times, even if you own zip-zero-nada in the way of productive assets.

Or: we're raising your taxes and expropriating your money via inflation to stabilize the system that benefits you. (And yes, you may kneel and kiss Janet Yellen's ring.)

The current level of mystification is truly extraordinary. But fortunately, oftwominds.com owns a demystification device that scrubs out the mystification, leaving only stark, unforgiving reality:

1. The global Power Elites know reform is necessary, but the risks of reform are unacceptably high. Why are they unacceptably high? The Status Quo players might lose power and perquisites, and that is unacceptable. These include crony capitalists, cartels, quasi-monopolies, public unions, state fiefdoms, the banking sector and assorted other predators and parasites.

In other words, real reform is impossible because that would implode the Status Quo.

2. Doing nothing will also bring down the Status Quo. Now that the global Status Quo is entirely dependent on rising debt to fund state deficits and marginal growth of investment and consumption, the Status Quo has been backed into a corner: expand debt or die.

Since households and companies can decide not to borrow more money even if they qualify to borrow more, it falls on the central states to borrow and blow money to keep their economies from imploding. This stupendous borrowing then falls on the central banks, which must monetize most of the state debt to keep interest rates low and force investors to chase risky assets and savers to squander their precious capital on gew-gaws and trifles, otherwise known as "aggregate demand" to the Keynesian Cargo Cultists dancing around Krugman's campfire.

3. Since the only endgames to ballooning debts and declining household incomes are runaway inflation or renunciation of debt, the Status Quo has only one choice left to preserve its neofeudal arrangement: do more of what has failed spectacularly, i.e. inflate more asset bubbles as a way to mask the system's phantom collateral for a few more months or perhaps years.

Unfortunately for central banks and their politico cronies, serial asset bubbles face the headwinds of diminishing returns. All the Fed and Federal agencies had to do to launch the first housing bubble was lower interest rates and encourage subprime mortgages.

Now it takes the Fed buying trillions of dollars in impaired mortgages, lowering interest rates to zero, guaranteeing FHA loans to anyone with a pulse and a paycheck, etc. just to keep housing from flatlining. See that little blip up that trillions of dollars in subsidies and intervention bought the Status Quo?

The other serial bubble in progress is of course stocks, which recently scored nominal new highs even as the adjusted-for-inflation (consumer price index) market notched a classic diminishing-return lower high:

4. The only metrics that count are debt and the ability to service that debt. Households have this tiny little problem known as declining income that makes it impossible to service more debt unless interest rates fall to near-zero. Presto-magico, real interest rates (adjusted for inflation) are near-zero, and can't fall any lower.

(Note that this is median income, and since only the top 5% have seen an increase in income, the lower 95% have actually experienced a steeper decline than shown here.)

That means the Fed has run out of room to lower rates. From here on, households will only be able to service more debt if their income rises. Alas, with full-time employment (the only measure that counts--sorry, Federal bean-counters, political lackeys and media toadies, 12-hour a week minimum-wage barista jobs and self-employed people with net earnings of $154 a year don't count) back to 1980 levels, that is not even a remote possibility.

That leaves the global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--only one choice: do more of what has failed spectacularly. Yes, it will fail spectacularly again, but until then, the mystification machine is running full tilt.

 


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Tue, 04/23/2013 - 10:45 | Link to Comment Mercury
Mercury's picture

And while you were looking that way....

 

Bloomberg has worked himself into a suspended state of sexual arousal at the prospect of expanding executive police powers:

 

If the terrorists take away your freedoms, they win. If the terrorists give the government an excuse to take away your freedoms, we win. Got that? http://politicker.com/2013/04/bloomberg-says-post-boston-interpretation-of-the-constitution-will-have-to-change/

Tue, 04/23/2013 - 10:48 | Link to Comment AlaricBalth
AlaricBalth's picture

."Insanity: doing the same thing over and over again and expecting different results." - Albert Einstein

Tue, 04/23/2013 - 10:51 | Link to Comment Mercury
Mercury's picture

It's more like...

The Founders: The state still will find the urge to go into business for itself irresistible.

Tue, 04/23/2013 - 10:56 | Link to Comment rajat_bhatia
rajat_bhatia's picture

Dude, 'the founders' are a relic! You're impeding progress by bringing their name in everything! 

Tue, 04/23/2013 - 11:03 | Link to Comment toys for tits
toys for tits's picture

Created by genuises, run by idiots.

Tue, 04/23/2013 - 11:07 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

Created by genuises, destroyed by idiots.

Fixed it for ya.

Tue, 04/23/2013 - 11:54 | Link to Comment AlaricBalth
AlaricBalth's picture

Our current financial system has been constructed to produce the outcomes we are getting. It is by design. The designers are the ones who are reaping the benefits. Different results require a completely different composition of our economic model.

A good start would be eliminating corporate "personhood", and bringing back some form of the Tillman Act, which would disallow corporate contributions to political campaigns. I know its a long shot...

Tue, 04/23/2013 - 11:59 | Link to Comment outamyeffinway
outamyeffinway's picture

But realize that "terrorism" is like one big circle jerk.

 

"You terrorize us and we'll pass punitive laws against our citizens strengthening Gov and we'll do the same for you!"

 

Realize that and your analysis changes.

Tue, 04/23/2013 - 12:39 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

Created by geniuses, destroyed by apathy is actually more apropos.

Tue, 04/23/2013 - 11:37 | Link to Comment smlbizman
smlbizman's picture

bloomy is right...it is so much easier to get probable cause if they search us first...the other way takes soooo much time...

Tue, 04/23/2013 - 11:03 | Link to Comment Mercury
Mercury's picture

But men like Bloomberg are much, much older.

Tue, 04/23/2013 - 12:02 | Link to Comment gwar5
gwar5's picture

Marx is a relic. He was a racist along with your other heroes Che, Castro, Woodrow Wilson, and Hitler. You're a relic! May you all rust in peace.

Tue, 04/23/2013 - 10:55 | Link to Comment adr
adr's picture

Insanity is doing the same thing over and over again knowing you will fail.

If you keep doing the same thing without understanding that it failed before, you're just fucking stupid.

Tue, 04/23/2013 - 11:07 | Link to Comment Mercury
Mercury's picture

Failure? The people who control the state and central planning are more powerful than ever.

Tue, 04/23/2013 - 11:14 | Link to Comment mayhem_korner
mayhem_korner's picture

 

 

Yes, but that's "transitory".

Wed, 04/24/2013 - 05:21 | Link to Comment Colonel Klink
Colonel Klink's picture

Haven't you figured it out?  It's failure by design, with no penalty clause for the policy makers other than losing a job.  Only to gain a better paying one once they do.

Tue, 04/23/2013 - 11:02 | Link to Comment lead salad
lead salad's picture

Quick, look behind you....Anthony Weiner has a new Twitter account...speaking of failures:
http://m.weeklystandard.com/blogs/anthony-weiner-creates-new-twitter-acc...

Tue, 04/23/2013 - 11:04 | Link to Comment toys for tits
toys for tits's picture

Thank goodness, I have been running low on dick pics.

Tue, 04/23/2013 - 10:55 | Link to Comment BlueStreet
BlueStreet's picture

The 'Power Elites' don't give a fuck about the people as a whole, that's understood.  But most of them have children, and possibly grandchildren, and they are basically saying they don't give a fuck about them either. 

Tue, 04/23/2013 - 11:07 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

Their children and grandchildren will be just fine.  Its OUR children and grandchildren that will be fucked at the expense of THEIR children and grandchildren.

Tue, 04/23/2013 - 10:51 | Link to Comment Sudden Debt
Sudden Debt's picture

Yeah... but look at the bigger picture... we saved banks... for now...

Tue, 04/23/2013 - 10:51 | Link to Comment adr
adr's picture

You know, I keep trying to accidentally nail my wife in the ass. I keep failing. The straight approach will never work.

I guess I need to try more quantitative easing.

Tue, 04/23/2013 - 10:57 | Link to Comment Sudden Debt
Sudden Debt's picture

2 bottles of red wine usually do the trick...

Tue, 04/23/2013 - 10:59 | Link to Comment Isotope
Isotope's picture

My favorite pickup line, "Does this rag smell like chloroform to you?"

Tue, 04/23/2013 - 11:08 | Link to Comment Sudden Debt
Sudden Debt's picture

My favorite pickup line: "HERE'S 20 EURO FOR A CAB! YOU'LL NEED IT TO GET HOME WHEN I'M DONE!"

Tue, 04/23/2013 - 11:09 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

@adr, LOL!!  Honey, you are so TIGHT tonight!!

Tue, 04/23/2013 - 10:59 | Link to Comment Shevva
Shevva's picture

If you hadn't come to an agreement before you got married you ain't going to start now.

Try your local corner with the world economy going the way it is you can bet your arse someones selling it cheap.

Tue, 04/23/2013 - 11:18 | Link to Comment mayhem_korner
mayhem_korner's picture

 

 

Indeed.  The "market top" is always in right before you walk to the altar.

Tue, 04/23/2013 - 10:54 | Link to Comment Chupacabra-322
Chupacabra-322's picture

The Federal Reserve Charter expires on December 31, 2013 at 11:59 P.M.

 

After that, the Illusion and deception can continue.  It must be voted on by Congress.  Will they re cerifiy the Charter?

Well, they passed it the first time before a Christmas Holiday.

Will this be a TBTF Bank Holiday or Fasle Flag Re Certification Federal Reserve Charter to continue the Illusion?

 

“The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.”
? Frank Zappa

 

 

 

Tue, 04/23/2013 - 11:07 | Link to Comment Dr. Engali
Dr. Engali's picture

The federal reserve does not have a charter that ends. In 1927 congress passed the Pepper McFadden Bill which extended the charter to in perpetuity.  It can only be revoked by congress or the franchise is forfeited if they violated the law....since they own congress and write the laws I don't see that happening.

Tue, 04/23/2013 - 12:49 | Link to Comment Chupacabra-322
Chupacabra-322's picture

@ Dr. Engali,

Do you have a limk for:

"In 1927 congress passed the Pepper McFadden Bill which extended the charter to in perpetuity. "

Tue, 04/23/2013 - 10:57 | Link to Comment adr
adr's picture

You think the Fed believes they even need the Charter anymore?

90% of the tards in Congress don't even know what's in the Constitution. Do you think they even know what the definition of a Charter is?

Maxine Waters will probably think Ben Bernanke's holiday vacation package was cancelled.

 

Tue, 04/23/2013 - 10:55 | Link to Comment Dr. Engali
Dr. Engali's picture

Just when you think this thing is teetering on the brink of collapse TPTB pull something out of their ass and kick the can another few months. Their ability to keep this up has been astounding to me.

Tue, 04/23/2013 - 11:01 | Link to Comment adr
adr's picture

I'd love to say they pulled something out of their ass, but that actually says something of substance exists.

This was TPTB eating egg salad for lunch and clearing out the room.

The can is kicked only because nobody can actually brave the stench long enough to affect anything.

Tue, 04/23/2013 - 11:05 | Link to Comment espirit
espirit's picture

Keep stocking and stacking, it's the only way keep one's sanity.

Of course, there is the bluepill.

Tue, 04/23/2013 - 11:21 | Link to Comment mayhem_korner
mayhem_korner's picture

Just when you think this thing is teetering on the brink of collapse TPTB pull something out of their ass and kick the can another few months. Their ability to keep this up has been astounding to me.

 

So who will be more surprised when the laws of mathematics finally overcome the scheme - you, or them?

They cannot keep it up long enough for it not to matter to me and my kids.

Tue, 04/23/2013 - 12:03 | Link to Comment smacker
smacker's picture

Agreed.

The question always on my mind is exactly how much repair work do they actually have to carry out to prevent the whole house of cards from collapsing?

There are plenty of people who think that a few rolls of duct tape is sufficient to keep the fantasy show on the road for another generation. This could go on for another 10 years without any serious resolution.

Tue, 04/23/2013 - 10:55 | Link to Comment Skin666
Skin666's picture

"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."

Ludwig Von Mises on the crack-up boom.

Tue, 04/23/2013 - 11:09 | Link to Comment The Dancer
The Dancer's picture

Yes, the masses don't have a clue what's going down...but do we the presumed informed know....how many truly grasp the scope and dept of this global takeover that is unfolding right in front of our eyes...this is not petty politics or merely just kicking the can down the road....JMHO, it seems bigger than that to me....it's so controlled and powerful...like a giant steamroller leveling all opposition(ie...shorts and anyone not playing their brand of ball). This is for all the marbles...control of the planet---both public and would-be private---It appear to me that the paradigm may have changed "this time" in the sense of it's scope and power that the Internationalist Elite weild at this time in all the markets.  Would like to hear comments...and I've got my hard hat on!

Tue, 04/23/2013 - 11:54 | Link to Comment Antifederalist
Antifederalist's picture

Agree.  This is for all of the marbles.  Gold market shows that.  WAR by other means.

Tue, 04/23/2013 - 10:59 | Link to Comment observer007
observer007's picture

off topic:

 

Interview Mother of Tamerlan and Dzhokhar Tsarnaev: My Sons Not guilty

Mother: "My kids would never do anything like that. I know my kids. They never would do this."

Full Interview, just releassed:
http://homment.com/tamerlan-mother

Tue, 04/23/2013 - 11:52 | Link to Comment gwar5
gwar5's picture

We may never really know what the fuck happened in Boston, but what happened in Boston happens every single day somewhere around the world by fanatic muslim perps. It's a global problem and it's been going on for centuries.

 

Would be easy to see how/why the CIA would be tempted to manipulate terrorist events to be the excuse for Martial Law instead of the coming economic meltdown.  All they have to do is let the perps slip through and do their thing. Al-Qaeda would not oppose that either.

It's already been 20 years since the first WTC bombing and here we still are. Caliphate ain't just a dismal economic future for the Golden State. 

Tue, 04/23/2013 - 11:00 | Link to Comment buzzsaw99
buzzsaw99's picture

it hasn't failed FOR THEM

Tue, 04/23/2013 - 11:05 | Link to Comment gwar5
gwar5's picture

Instead of liquidating the banks and starting over they're liquidating the middle class to start over. Banker fascism means never having to say you're sorry. Real crises is fascism vs self government.

O/T Sinclair reports a large holder of gold just went to a major Swiss bank to remove his allocated gold and was denied. Also, Switzerland just revived a 1934 bank law that allows them to confiscate depositor money. Confiscations on the way.

Tue, 04/23/2013 - 14:49 | Link to Comment GreatUncle
GreatUncle's picture

Remove the middle class and you get left with just two classes...

SLAVES & SLAVE OWNERS.

Tue, 04/23/2013 - 11:10 | Link to Comment poor fella
poor fella's picture

Bong yields are not co-operating with the Magical Levitation Tour drug overdose affecting the markets.  

This fucker's so broken, it can never be fixed...  think about it.  That's why there has to be a blow off top of destruction. Nobody trusts this steaming pile of manipulated garbage.  "It's ART - no, it's SHIT"

Tue, 04/23/2013 - 11:15 | Link to Comment mayhem_korner
mayhem_korner's picture

Do More Of What Has Failed Spectacularly

 

I was sure there was going to be a pic of Rex Ryan for this post.

Tue, 04/23/2013 - 11:17 | Link to Comment The Dancer
The Dancer's picture

gwar, YES! I do mean for all the marbles/gold! War can not be far off in some real sense...

Tue, 04/23/2013 - 11:19 | Link to Comment MarsInScorpio
MarsInScorpio's picture

When people diss ZH it is almost always because they cannot grasp the time it takes for a global financial system to implode - especially when the Status Quo can print unlimited amounts of fiat to "paper over" their scam.

 

The truth is that anyone who fails to read - and heed - the confluence of thought found in ZH, is a fool.

-30-

Tue, 04/23/2013 - 11:20 | Link to Comment orangegeek
orangegeek's picture

Euro markets keep climbing - up between 1.5% and 2.5%.

 

And the gong show continues.

Tue, 04/23/2013 - 11:21 | Link to Comment polo007
polo007's picture

http://www.safehaven.com/article/29588/4-year-cycle

The Four Year Stock Market Cycle

Prior to last week's detour to discuss the gold market my April commentaries have been about Lindsay's long cycle and how that matches what we all normally think of as secular bull and bear markets. The second commentary in this series discussed finding the high in the current long cycle and the conclusion was that a high should be found between March and September of this year. Before going any further with Lindsay I want to spend this week to see if we can confirm this forecast using another common cycle approach (non-Lindsay), the four-year cycle.

The vertical lines on the historical chart of the Dow Industrial Average (below) represent the four year cycle. There are a few cycles which contract closer to three years and two which expand to five years but the overwhelming majority of cycles are four year cycles. There have been only two times in over 100 years that the cycle has contracted to two years and those are highlighted with red vertical lines. The final low in each two-year cycle is, coincidentally, a time when Lindsay's long cycle was experiencing a shift as well.

The solid green lines are the focus of this week's commentary. Notice that in these two instances the cycles have inverted. That is, instead of a cycle which extends from low to low, these cycles extend from a low to a high. What could have caused this inversion? During WWII the Fed became heavily involved in buying treasury bills for the first time. By 1946 the Fed had bought virtually every T-bill in existence in order to help keep interest rates low for the war effort. We all know of the Fed's recent efforts (QE to Infinity!) to jump start the economy by buying treasury debt. The final green vertical line on the chart shows that it has been four years since the last four year low and we are currently at a high. It is another sign that the market has reached a top.

Historical Chart of the Dow Jones Industrial Average:

http://www.scribd.com/doc/137554488/Historical-Chart-of-the-Dow-Jones-Industrial-Average

Tue, 04/23/2013 - 11:33 | Link to Comment nakedshorted
nakedshorted's picture

Funny, you can spend a 10th of that once these roll out.  http://www.butterflylabs.com/

Tue, 04/23/2013 - 11:55 | Link to Comment sbenard
sbenard's picture

Great book for understanding log-periodic style bubbles like the current stock market. I'm reading it now!

http://www.amazon.com/Why-Stock-Markets-Crash-Financial/dp/0691118507

Tue, 04/23/2013 - 12:01 | Link to Comment Tombstone
Tombstone's picture

There is no doubting that we all are on the Titanic and Benny is the driver.  As long as he keeps feeding dollars into the stoker, the ship will rumble forward.  I am even beginning to believe that the FED can melt icebergs.  So, no problem getting to where we want to go, wherever that is.

Tue, 04/23/2013 - 12:20 | Link to Comment AgShaman
AgShaman's picture

"Technocrats of world unite!"

Tue, 04/23/2013 - 12:40 | Link to Comment LooseLee
LooseLee's picture

The status quo has got to go. It is as simple as that...

Tue, 04/23/2013 - 13:05 | Link to Comment polo007
polo007's picture

http://blogs.marketwatch.com/thetell/2013/04/23/it-will-take-decade-to-return-fed-balance-sheet-to-normal-goldman-economist/

The swollen Federal Reserve’s balance sheet won’t return to pre-crisis norms until 2022, according to projections published Tuesday by Kris Dawsey, a Goldman Sachs economist.

The forecast assumes the Fed isn’t likely to stop buying securities until well into 2014, resulting in a balance sheet well over $4 trillion.

Another key assumption is the Fed will shift its policy stance and rely mainly on “passive” portfolio runoff from maturities and pre-pays to shrink its balance sheet when the time comes, instead of outright sales.

The last exit strategy, published by the Fed in 2011, projected the central bank would sell mortgage-backed securities on its balance sheet over a period of 3 to 5 years.

Over the last few months, Fed Chief Ben Bernanke and other officials have begun suggesting a more passive approach to shrinking its balance sheet, in order to avoid adverse effects on market functioning.

This will result in a very slow normalization of the balance sheet, Dawsey said.

There will be essentially no natural runoff of Treasurys until 2016, and the mortgage-backed securities portfolio will mainly wind down due to pre-payments, he said.

The size of the mortgage-backed portfolio will decline at a rate of 13% per year, Goldman projected. This is slower than the rate of pre-payment seen in recent years, but a higher interest rate environment will mean fewer borrowers will be “in-the-money” on their prepayment options and refinancing activity will slow.

Total Dollar Amount of All U.S. Treasury and Mortgage-Backed Securities Held by the Federal Reserve:

http://www.scribd.com/doc/137574040/Total-Dollar-Amount-of-All-U-S-Treasury-and-Mortgage-Backed-Securities-Held-by-the-Federal-Reserve

Tue, 04/23/2013 - 18:57 | Link to Comment Bazza McKenzie
Bazza McKenzie's picture

Anyone who tells you the Fed is ever going to stop buying securities is either a moron or a shill for TPTB.  The US government can no longer function without the Fed monetizing its debt and giving it 40% or more of the money it wants to spend.

If the Fed stops buying, interest rates will immediately jump to 70s levels or above, totally crushing the "value" of all existing paper financial assets, destroying all the big casino banks and most of the financial markets, and putting the US in a situation where interest on new borrowings will soon consume all its taxes.

The Fed has two choices.  It can stop monetizing and immediately precipitate an economic collapse of the bubble it has been blowing.  Or it can keep blowing the bubble until it bursts and then claim the explosion was totally unexpected and unpredictable according to its models.  No political animal will make the first choice.

Tue, 04/23/2013 - 13:30 | Link to Comment polo007
polo007's picture

http://www.pionline.com/article/20130422/REG/130429982/feds-policy-jeopardizes-achievement-of-its-goals-and-risks-upending-markets

Since the global financial crisis, central banks around the world have been forced to take dramatic and unprecedented actions to stabilize markets and shore up faltering economies. As a result, a high degree of global monetary policy accommodation has been part of our economic landscape for years, and likely will remain so for some time.

That said, a wide variety of asset classes are beginning to show signs of disconnect from fundamental valuation underpinnings as a result of these policies, and it's increasingly clear that policy actions are starting to distort fixed-income markets in particular. Moreover, in the U.S., the Federal Reserve is unlikely to achieve its stated labor market goal of 6.5% unemployment any time soon, largely due to structural trends that hamper rapid employment recovery. Therefore, and perhaps ironically, the Fed's policy goals might be better served over the medium term if the central bank were to slowly begin reducing its quantitative easing program and allow interest rate markets to begin a process of normalization.

There is little question that in the aftermath of the financial crisis the Fed's zero-interest-rate policy, its alphabet soup of emergency liquidity programs and its early rounds of quantitative easing combined to help stave off an economic disaster much worse than that experienced. Also, in the absence of fiscal support due to political paralysis in Washington, the Fed's asset purchases have bolstered markets through the eurozone crisis and other troubles.

Nevertheless, we have now arrived at a point in which household debt levels in the U.S. are moving closer to historic norms, nominal gross domestic product is growing, household net worth has dramatically recovered from crisis lows, and corporate earnings and margins are strong. Further, the original site of financial crisis trouble, the housing sector, appears to be staging a legitimate rebound, and indeed median home price affordability has come back to its longer term, or 1981-2000, average. From this standpoint, the Fed's desire for a continued wealth effect might prove counterproductive, as it risks excessively distorting markets through asset price inflation and it hampers true price discovery mechanisms.

Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy, from corporate treasury departments and pension funds, which have either had to take greater risks to meet their return targets or risk facing negative returns after inflation in purportedly safe assets, to households attempting to save for future liabilities. Beyond capital flow distortions, I have long argued that Fed policy is having a significant impact on bond market supply-and-demand dynamics. This impact is most obvious in sectors such as U.S. agency mortgage-backed securities, where Fed purchasing in recent months has comprised between 40% and 60% of the gross issuance in that segment of the market, but dislocations can also be seen in a variety of other sectors. Generally speaking, demand for fixed-income assets has continued to be strong, but net supply remains relatively low, particularly when accounting for Fed purchases. Moreover, a greater degree of interest-rate risk has crept into commonly tracked bond market benchmarks, adding risks to portfolios in exchange for meager compensation.

Still, what is the ultimate payoff for the price of potentially distorted markets? Will the Fed's stated goal of improving labor market conditions be met as a result of its policies?

Unfortunately, I do not believe current policy will aid in resolving job market struggles more than at the margin. The U.S. labor market recovery suffers not merely from uncertainty, or from lack of sufficient aggregate demand, as contended by many, but rather it faces an array of structural headwinds that are likely to be overcome only in time. For example, most of the payroll gains witnessed since the beginning of the labor market recovery have come in sectors not directly affected by the financial crisis, whereas the sectors of the economy most directly disrupted have struggled to adjust to the new environment. And while the economy grows and labor markets slowly improve, the labor force should also expand at a clip that might keep the unemployment rate unusually high and the Fed accommodative for too long.

Tue, 04/23/2013 - 13:35 | Link to Comment Seize Mars
Seize Mars's picture

Speaking of distractions and smoke screens, notice how North Korea is gone, baby gone. It didn't work to herd currency cats into the USD fiat. So, they just went with another attack against Americans in Boston, with a full on paper gold monkey hammer on order to cover looming delivery default at crimex. Nice. Oh and also while we are aghast at another government attack against Americans (two deaths) there was a cruise missile strike against a Texas company that had a fair shot of lawsuit success against Monsanto. Boom, 60 dead.
'Murica.
Hell.

Tue, 04/23/2013 - 19:59 | Link to Comment dadichris
dadichris's picture

promoting the "wealth effect" = centrally planning your economy = fail

 

 

Do NOT follow this link or you will be banned from the site!