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Why Policy Has Failed

Tyler Durden's picture




 

Put down the Sunday newspaper; grab a pot of coffee; and call 'mom' and tell her she has to read this. Doug Rudisch has written a far-reaching summary of the true state of the world and 'why policy has failed'. Simply put, there is no faith in the system; real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already.

Something has to happen to restore our collective faith. And more short term fixes and empty promises during campaign speeches and the State of the Union addresses are not where to do it. Fed policy has worked with respect to increasing the values of liquid securities and real estate, and failed to date with respect to employment and capital investment. This latest massive and expensive effort by the government and Fed designed to encourage CEOs to increase risk-taking has done the opposite and scared them into a shell or at a minimum just not worked. Whatever CEOs are afraid of; ZIRP, QE, building more roads and bridges and paying out more entitlements is not making them unafraid of those things.

We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels. We wish we could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, we don’t think the U.S. realizes it has a problem.

 

Via Michael Krieger of Liberty Blitzkrieg blog,

The essay below is courtesy of Doug Rudisch, a friend and former fund manager, who I have known and respected since my days on Wall Street.  I am extremely grateful that he took the time and effort to so insightfully write on some of the greatest issues facing our nation today and to provide this content to my readers.  What follows below are some of the most powerful passages from his piece and the entire thing is embedded at the end. The whole thing is simply excellent.

What I can say with absolute certainty is that I have lost a lot of faith and trust in the system. And I am not the only one. This sentiment is running at all-time highs amongst business leaders (their collective in-actions prove it) and guys on the street. It is both sides of the barbell and middle that are upset. Often it’s one or the other, but not all three. This time it’s not at an external state, it’s directed inwards. That is a tough problem to solve. Jingoism is not the answer either as we already tried that.

 

If there is no faith in the system, it has a really hard time working. And I mean real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. These are valid notions, but as a point of clarity I am talking about a something different. There also is a subtle but important distinction between faith and trust versus confidence. Faith and trust are longer term and more powerful concepts.

 

There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already.

 

However as the above chart shows, things clearly changed in the 2003 and 2009 profit cycles as corporate profits surged while employment did not. My explanations:

 

Starting with the 2009 cycle first. In the 2008 downturn companies eliminated a lot of jobs. The depth of the downturn forced them to make the tough decision. Normally that kills consumer spend due to wage loss. But the government plugged the revenue gap with transfer payments and direct investment. See the green line go nearly vertical and it is fascinating how profit growth has mirrored the trajectory of debt growth. The consumer has started to dis-save again as well. Thus corporations kept the revenue, lost the labor, and voila record margins. You could argue unemployment is being subsidized. Like anything else, when something is subsidized, you tend to get a lot of it.

 

For example, see the recent new investor activity in single family homes and farmland of all things, including equity hedge funds who apparently think homes are like stocks. Maybe it’s a sign that other asset categories (equities and credit) are getting toppy or inflation expectations are increasing when hedge funds begin to foray into the single family housing market and farmland (some having little or no prior experience in these markets). At any rate, it seems odd and not good to me when policy results in hedge funds buying single family homes and farms.

 

Sorry Mr. Greenspan we have seen where valuing assets solely on the basis of current rates got us. If we should do that, baseball cards and chewing gum would also be great investments today. My suspicion is from here baseball cards and chewing gum will hold their value over time better than the typical company trading at 15x earnings derived from profit margins that are twice its average levels. And in point of fact according to the CPI the price of candy and chewing gum increased 31% between the years 2000-2012, while the S&P index including this year’s rip is only up 6% since 2000. Yes it matters what the price is that one pays for an asset!

 

There is much more going on than technology replacing labor at an accelerating rate, globalization, or a structural mismatch of skills to available jobs. Sure they are part of the problem, but not a majority. They are a convenient excuse to rationalize failed policy. Productivity growth was always hailed as a good thing, both in terms of job creation and its ability to contain inflation.

 

The important similarity to both profit cycles is that they were driven by credit growth that supported corporate revenues above what consumer income alone would have. In both cases corporate profits were the offsetting asset relative to the liability of government and consumer debt. The credit growth of 2003 proved itself not only un-sustainable, but tremendously costly. That loss of consumer credit has now been shifted to the government balance sheet and that of the US Federal Reserve. By definition, this also is unsustainable in some form. Sure it can continue to grow, but if it does at some point I believe it has to resolve itself painfully through higher rates or inflation, some other form of taxation or confiscation, or something else I can’t think of.

 

Won’t it be interesting if going forward economic cycles are not marked by the supply of excess production capacity, but instead the supply of excess credit which creates asset bubbles as opposed to excess production capacity? I believe CEO’s have more rational expectations than certain classes of investors, namely the renters, who are a very big group collectively investing enormous amounts of capital. Thus policy causes a rice in price in certain asset classes (often as we have seen recently to irrational levels) more effectively than it stimulates investment by businesses in capital or labor. The costs and risks of monetary policy attempting to substitute for un-sound structural policy are much greater than the potential benefits! It just causes asset bubbles and does not drive employment.

 

Counter- intuitively Japanese gross fixed business investment over the last 10 years has averaged 13.7% of GDP versus the U.S. at 10.5% of GDP, yet Japan has still grown less quickly than the U.S. Monetary policy which doesn’t work perfectly to begin with cannot overcome structural, demographic, or political problems. Oftentimes monetary policy makes these issues worse for numerous reasons including causing capital misallocation and providing steroid boosts that enable politicians to ignore making the necessary structural change that needs to occur for an economy to become sustainably healthy. This may be the worst of all the negative side-effects of monetary policy.

 

Ultimately either price will decline to meet wages or wages will rise to meet price.

 

I am sure the Fed believes that if all the sudden this money starts to work its way into the economy and it begins to overheat they can remove money or credit at the exact appropriate time and rate such that excess inflation never happens. They probably also convince themselves this is the better problem to have. The same guys that get every forecast wrong, have missed at least 2 bubbles, and who have been flummoxed by QE and ZIRP not doing what they thought it would, think they can anticipate all the global knock-on effects of this policy action and also remove the stimulus at exactly the right time and rate and engineer a smooth landing?

 

Where I may be understating QE’s impact is the excess liquidity and consumption that has entered the economy through specialty finance companies (consumer finance, mortgage REITs, etc.). Specialty finance companies and mortgage REITs can access capital from banks via securitizations and the repo market incredibly cheaply now (30 day rate currently 15bp) because banks have excess reserves, and then turn around and lend it, which they have started doing aggressively again (and last time this did not end well). So some segments of the economy may have received disproportionate liquidity from QE. Here are some data-points and they are scary about the degree to which certain segments of the economy seem to have re-bubbled or over- consumed due to ZIRP and excess liquidity:

 

  • The average maturity for car loans to borrowers with blemished credit contained in asset-backed securities surpassed 70 months last year for the first time since at least 2005, according to Moody’s Investors Service, which uses General Motors Co.’s GM Financial as a bellwether for the segment. All loans longer than 72 months more than doubled to 14 percent as of April 20 from six percent in 2010, according to J.D. Power & Associates.
  • Auto loans which specialty finance companies crowded into that were made in 2012 are already running at a rate of non-performance that equates to the 2006 vintage which had the record rate of non-performance
  • Auto sales back to roughly 2007 levels when U-6 unemployment was about 8% and now it is 14%. How does that make sense and how is it good to once again pull a bunch a demand forward and put cars in the hands of people that may not be able to afford them, which previously helped bankrupt the industry and cost taxpayers $25b and counting
  • Covenant-light loans on pace to break 2007 record issuance, already at $88b YTD (April) versus 2007 peak of $97b.

 

The Fed has adopted wealth effect driven policy for a long time, but it is only making people poorer. As I pointed out real median annual household income is 8% lower than it was in the year 2000. And it is not creating jobs.

 

By way of analogy and not to belittle the severity of either event, 9/11 became an excuse to try to occupy two countries amongst other things. Now we are figuring out it didn’t turn out so well and was very costly. Similarly the financial crisis turned into an excuse for certain economists and politicians to uncork experiments and spend money like it is going out of style. Hopefully the latter turns out better than the former. But so far, both events have led to an enormous amount of wasteful and failed government expenditure and intervention which has ballooned our deficit and diminished our influence on the world stage.

 

We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels.

 

And by doing it to the degree it is, the Fed is acting as if it has 100% certainty it is correct when what they are directionally doing has a long history of ending badly.

 

It would be interesting if the American public were able to vote on Fed policy. Both sides argue their views in several very public debates, and the population votes. My strong suspicion is ex those in the financial industry, the vote would be a resounding no.  And it would be by a larger margin than by what the current president was elected with. So is the Fed having all this power and leeway a good structure? Maybe. Democratic? Certainly not.

 

And to be clear, I am not arguing the Fed should be politicized or even become a democracy. I do think part of the problem is it has become politicized. But I am arguing there needs to be a stricter limit on what the Fed’s powers are and how they are measured as the current governance mechanism (the mandate alone) and measurement system (the CPI and employment) has given them too much leeway.

 

The twelve members of the FOMC average 57 years of age with a standard deviation of only 4.5 years. The three members of the President’s Council of Economic Advisors average almost the same 56 years of age with a standard deviation of only 2.6 years. All PhDs, and a big overlap in academic institutions. Talk about a tightly grouped bunch. Now this does not guarantee they all think the same way (come from same school of thought), and self-selected themselves, but it sure increases the chances.

 

No system will work optimally if everyone thinks the same way, anchoring and confirmation bias will just take over. If there are twelve people in a room, and they all think the same way, you might as well just have one. As CEO if one pursues a strategy and it doesn’t work, you change it, or lose your job. In investing, if you make a bad investment, you sell it. In life, if you are in a bad relationship, you change your behavior, or end it. But apparently in economics, if a policy isn’t working, you sit in a room and agree with each other that it is great and do more of it and get promoted through the system?

 

As a reality test, how about a simpler basket comprised of actual home prices, college tuition (which by itself is interesting because a lot of cost factors are embedded in college tuition including labor), food (maybe just the prices of a Big Mac which are up 5.2% per year since the end of the recession and labor is also part of the price of a Big Mac) and energy (gas) and health insurance prices (includes labor). Look at how these actual prices have changed and then tell me whether or not there is inflation. Is it a perfect measure? Probably not. An interesting reality test and point of compare? You bet! And it is probably a fair bit closer to what the average consumer seems to be feeling now. This basket also would have set off giant red flags about Fed and Government policy long before the financial crisis reared its ugly head in 2008.

 

I wish I could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, I don’t think the U.S. realizes it has a problem, so that is why I picked on that issue, and did my best to provide potential solutions.

Full essay is embedded below.  It’s most definitely worth your time.  Enjoy!

Why Policy Has Failed23_1

 

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Sun, 05/12/2013 - 13:08 | 3553736 IMA5U
IMA5U's picture

we are doomed 

 

buy some gold and a shotgun

Sun, 05/12/2013 - 13:13 | 3553743 freewolf7
freewolf7's picture

"And what would you like to DO?"

Sun, 05/12/2013 - 13:24 | 3553761 Precious
Precious's picture

policy /= productivity

Sun, 05/12/2013 - 13:33 | 3553777 BoNeSxxx
BoNeSxxx's picture

Step 1: We realize that we are powerless over propaganda and that our fiscal affairs have become unmanageable.

Sun, 05/12/2013 - 16:02 | 3554057 Supernova Born
Supernova Born's picture

delete

Sun, 05/12/2013 - 13:35 | 3553786 Pooper Popper
Pooper Popper's picture

A SHOTGUN????

Is that you Joey....Dont you have V.P. things to do?

Sun, 05/12/2013 - 14:08 | 3553834 Fuku Ben
Fuku Ben's picture

Did you meant a double barrel shotgun?

http://www.youtube.com/watch?v=phTdVBOY0BU

Sun, 05/12/2013 - 15:42 | 3554001 sgt_doom
sgt_doom's picture

Excoooooossse meeeee????

Risk takers??????

Is somebody on drugs again?

We've read articles here on how Goldman Sachs does the majority of trading on the NYSE, utilizing HFT in micro-second burst trades, while paying paltry criminal penalties for the consistent crimes of financial fraud, and that the NYSE is being purchased by the InterContinental Exchange (ICE) which is owned by Goldman Sachs, Morgan Stanley, the oil companies and Deutsche Bank, etc.  (And that double jeopardy in law has been discontinued where Goldman Sachs is concerned --- continuously suing Sergey Aleynikov for the same exact thing over and over and over again...)

We already know that the top banks own the largest hedge funds, and the next subset of the largest hedge funds are directly owned by the super-richest families, and that the top banksters and oil companies own all the financial exchanges and clearinghouses (NYSE, Goldman Sachs, JPMorgan Chase and Credit Suisse own DTCC, beginning to see the ultra-monopoly of interlocking ownership, doods?).

Where's the risk in an ultra-monopoly where they have the ultimate weapons:  (1) unlimited number of futures contracts bought and sold for financial manipulation and leveraged speculation; (2) unlimited number of naked swaps for financial manipulation of the highest order; (3) naked short selling thanks to DTCC's Stock Borrow Program and virtual capital for those stocks NOT EVEN IN PLAY, etc.; (4) unlimited number of investors allowed in hedge funds, highly opaque to begin with, etc.; and, (5) LIBOR rate and ISDA/Thomson Reuters' interest swap rate manipulation?

Risk taking my barbously hard ass. . . .

Breaking News:

http://www.wbtw.com/story/22217297/bill-gates-jeb-bush-and-warren-buffett-meeting-at-sc-island

 

Sun, 05/12/2013 - 13:13 | 3553742 francis_sawyer
francis_sawyer's picture

The ultimate laugh is that the 'hubris' of TPTB, in an effort to control everything, will eventually be the cause for dismantling themselves & the spheres of influence that they've stumbled upon & into...

~~~

The sad part is... That the 'watercarriers' of that effort aren't going to be treated very well by the disorganized mobs that follow in that wake...

Sun, 05/12/2013 - 13:50 | 3553803 Waterfallsparkles
Waterfallsparkles's picture

There will be no disorganized mobs, UNLESS they stop paying Food Stamps and Welfare.

Sun, 05/12/2013 - 13:15 | 3553747 q99x2
q99x2's picture

Just about too late to send the money directly to the citizens. The big machine has already begun turning against them.

Hillary was a good example last week. Once this turns it will quickly gain momentum. As soon as Holder is ousted it is on.

Banksters you better git while the going is good.

Sun, 05/12/2013 - 18:03 | 3554277 JoeSoMD
JoeSoMD's picture

Sorry q... I didn't "get" your comment about Hillary... please explain.  Please also explain why you think Holder is on the way out.  I don't see it but I am interested in your perspective.

Sun, 05/12/2013 - 13:17 | 3553749 observer007
observer007's picture

Its becoming serious:

Deposits in Danger: BCG wants haircut for everyone of 11-30% to solve debt-crisis / US-wealth tax of 25%

 

Wealth and Savings In Danger: Bosten Consulting Group (BCG) wants haircut for everyone of 11-30% to solve debt-crisis. In the US a one-time wealth tax of 25% of financial assets would be required.

 

For most countries, a haircut of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher;

http://homment.com/boston-haircut

Sun, 05/12/2013 - 13:52 | 3553806 freewolf7
freewolf7's picture

When it becomes serious you have to lie.

Sun, 05/12/2013 - 13:58 | 3553817 orez65
orez65's picture

"... wants haircut for everyone of 11-30% to solve debt-crisis."

SOLVE DEBT CRISIS??!!!!

You have to be a fucking moron to believe that!!

They will just SPEND whatever money they steal from us

Sun, 05/12/2013 - 14:35 | 3553880 smartstrike
smartstrike's picture

There is no DEBT crisis----the problem is wealth accumulation.  Once wealth tax is set at 90%, there would be no DEBT.

Sun, 05/12/2013 - 16:58 | 3554168 Urban Redneck
Urban Redneck's picture

Only if you can collect on mark-to-myth accounting valuations.  

There is also a not-so-minor counter-intuitive issue with the (believe it or not) limited fiat money supply, not being large enough to absorb 30% liquidation, much less a 90% liquidation.

 

Sun, 05/12/2013 - 14:24 | 3553863 Rick Blaine
Rick Blaine's picture

For a second there, I thought your comment was about the still ravenous demand for good bolt carrier groups (BCGs)...

Bravo Company still can't make them fast enough.

Sun, 05/12/2013 - 18:54 | 3554401 GVB
GVB's picture

I think that BCG report was released in 2009. Correct me if I'm wrong

Sun, 05/12/2013 - 13:20 | 3553754 PiltdownMan
PiltdownMan's picture

It is a crony communism joke. But to quote SS Hillary Clinton, "What difference does it make?"

http://confoundedinterest.wordpress.com/2013/05/11/is-the-fed-going-cold-turkey-after-going-wild-turkey-housing-and-the-stock-market/

 

Sun, 05/12/2013 - 14:30 | 3553874 Rick Blaine
Rick Blaine's picture

Had I been in the room when she said that, I would have slapped her...actually, no...I would have punched her, criminal charges be damned.

I bet it would have mattered to her if one of those four people were her friends/family.

Although I never really liked her per se, I used to at least have SOME respect for her...

Now I think she's a waste of oxygen.

Sun, 05/12/2013 - 13:26 | 3553764 sethstorm
sethstorm's picture

Businesses also love unemployment since it provides the means to avoid competitive forces while using a different set of competitive forces (the proverbial "long line of labor outside the factory" on the national and global scales) to make things worse for the people that work for them(where monopsonistic forces are not just for the unskilled, but for many in the First World).

There is only so much that can be attributed to government(which is a lot) before the fault is on businesses that have an overdose of entitlement mentality - an amount that eclipses everyone else accused of having it.

It's one thing to say that policy is failing.  It is another for the private sector to stand up and *want* to solve the problem versus using it as a grindstone against the people that work in it.

 

 

Sun, 05/12/2013 - 13:53 | 3553809 kaiserhoff
kaiserhoff's picture

Of which business do you speak?  Your sister's lemonade stand?

The private sector is much smaller, but it still exists, and real business needs demand, not Bennie loans.

Sun, 05/12/2013 - 14:04 | 3553827 orez65
orez65's picture

"There is only so much that can be attributed to government ..."

Like spending $1.5 Trillion per year more than it collects in taxes and fees!

Like the Iraq, Afghanistan and Lybia wars!

Like fiat money and fractional reserve banking!

Doesn't leave much for the private sector.

Sun, 05/12/2013 - 14:21 | 3553859 chunga
chunga's picture

Financial predators at the top of the "private sector" are one and the same with govt.

Sun, 05/12/2013 - 13:30 | 3553770 Waterfallsparkles
Waterfallsparkles's picture

Who has confidence in a system such as Wall Street when you have HFT frontrunning every trade.  Insider Trading, including Congress and the Senate.  Early release of financial data to all Financial Insiders, prior to the public.

The FED itself "managing" the Market.  Or rigging the game so that all of the Money created goes to the Wall Street Crowd and the Bankers.

Wall Street waiting for YOU to put your Money in before yanking the cord and crashing every stock, so you become that "Long Term" holder waiting 10 or more years just to get your money back.  Tech Reck 2000, 911 in 2001, Financial Crisis 2008, Flash Crash, etc.

Sun, 05/12/2013 - 15:14 | 3553949 Doctor of Reality
Doctor of Reality's picture

I agree, but when the "dollar cost average" line starts being talked... the sheep start to tune you out.

Does anyone know what $10,000 invested in the DOW index in 1971, with let's say $1,000 added each year, is worth today? Compare that to $10,000 in gold in 1971 with $1,000 in gold purchased per year.

I'm betting the guy with the gold has more buying power today... but I could be wrong.  

Sun, 05/12/2013 - 15:41 | 3554016 Waterfallsparkles
Waterfallsparkles's picture

I love when they talk about being a "Stock Picker".  That means to me that the Market is going down.

They try to indicate that by being a "Stock Picker" that "They" have the key to know which stocks will survive and do well and that you cannot be trusted with your own money and you have to give it to them to manipulate.  The problem is that all of those "Stock Pickers" will put your Money in the most Momentum Stocks and lose it all for you when the Market goes down.  Most people with common sense would not put Money in a Stock at the top, just because there is too much downside risk.  Kind of like where the Market is now.  But, Money Managers will plow your Money in like there is no tomorrow.  If you lose, oh well, they are sorry they did not see it comming.  But, who takes the loss?  YOU.

Sun, 05/12/2013 - 19:40 | 3554505 lotsoffun
lotsoffun's picture

flash crash was a real cutie pie.  i remember watching on my bloomberg while i was at a small investment bank with junior members.  the rise was incredible. the money the big boys made had to be beyond belief.  nice stunt.  will be a long time before they play that one again, but, they got away with it.....  with zirp, they don't currently need it.

 

Sun, 05/12/2013 - 13:32 | 3553774 1C3-N1N3
1C3-N1N3's picture

.

I believe it has to resolve itself painfully through higher rates or inflation, some other form of taxation or confiscation, or something else I can’t think of.

Something like war?

Sun, 05/12/2013 - 13:40 | 3553790 ekm
ekm's picture

Fed policy has failed because financial policy is useless if east asia producing everything we consume.

Sun, 05/12/2013 - 18:12 | 3554309 JoeSoMD
JoeSoMD's picture

Isn't printing the only way to counter this?

Sun, 05/12/2013 - 13:42 | 3553792 Waterfallsparkles
Waterfallsparkles's picture

I think the inflation index should be based on Food, Housing, Gasoline, Heating Oil, Health Insurance Costs.  Things that people use every day for living.

Bernanke says he has one of the best records for inflation but the index excludes everything that people use every day.  No wonder if you do not count the things that go up the most then the index will not reflect the true amount of inflation.

It would also be interesting if they also considered the lower income levels in the US to show the true loss of purchasing power of the American People.

Sun, 05/12/2013 - 13:56 | 3553814 akak
akak's picture

Waterfall, you bring up an interesting point regarding the CPI.  As manipulated and lowballed as we all know the CPI truly is (all of us except JimmyJames, perhaps), it almost exclusively only includes and measures the prices of tangible goods such as food, gasoline, and clothing, aside from the cost of certain services and the laughable "owner equivalent rent" when it comes to housing.  But what about necessary costs, such as taxes, fees, and insurance --- particularly mandatory insurances?  Are those not just as much a "cost of living" as food or clothing as well?

Sun, 05/12/2013 - 14:02 | 3553823 Waterfallsparkles
Waterfallsparkles's picture

How about adding in the increase in Stock Prices into the inflation index?

As far as the way they calculate food it is deceptive.  They may say that a can of tuna is the same price but they do not take into consideration that you are getting 1 or 2 oz's less.  Same with things like ice cream.  The cost is about the same but instead of getting a gallon you get 1.5 pints.

Sun, 05/12/2013 - 14:30 | 3553873 Mineral-Invest
Mineral-Invest's picture

"They may say that a can of tuna is the same price but they do not take into consideration that you are getting 1 or 2 oz's less."

 

Yes "they" do take that into consideration. "They" claim that the quality increase of that can of tuna is of such a great importance that it negates the fact that you recieve less tuna. Less bang for you buck? No, "bang" apparantly also means quality.

 

Dont forget that "we" are fat and shouldn't eat so much food. Problem is, we eat cheap and high energy food. Which in turn makes us fat. Which in turn lowers the CPI. Which in turn gives "them" incentive to give us cheap food.

Sun, 05/12/2013 - 15:29 | 3553980 Waterfallsparkles
Waterfallsparkles's picture

I agree with you.  I like to buy fresh vegtables and fruit.  It is just amazing how much they have gone up in cost.  Over a 4 year period a pound of  apples costs now as much as a T bone steak per pound 4 years ago.

I do not even eat beef anymore.  Switched to Port or chicken.  But, fresh vegtables being my weakness I pay up.

Sun, 05/12/2013 - 20:13 | 3554575 Diogenes
Diogenes's picture

They don't even count food, housing or gasoline anymore because, well, they went up too much. Because of hedonic adjustments, your cost of living has gone down. This means if your new TV cost more than the last one but has a bigger screen, really your cost per square inch went down. And if your new car is better than the one you trade in, it is cheaper even though it cost more.

So, your cost of living is not really going up as long as you eat your TV and live in your car.

Sun, 05/12/2013 - 13:54 | 3553810 phoolish
phoolish's picture

Yea.  They take the risk but never have pay for their failure(s).

Everyone I know, even every J6P knows this deal is corrupted beyond repair and are definitely not happy about it.

There is a breaking point somewhere.  Joe won't take it forever.

The savers & prudent are being crushed.

Sun, 05/12/2013 - 14:33 | 3553865 W T F II
W T F II's picture

All Great Stuff, BUT....It doesn't matter, because NWO is coming VERY SOON (and not the "kook-fringe" version..!!):

http://www.thenewamerican.com/usnews/politics/item/15036-joe-biden-on-cr...

http://www.pinnacledigest.com/blog/fastfoot/world-bank-whistleblower-say...

All Because:

http://en.wikipedia.org/wiki/Triffin_dilemma

Look for metals to get pounded...AGAIN

$ to SPIKE

S+P to tank

Then, "The Collaborators" will roll out the "SOLUTION" before year-end. Here is the template:

http://www.imf.org/external/np/pp/eng/2010/041310.pdf

Sun, 05/12/2013 - 16:49 | 3554155 Mr. Hudson
Mr. Hudson's picture

Good post! More people should be educated about the "Triffin Dilemma". I agree with you about metals and the dollar. Money is going to get very tight.

Sun, 05/12/2013 - 19:31 | 3554486 Dyhana
Dyhana's picture

if it gets any tighter i'll be living in my car and considering how my cat might taste marinated and roasted over a campfire.

Sun, 05/12/2013 - 18:21 | 3554328 JoeSoMD
JoeSoMD's picture

Yeah... great post... it's the type of post that makes wading through much of the pumping and other nonsense on ZH worthwhile.

Sun, 05/12/2013 - 14:26 | 3553867 sitenine
sitenine's picture

I have plenty of faith in the system...

 

I have faith that the system is, and will forever be, centrally planned.

I have faith that the system will 'grow' its way into a corner.

I have faith that the system is a ponzi.

I have faith that the system is unsustainable.

I have faith that the system places more importance on financial growth than real growth.

I have faith that the system is now a means to its own end.

I have faith that the system will, one day (soon), stop growing.

I have faith that the system will die when growth stops (it actually already has).

I have faith that the system has conned a lot of people who will suffer greatly and still do nothing to change anything.

Sun, 05/12/2013 - 14:34 | 3553884 Gunga
Gunga's picture

Did they think we would stay within the system despite the constant lies and outright theft ? Do they not realize that there is a point at which we have to " go Galt" to protect what we still have ?

Sun, 05/12/2013 - 14:37 | 3553889 smartstrike
smartstrike's picture

Going Galt is a neo-Liberitarian LIE.

Sun, 05/12/2013 - 15:34 | 3553990 Doctor of Reality
Doctor of Reality's picture

"Going Galt" is deciding to lessen one's lifestyle so one can work less. Going Galt means living on $8/hr if you make $10 and on up the wage scale. Going Galt means not hiring another employee or buying more equipment that needs to be financially serviced; and either taking on less work or paying staff more for their additional labor. 

Consider a medical provider who charges for "office visits". What makes more sense for them individually:

Seeing 3 patients/hr at $50/visit = $150/hr CASH... 

OR

Signing up for Medicaid and accepting $35/visit and then seeing 5 patients/hr = $175/hr

Sure, they get to make 17% more, while working 66% harder!!! Add to that their patients get 40% less time with them!!! Not to mention the regulations!

I'm in the process of "going Galt" my friend!

Sun, 05/12/2013 - 14:39 | 3553892 Hail Spode
Hail Spode's picture

The problem is not that the Fed is too politicized, or not politicized enough.  It's not that all FOMC members are almost the same age.  The real problem is that government cannot be trusted with money.  Period. This is the obvious lesson of history since before the Romans started devaluing the denarius.  

Even if you ended the fed and brought back a gold standard, within a few decades they would start to look for ways to welch on it.   Since any issuer of money stands to gain when they violate the implied contract of maintianing the value of the money that they issue, it is clear that government should not be permitted to issue any money.  It can't be trusted to enforce a contract to which it is a party, not when the benefits from welching are so enormous.  Government should be banned from issuing money, and be strictly limited to enforcing the implied contract of the value of hard money between issuer and user.  That concept is a part of a philosophy of government called Localism http://www.barnesandnoble.com/w/localism-a-philosophy-of-government-achbani/1114141668

Let's remeber that for when this whole thing comes down and it is time to build America 2.0.  There are people reading this board that may be among the re-Founders.

Sun, 05/12/2013 - 14:45 | 3553900 sitenine
sitenine's picture

"Government should be banned from issuing money" ?

I'm not sure I understand you here. Don't you mean the FED should be banned from issuing money at interest TO the government, and that the government should issue OUR own money? I get your local philosophy, and I appreciate the value of the argument - I'm just wondering whether or not you see a difference between privately issued money (which we have now) and government issued money (which is what the constitution mandates)?

Sun, 05/12/2013 - 15:55 | 3554046 Professorlocknload
Professorlocknload's picture

I think maybe the implication is 'money vs. honest money.' A whole 'nuther subject.

Minting gold and silver coin, by government for issuance is not the same as producing the raw material.

That said, I just don't see a distinct seperation between the FRB and the US Treasury these days.

Fiat Worlds are like that.

Sun, 05/12/2013 - 16:36 | 3554134 JR
JR's picture

G.M. Coogan, who stood firmly against the money manipulators who were the same in her day as they are today,  gave her view in Money Creators in 1937 as to why neither the U.S. Congress nor the UK Parliament (nor a privately-owned Rothschild central bank) should have unchecked arbitrary power to issue and control the medium of exchange. And gives her blueprint for the solution.

“If the Government (or dictators of government policies such as the Fed) controls the lending of money, it can determine who may or who may not borrow money and hence can control every single business in the country. (Think of Pelosi/Reid/Boehner/Lew/Obama issuing and controlling the money supply and who gets it, especially in light of the current corruption within the IRS.) Controlling every business means controlling every economic activity; control of every economic activity gives power to control also the cultural and spiritual activities of the citizen… Lenin recommended Government origination and control of the medium for exchange. Unless the power to originate money is restricted to sovereignty and scientifically exercised, and lending is restricted exclusively to private, independent, State-chartered corporations, it is nothing short of childish prattle to talk about preventing the onrush of Socialism, or whatever name one wants to use to designate an anti-Christian State, in which all but the ‘chosen few’ are hopeless slaves.”

Money in the hands of the Supra-National Money Creators has become a weapon that renders nations powerless to protect themselves from the bankers.

Coogan, in her book, says that creation of money -- the issuing of claims to goods and services valid and acceptable to all the citizens of a country -- is by right a prerogative of the authority exercising jurisdiction over the whole country.

The lending of the lawful money issued by the governmental should be carried out not by the governmental monetary authority, says Coogan, but by privately-owned Corporations erected into a Guild and functioning under a Guild Charter.

Says Coogan: “The most dangerous things that could be done would be to place the merchandising of money in the hands of the National Government.  Such a step would give the internationalists their final weapon to destroy the property and personal rights of loyal citizens… (Think of how the bankers have purchased control of the U.S. Congress and the Presidency.)

With regard to the lending of money by privately owned corporations, she says “existing banks should be divided into two separate institutions…   The first…carrying deposits subject to withdrawal would require 100 percent reserve and no interest would be paid but depositors would pay a bookkeeping service fee.

“In addition, there would be loan-banks for lending or investing.  These savings-banks would get the money to lend from their own money (capital), from the money received from customers (savings accounts), from the money repaid on maturing loans…”   The only limitation on banks loans would be that no money could be lent unless there was money to lend.

Sun, 05/12/2013 - 18:59 | 3554412 Hail Spode
Hail Spode's picture

Acbani says a lot of the same things as Coogan.  Dividing investment from deposit banking is a no-brainer.    Localism also has rules in place to protect a nation from fiat money from other nations- echoing some of Coogan's concerns.   But there would be no "government money" in a localist nation.   It's a conflict of interest because they are supposed to enforce contracts-   but when they issue money they are a party to an implied contract that says the money they just paid you will be kept sound.   They can more impartially enforce such a contract if they are neither the issuer or specific user of money.  Money here is "hard" money.   Again, fiat can be allowed but its use can be restricted.  Legal tender laws are prohibited.  Individials decide what sort of private hard money they will accept for payment.

Sun, 05/12/2013 - 18:39 | 3554363 Hail Spode
Hail Spode's picture

To be more clear, both what the Treasury does and what the Fed does should be banned.  Money is too important to be left in the hands of government, either directly or most especially through a Fed type Public-Private partnership (government-backed private monopoly/cartel).  

Whoever issues money (and uses it to buy something) has a powerful incentive to devalue it, whether to pay back debt they have issued in it or squrim out of other obigations so denominated.    Even when we had a gold standard, we went from $20.67 to the ounce of gold to $35 to $42.42 or something.   Then we took redemption for gold away from U.S. Citizens and then from the world.  Now our money is made of base metals- we can't even keep to the copper standard!   And this is not America that is especially evil or wicked.   Rome did this to the denarius 2,000 years ago.  All governments that get in a position to do it will do it, because devaluing currency works like a majic money machine for the issuer (value is sucked out of all the money held by those who sold them something and placed into new money that they create from thin air).    It does not matter whether the government does this directly or goes through a public-private cartel.  It is too powerful a fraud to resist, especially when no one can call the cops on the cops.

Yes, the Constitution does ALLOW FEDGOV to coin money, but that does not mean they have to, or should.  Plus, the Constitution does not give FEDGOV the power to make their money a LEGAL TENDER.   The STATES are the only ones empowered to make something a legal tender, and that is only if it is made of gold or silver.   The ebook I linked to had some interesting commentary about how the states were originally meant to sit in judgement of FEDGOV's coinage.   The main point of the book is that the Founders WANTED government to stay decentralized (at least the anti-federalists) but that the barriers they put in place to do this proved to be inadequate.   It then postulates what sort of barriers are necessary to actually pull off what they intended- a government where power remains limited, and decentralized.

Mon, 05/13/2013 - 00:59 | 3555276 sitenine
sitenine's picture

+1 thanks

Sun, 05/12/2013 - 14:46 | 3553903 smartstrike
smartstrike's picture

If government issued its own money, there would be no sovereign DEBT. The problem is that money is willed into existence by private business with attached interest.

Sun, 05/12/2013 - 18:42 | 3554373 Hail Spode
Hail Spode's picture

I wish that were the only problem, but as I pointed out earlier, governments throughout history have devalued money that they issue.  It is just too tempting for them to run up a bunch of debt and then pay it back with devalued money.

Sun, 05/12/2013 - 15:42 | 3554025 Professorlocknload
Professorlocknload's picture

Hail, +1 on that.

The original implication was "The government has no money. It all belongs to the people."

Kinda went out the window like the concept "Civil Service," under which government was employed by the people.

What happened? Now it's gone 180 degrees. The Federal Reserve Notes belong to the corporate/government consortium, to be entrusted to it's "cronies."

Just demand a look at "your" real wealth there in Ft Knox and watch what happens.

It will take much pain to bring back liberty.

 

Mon, 05/13/2013 - 10:04 | 3555927 smacker
smacker's picture

Agree with all of this.

Except to say that the problem of government is massively bigger than simply not being trustworthy with money. Government cannot be trusted with virtually anything. It assumes and demands the right to be in control of anything & everything, but then proceeds to make a complete shambles of whatever it does. Lots of reasons for this: hidden agendas, incompetence and corruption etc.

The only real solution is for an elected government to have a clearly articulated mandate which it is allowed to engage in. If something ain't on the list, then it ain't government's business. Period. We're talking here of a strong Constitution that's supervised. But of course to achieve such a system would require 'The People' to assert their ultimate sovereign power over current government and its corrupt agencies of power.

Sun, 05/12/2013 - 14:49 | 3553906 KickIce
KickIce's picture

I would imagine the bankers and most politicians find it an overwhlming success, it was never meant to benefit the people.

Sun, 05/12/2013 - 15:03 | 3553927 JR
JR's picture

“Inflation is the biggest killer of civilizations, even more than war itself.” -- John Hospers

“Each generation and country follows the same mirage. Each grasps for the same Dead Sea fruit that turns to dust and ashes in its mouth.  For it is the nature of inflation to give birth to a thousand illusions.” – Henry Hazlitt

Pearl Buck describes the devastation brought upon the German people by the runaway inflation of 1923:

“The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people.  They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them.  Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency.”

And the money vultures flew in from all around the globe to buy up and feast on the stolen wealth, for pfennigs on the deutsche mark.

All the inflation-fighting solutions promoted by the entrenched bureaucrats are making inflation worse—which tragically for the economy is what they want: it puts money in their pockets and/or reduces their debt. Like Majority Rule where the majority can vote itself the assets of the 49% minority, the 01% elite who issue and overprint the money use the hidden inflation tax as just another redistribution-of-the-wealth scheme – to themselves.

 “Increased wages and prices do not cause inflation; in fact, they do not even contribute to it. Inflation is caused by only ONE thing: AN INCREASE IN THE MONEY SUPPLY.  It is this increase in the money supply which CAUSES wages and prices to increase; wage and price increases, in other words, are the RESULT of inflation.” – Robert Ringer

What the media, the government and the Fed tell you about inflation is the exact opposite of the truth.  Big Brother is causing inflation through Big Printing of paper money.

As for peoples refusal to buy, the consequence of depression, is not to recognized the real cause --the uncertainty brought about by Fed and D.C. policiy. “The larger cash balances of firms and individuals are merely one link in the chain of consequeces from that uncertainty.To blame ‘excessive saving’ for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples.” – Henry Hazlitt

There is no such thing as something for nothing.

“The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” – Henry Hazlitt

Sun, 05/12/2013 - 15:24 | 3553966 Professorlocknload
Professorlocknload's picture

Mises on economics.   "the outcomes of countless conscious, purposive actions, choices, and preferences of individuals, each of whom was trying as best as he or she could under the circumstances to attain various wants and ends and to avoid undesired consequences. "

Place a bureaucrat between any of the above words and it all goes to hell.

Sun, 05/12/2013 - 15:08 | 3553934 Professorlocknload
Professorlocknload's picture

Nothing new here. We have a Government/Corporate Mandated economy, and have had since 1913.

The power will simply inflate it's way out of this, Socially engineering who sinks and who swims. Concepts such as real wealth creation and productivity mean nothing to all-consuming bureaucrats.

The swimmers will be sorted into large voting blocks, and thrown a fish, and the sinkers will go to the bottom like Au, except they can't hold their breath as long.

 

Brace for a Crack Up boom, then the abyss, then a renaissance.

Crisis = Opportunity.

Same,same.

Here it was, Stardate 1849. We can all only hope to re-incarnate as Akakiy's spirit.

http://www.classicreader.com/book/2026/1/

 

Sun, 05/12/2013 - 15:22 | 3553962 W T F II
W T F II's picture

yup...

Sun, 05/12/2013 - 15:15 | 3553952 Winston Smith 2009
Winston Smith 2009's picture

"there is no faith in the system"

Absolutely spot on.  Nor is there any faith in the reporting on it by what was supposed to be the last watchdog - the "news" media.

A mostly great column and analysis from Marketwatch.com of all places:

May 12, 2013
The news media is even worse than you think
The problems aren’t as bad as they appear. They are much, much worse.

http://www.marketwatch.com/Story/story/print?guid=53A39C1C-B91C-11E2-915...

 

Sun, 05/12/2013 - 15:25 | 3553969 kchrisc
kchrisc's picture

"...Simply put, there is no faith in the system;..."
"Faith" in a "system" that is a lie and designed only to enslave, steal and kill is ignorance and delusion not faith.

Faith is trust and belief in something while ignorance is trusting and believing in a lie and delusion is not seeing the lie. The lie, the ultimate lie, is government. What else has over 6,000 years of repugnant history and proof that it's only populated by psychopaths, cons and killers. "Faith" in such a thing as government and those of government is ignorance and delusion.

"...restore our collective faith."
Like restore the collectives of the Soviet Union?! How about restore our faith in ourselves and our ability to provide for ourselves and our families without interference and theft from others. It works. The early history of the American people up to 1913, when we were sold to the banksters, is proof that freedom of the individual indirectly serves all of mankind. "Collective" is just another word for people as farm animals.

The "system" is a fence. It is what they use to fence us, fleece us and feast upon us. The incredible thing is that we use and obey the fence instead of rebelling against it and destroying it. Our best interests as people is to reject the fence; reject the system and return to a "system" of self-reliance and of relationships with others.

"That's all I'm going to say about that."                   hujel

Sun, 05/12/2013 - 15:38 | 3554002 moneybots
moneybots's picture

"And by doing it to the degree it is, the Fed is acting as if it has 100% certainty it is correct when what they are directionally doing has a long history of ending badly."

 

AKA 100% of booms end in a bust, as in every cycle has an UP phase and a DOWN phase.  The DOWN phase is the ending badly part.

Sun, 05/12/2013 - 15:45 | 3554032 moneybots
moneybots's picture

"Why Policy has Failed"

 

You can't fool mother nature, which is what policy is trying to do.

Sun, 05/12/2013 - 16:06 | 3554068 Winston Smith 2009
Winston Smith 2009's picture

And here's one of the reasons why the proven to be fatally flawed economic theory used by the Fed continues to be taken seriously (besides the fact that it conveniently allows pols to deficit spend with no perceived negative consequences (deficits don't matter) and allows bankers to claim that being more in debt to them is something that will fix the economy (borrow your way to prosperity):

Priceless: How The Federal Reserve Bought The Economics Profession

http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278...

Sun, 05/12/2013 - 16:53 | 3554162 Mr. Hudson
Mr. Hudson's picture

How come Zerohedge doesn't organize groups to go out and make "citizen's arrests" on these banker criminals? It's all very legal.

http://en.wikipedia.org/wiki/Citizen%27s_arrest

 

Sun, 05/12/2013 - 22:06 | 3554903 proLiberty
proLiberty's picture

The Dear Leader's Money Man, Ben, has stated over and over again that one of the main goals of the Fed's money-printing is to boost the "wealth effect" in stocks and home prices. A secondary goal, again often repeated was to get people who live off the interest earnings of their life's savings will now have to make "more risky" investments. This is criminal.

The main economic components that influences the price level of the SP500 is earnings and dividends when compared to "risk free" instruments.

When government spends nearly twice the money that it takes in taxes, it makes up the difference by money-printing from mainly from the Fed, secondly from other central banks.

When nearly 50% of citizens pay their grocery bills with money from the government, half of which is air-backed money, and Walmart has 25% of grocery business, how much of Walmart's profit is from printing of air-backed money? How much of other SP500 companies? Even for CAT, how much of its profit comes from "shovel-ready" projects financed with air-backed money?

And the price of gold and silver? How much of its current price is suppressed and maniupuated by shorts financed by air-backed money?

There is no trust in this household for any of this price information. The DJI, the SP500, the time value of money, even the dollar price of gold are all mirages. What is the price when interest rates return to a free-market rate? Equities will be far lower as will bond prices. Gold will be much higher.

Meanwhile, how to people with limited capital survive and pay their bills?

Sun, 05/12/2013 - 23:24 | 3555100 polo007
polo007's picture

According to Deutsche Bank:

http://fs1.hidemyass.com/download/mrO2Y/adaqnrrv5bi21c176ems987q84

The lack of confidence in final demand that seems to justify corporate reticence has a mirror image in the financial sector’s liquidity trap – the fact that corporates prefer to save and not to leverage and invest. And it seems reasonable to justify the lack of confidence in the context of ongoing and unresolved fiscal tightening; household savings rates that are “naturally” capped not to go to zero or below this time; and a global sector that seems decidedly weaker. In other words, of all the Keynesian circular flow of income external drivers there are none doing any driving except corporate investment. But the Catch 22 is that corporate investment itself is restrained by the fear for the lack of the other drivers! The answer might be waiting for a pick up in the external sector; it might be seeing through the fiscal austerity and or at least suspending or reversing some of it; or it might be further improvement in the household balance sheets via housing. However all of these likely need time.

In this context we can then handicap central bank reaction functions. While we wait for something to give positively in favor of a stronger recovery, policy stays unusually easy. This then creates the dichotomy of buying more time in the near term through easier policy to deliver a proper recovery whilst potentially running the risk longer term of too much inflation the other side. The pent up monetary stimulus that exaggerates a liquidity trap now becomes a challenge to control on the other side. This schizophrenia has been played out numerous times since 2008. And it defines the unusual dislocation between ultra low real yields and high inflation expectations (inflation risk premia) that is also known as financial repression. Financial repression being one of the metrics that is supposed to encourage more risky lending and to break the liquidity trap.

The consensus of course is that after a certain amount of financial repression, the world will sufficiently improve and central banks have the tools to contain inflation so that the bulk of financial repression is contained to ultra low real yields rather than ultra high (realized) inflation. In this spirit Bernanke and now Kuroda are extremely confident. However we would actually go one stage forward. In the current low growth equilibrium there is a good chance that there is jolt to higher growth because the fiscal dynamics can never be resolved. This is particularly true for peripheral Europe and Japan; less true for the US but then partly depends on the willingness to address structural contingent liabilities. Absent that, the US might well be in the same boat as the others. In this case, the only solution is for the central banks to end up holding the majority of government claims and to consolidate their balance sheets with the government. In one fell swoop, cumulated deficits that may stretch back several years are ex post deficit financed. This would almost certainly break the liquidity trap in that it would represent a massive relief to expected fiscal tightening for the private sector. The central banks would quickly need to use their “tools” to contain a splurge in lending and control inflation. Ex post however there is no reason why inflation would materially rise, as long as liquidity was tightened commensurately with the debt relief implied by consolidated balance sheets of the central banks and the government. Moreover if G3+ acted synchronously, at least for the currency majors there may be little fall out.

So the interesting question is why not? Is there any cost of consolidation when we are otherwise in an eternal liquidity trap? The answer is, unfortunately yes. This would have to be a one shot game. Going forward governments’ would unlikely be able to borrow from the private sector for a long long time precisely because it threatened financial repression, even if only in the kind of negative real rates ex ante rather than even more negative ex post. Instead, government would be obliged to run balanced budgets. These authors don’t think this is necessarily a bad outcome. However it does mean that if and when consolidation comes, as much as possible needs to be consolidated otherwise fiscal policy would be on a perpetual tightening path to run the extant liabilities down. If you are going to consolidate, do it big because you are likely to have only one chance. It may seem extraordinary to think about consolidated balance sheets but there are plenty of examples in history, particularly during wars, of deficit financing. And however outlandish and non consensus it is, remember that a few years ago we talked about QE never ending, which at the time was also outlandish. Consolidation sounds an anathema to consensus but it is a logical conclusion to the liquidity trap and the probability rises each day that growth disappoints.

Mon, 05/13/2013 - 00:06 | 3555187 monad
monad's picture

Policy hasn't failed. The tyrant has centralized wealth and power, and you bought it. Forward soviet. It's not too late to get out. On one hand you have nothing to lose, you are already doomed. On the otherhand, if you resist, you won't get to watch the tyrant execute all the people who brought him to power, and crush the marching morons. All those people you despise most...

Mon, 05/13/2013 - 00:25 | 3555232 polo007
polo007's picture

According to Bank of America Merrill Lynch:

http://fs1.hidemyass.com/download/h8Cqx/1s3nkvl62fipb7krsefh0bajr1

Easy Fed policy: too much of a good thing?

The costs of easy Fed policy

Fed policy is aimed at stimulating economic activity, which involves incentivizing households, businesses and investors to take more risk. Investors have obliged, resulting in low rates, tight credit and mortgage spreads, and new all-time highs for major stock indices. But some worry the Fed is causing a dangerous search for yield that could lead to new asset bubbles and financial instability. Our assessment is that Fed policy has not led to an increase in systemic risk.

Risk-taking is good; systemic risk is bad

This piece provides a guide for monitoring financial stability and the linkages between asset markets, financial institutions and the real economy. We believe the ultimate question is whether the Fed’s policies have increased systemic risk.

This depends on the following, which we address in the note:

- Do market valuations appear overstretched and are there signs of asset
bubbles forming?

- Is there an increase in leverage in the market or an overreliance on short term funding? Would systemically important institutions be at risk of failure?

- How are the beneficiaries of easy credit using the proceeds? Are they using debt to fund risky investments, buy homes they can't afford or go on a consumption spree? Or is issuance going toward improving their balance sheets and lowering their vulnerably to the eventual rise in interest rates?

Risk transfer underway, but systemic concerns muted

We argue that Fed policies have encouraged a transfer of risk from borrowers (indebted households and corporations) to creditors (investors) who are willing to accept lower risk premiums. Increased real money participation in credit markets mitigates the systemic implications of this risk transfer. Corporate and household balance sheets are healthier, thanks in part to easy Fed policy, but signs of increased appetite for leverage in the corporate sector bear close monitoring.

Fed to stay the course

Our survey of financial conditions and systemic risk supports our base case that the Fed will maintain its asset purchase program at the current pace of $85bn/month through March 2014, followed by a 6-8 month tapering period.

QE will limit the upside in yields

The potential for a sizable rise in yields will be limited if the Fed maintains QE well into next year as we expect. We forecast a gradual rise in 10y rates by year-end.

Mon, 05/13/2013 - 00:37 | 3555250 No More Bubbles
No More Bubbles's picture

Lost trust in the "System"???

 

WHAT SYSTEM?  There isn't one.

Mon, 05/13/2013 - 06:36 | 3555505 GoldIsMoney
GoldIsMoney's picture

Wrong, there are lots of them and too many corrupt to the bones. That's the problem. The biggest lie is that we have a money, but the fact is it just an IOY note, and the states can print them (with the help of central banks) in any amount you could imagine. They have overdriven it in the past and are doing it again. The system is there and overall you can write. The system of state tolerated and assisted theft.

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